Manuela Troschke

English

Research Papers in Economics

 
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Kurzanalysen und 
Informationen 
Nr. 41 Mai 2009 
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Wirtschaftswissenschaftliche Abteilung 
   
 
Kurzanalysen  Nr. 41  
und Informationen   Mai 2009 
 
The financial crisis hits the real and social sector: 
Russia in spring 2009 
Manuela TROSCHKE  
 
 
 
The triple shock 
In Russia, a home-made financial crisis started 
already in August 2008. In reaction to the 
growing state-interference in the economy and 
the South-Ossetian war, growing amounts of 
foreign and domestic capital began to leave 
the country. During September stock markets 
plunged 53%. Some weeks later, the interna-
tional financial crisis hit Russia’s financial sys-
tem; the interbank money market contracted in 
a “crisis of trust”. To stabilize the banking sys-
tem, banks were equipped with additional li-
quidity, several banks were recapitalized, and 
deposit insurance was raised substantially 
from 400.000 to 700.000 roubles. The rouble 
came under severe pressure; massive inter-
ventions of the central bank could not stabilize 
the currency which devaluated by about 35% 
within the last six month. In December  2008 
sovereign debt credit ratings for Russia were 
decreased for the first time since January 1999 
to BBB with a negative outlook by S&P. Inter-
national reserves of the Central Bank, partly 
held in the Stabilization Fund, eroded from 
nearly 600 bn USD at the beginning of the 
crisis to 384 bn USD in April 2009. In the same 
period the price for oil, one of Russia’s main 
export goods, fell 67%.  
Thus, the Russian economy since late Au-
gust 2008 was exposed to three major shocks: 
the Georgian conflict, the spill-over from the 
international financial crisis, and the plunge in 
oil prices. GDP growth predictions of 7% for-
mulated by the Ministry of Economic Develop-
ment (MoE) in early August 2008, eroded to 
minus 2.2% published in late March 2009 by 
the same institution.  Latest IMF forecasts of -
6%are even more pessimistic whereas the 
World Bank estimated end of March -4.5%, 
down from -1,7% predicted in November 2008. 
 
 
Russia in spring 2009 
GDP Growth: Even the pessimistic growth 
assumptions of international finance institu-
tions might underestimate the growth effects of 
the triple crisis on Russia. According to the 
preliminary overview of the economic situation 
in Russia for the first quarter of 2009 published 
on 27
th of April by the Russian MoE, Russian 
GDP is estimated to have shrunken by 9.5% 
from January to March compared to the same 
period of previous year. While a collaps of the 
Russian banking system could by avoided 
thanks to massive state interventions, the real 
sector of the economy, depending on exports 
and being still weakly diversified, is suffering 
hard. Although the recent economic indicators 
turn out to be worse than the officially pre-
dicted growth rates, no new estimates on the 
expected growth rates have been published   
by governmental institutions as yet. 
 
 OSTEUROPA-INSTITUT REGENSBURG 
Table 1:   Main economic indicators of Russia in the first quarter of 2008 and 2009  
  (compared to same period of previous years, in %) 
 2008  2009 
  January-March  January - March 
GDP 8,7  -9,5 
Index of consumper prices  4,8  5,4 
Industrial production  6,5  -14,3 
Processing industry  8,7  -20,8 
Agricultural production  5,5  2,1 
Capital investment  23,6  -15 
Construction   28,9  -19,3 
Disposable income of population  8  -2,3 
Real wage  13,4  -2,3 
Export January-February, custom statistics  55  -48 
Import, January-February, custom statistics  49,7  -37,8 
Average price of crude oil, USD/barrel  93,6  43,5 
Source: Ministry of Economic Development of the RF 
 
