Russia appeals for calm as crisis forces it to cut budget

By JAMES ELLINGWORTH
and VLADIMIR ISACHENKOV

MOSCOW (AP) — Russian government officials appealed for calm on Wednesday after predicting budget cuts and a further surge in inflation as the country faces its worst economic downturn in 15 years.

With the currency and economy wilting under the twin blows of Western sanctions and a fall in the price of oil exports, Finance Minister Anton Siluanov proposed slashing some 10 percent to most areas of the state budget.

That is a significant turnaround for the government of President Vladimir Putin, who only weeks ago told the