Prices: Since half of consumer demand is 
covered by imported goods, the devaluation of 
the rouble translates into higher consumer 
prices, although reduced demand has a damp-
ening effect on prices. Thus the consumer 
price index for the first quarter amounted to 
5.4%. But the underlying downward trend of 
prices is expected to persist as disposable 
income diminishes further. However, the trend 
of falling producer prices as observed from 
September 2008 throughout January 2009, 
reversed in February in spite of plummeting 
producers demand. According to the MoE, 
monopolistic price setting, reduced competition 
induced by protectionist anti-crisis measures, 
and corruptive practices in the construction 
sector are hold responsible for this unfavour-
able development. 
Production: Industrial production in the first 
quarter fell by 14.3 percentage points in com-
parison to the same period in 2008, with proc-
essing industry showing the worst results (-
20.8%). Output fall is reported in nearly all 
subcategories of processing. Main contributor 
to industrial contraction is the export-driven 
metallurgy (-27.3%), followed by transport 
industry (-35.5%). Lacking investment demand 
caused a sharp decline in production of ma-
chinery and equipment (-25.7%), with produc-
tion cuts up to 90% in building equipment. 
Lacking consumer demand is most visible in 
decreased production of cars (-62.9%). Verifi-
able data for stocks of unsold production in this 
sector, as for any other sectors, are not avail-
able. It is not only the processing sector, how-
ever, who is reporting a decline on broad ba-
sis, also the  production of natural gas and 
coal came down by 15% and 19% respec-
tively. Construction activities, which had con-
tributed to high growth rates over the last 
years, decreased 19.3% owed to the crisis in 
the real estate market. The second pillar of 
national demand, retail trade , suffered a re-
versal of the long lasting growth trend in Feb-
ruary; within the first quarter, turnover of this 
sector fell  1,1%  compared to last year . 
Agrarian production in comparative prices rose 
2.1%, whereas in physical terms, many sub-
categories show a decrease.  
Foreign Trade: Custom statistics show a 
sharp decline in  exports (-48%) as well as 
imports (-37,8%) for January-February 2009 
compared to previous year. The trade surplus 
decreased by 57% from 36 bn USD to a mere 
15,3 bn USD. The trade surplus decreased 
from 49.9 bn USD to 21.7 bn USD. The plum-
meting exports of oil (-54.2%) and metal and 
metal products (-42.1%) reflect the erosion of 
crude oil and steel prices with physical export 
volumes nearly unchanged, while the decrease 
of gas exports (-55.9% in value terms and -
59% in physical terms) is driven by the Ukrain-
ian gas crisis in January and lower demand of 
CIS neighbouring countries. In January-
February, these product groups accounted for 
79.2% of all exports, which leaves the struc-
ture of export nearly unchanged. For imports, 
an erosion of investment demand is revealed 
in decreased import of machinery and equip-
ment (-46.9%), with car imports alone down by 
63.1%.  
 
 
 
Kurzanalysen  
und Informationen 
2Russia in spring 2009  
66,4
24,6
4,6 4,4
Oil and Gas Raw materials
Machinery and Equipment Other
 
Figure 1:   Export Januar-February 2009 (% of total) 
 
 
1,6
25,5
43,8
29,1
Oil and Gas Raw materials Machinery and Equipment Other
 
Figure 2:   Import Januar-February 2009 (% of total) 
 
Investment and Finance: Capital invest-
ment came down by 15% for January and Feb-
ruary in comparison to last years investments. 
Due to persisting inflationary pressure, the 
central bank only end of April began to lower 
the prime rate marginally from 13% to 12.5%; 
lending rates of commercial banks still range 
from 15-16%. The risk exposure of the banking 
sector remains high. The amount of overdue 
credits is estimated between 10% (Ministry of 
Finance) and 3-4% (Central Bank).  
Social indicators: By now, the economic cri-
sis visibly transforms into an erosion of social 
indicators. During the first quarter of 2009, 
unemployment according to ILO definition rose 
by 33.9% compared to the first quarter of the 
previous year to 7.1 Million people or 9.5% of 
the economic active population. Most lay-offs 
took place in the metallurgical and machine-
   Nr. 41 
     Mai 2009 
3 OSTEUROPA-INSTITUT REGENSBURG 
building sectors. In the same period, real 
wages, which had risen 10.3% throughout 
2008, fell by 2.3%, driven by inflation and 
nominal wage cuts mainly caused by short-
time work in the chemical and metallurgical 
industries. The overdue wage debt, amounting 
to 2% of the wage sum, almost doubled from 
4.6 bn roubles in January 2009 to 8.8 bn rou-
bles in April. In contrast to the  transition period 
where the wage debts were concentrated in 
the budget sphere it is now an economy wide 
phenomenon. Wage indebtedness in, , the 
budget sphere is now only a minor part of total 
indebtedness (5,5%).  
According to preliminary official data, the 
disposable income of the population fell by 
2.3%. However, enterprise surveys, which also 
reviewed the  payment of bonuses, show a 
much stronger decline. In addition,  the whole 
sphere of unofficial payments, privileges and 
income from corruption is not captured by the 
data at all. Thus, the deterioration of the social 
situation of vast layers of the population might 
be de facto much more severe than indicated 
by social indicators. 
Anti-Crisis program: On April 6
th, the Rus-
sian Government  published a blown-up pro-
gram of anti-crisis measures, which according 
to statements of Prime Minister Putin amounts 
to 4.5 % of GDP and even 12% of GDP if fi-
nancing of the central bank is accounted for 
(with GDP 2009 estimated at 44 trillion rou-
bles). While these calculations are hard to 
trace, the main measures foreseen in the pro-
gram for 2009 sum up to 2.93 bn roubles in-
cluding losses of budget income due to low-
ered tax rates. The administration of money to 
be distributed to the economy rests in the hand 
of the central government; decentralized 
measures in the regions remain restricted to 
co-financing of labour-market programs, clos-
ing of regional budget deficits (300 bn roubles), 
and participation in housing reconstruction 
programs. While the priorities as described in 
the analytical part of the program should focus 
on development of human capital and restruc-
turing of the economy, the lions share of 
money will flow to the banking sector (up to 
1055 bn roubles) , conservative measures 
preserving enterprises identified to be of sys-
temic importance (up to 300 bn roubles), and 
social measures like covering of deficits of the 
pension fund (315 bn roubles), financing of 
additional joblessness (44 bn roubles), and 
support to the housing sector. The deficit-
running state-owned railroad company will 
receive 50 bn roubles, the agricultural sector is 
stimulated with 70 bn roubles, of which 45 bn 
are additional capital for the Russian Agrarian 
Bank. State purchases directed to support the 
national automotive industry amount to 32.5 bn 
roubles, defense industry is subsidized by a 
set of different measures amounting to 70 bn 
roubles. Construction will be pushed by addi-
tional public demand, favourable credit condi-
tions, and higher deductibility in the private 
sphere with 104 bn roubles.  
With respect to the substantial amounts of 
measures foreseen, the budget deficit of 2009 
is planned to reach about 8% of GDP or 3 bn 
roubles. The 18% VAT, which was envisaged 
to be lowered already in 2008, will remain un-
changed in 2009 and most probably through-
out 2010. According to the program, approxi-
mately 2751.5 bn roubles will be spent from 
the Stabilization Fund to finance the mentioned 
measures.  
While only a part of these measures are 
encouraging business and structural change, 
the stimulation of enterprises through lowered 
corporate taxation (from 24% to 20%) and the 
introduction of favourable depreciation 
schemes for certain investments, depriving the 
budget of about 350 bn roubles, are a step in 
the right direction. Plans to increase the so-
called social tax, which covers all wage deduc-
tions directed to social funds, from 26 to 34% 
have been postponed to 2011, which is quite 
favourable for business. However, tax reduc-
tions and tax breaks are not sufficient to push 
restructuring  if further incentives for future-
oriented investment are lacking. The financing 
of active measures to encourage the develop-
ment of small and medium enterprises remains 
limited with 30 bn roubles. The percentage of 
future-oriented investment as  measures of 
labour qualification and the improvement of 
human capital cannot be identified in the pro-
gram, because the amount of 77.6 bn roubles 
directed to labour market measures comprise 
an unspecified amount of financing of short-
time work. Thus, only a minor share of the 
program is devoted to the main structural prob-
lems of the Russian economy – lacking diversi-
fication and innovation and a lack of qualified 
labour supply.  
Kurzanalysen  
und Informationen 
4Russia in spring 2009  
1055
773
300
70
70
104
50
315 183
Banking Sector Labour Market Systemic Enterprises
Agrarian Sector Defense industry Housing 
Railroad Pension Fonds Other
 
Figure 3:  Measures of the Anti-Crisis-Program 2009 (% of total) 
 
Politics . The economic crisis in Russia 
bears both a political risk stemming from the 
population deprived of their incomes, and a 
dangerous potential for intensified centraliza-
tion and state influence on the economy. 
Averting the already materialized and expected 
future social unrest from the central govern-
ment, on March 16
th President Medvedev ac-
cused the banks of “corporate egoism”. He 
called them to expand lending to enterprises 
and to agree to moratoria of enterprise debt 
repayment to avoid bankruptcies and growing 
joblessness. These signals for bailing-out of 
enterprises, if taken serious by banks, could 
result in the revival of the system of soft loans 
known in early transition. On contrast, Minister 
of Finance Kudrin blames the government for 
not having sterilized the massive money in-
flows earned with oil and gas, which financed 
bubbles in the economy. Regarding depth and 
duration of the crisis, he takes the most pessi-
mistic position warning of a second cycle of the 
banking crisis coming up with the growing 
amount of overdue credits, while the Ministry 
of Economics and especially the central bank 
already mid of March saw an end of the crisis.  
The struggling for influence over additional 
budget amounts waiting to be distributed is 
offering many possibilities for renewed activi-
ties by oligarchic structures and grand corrup-
tion. In addition, the influence of the state is 
strengthened. A prominent example is the deal 
with Oleg Deripaska´s holding, which while 
seeking support from the government in re-
structuring debts was asked to provide a 25% 
stake of Norilsk Nikel as collateral. According 
to the governmental program, the 295 enter-
prises identified to be of systemic importance 
can enjoy additional crediting only if they cut 
managerial bonuses substantially, provide full 
information on all operational accounts and 
agree to the “regulation of their relations with 
suppliers and contractors”. The latter phrase 
evokes soviet-style planning mechanisms. Line 
ministries, long deprived of their channels of 
influence over “their” enterprises, thus might 
regain access to intra-enterprise information, 
control over assets, and regain a part of their 
former strength. The same holds true for the 
selected state banks, which are distributing 
and administering the governmental programs 
and loans 
   Nr. 41 
     Mai 2009 
5 

The financial crisis hits the real and social sector : Russia in spring 2009

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The financial crisis hits the real and social sector : Russia in spring 2009

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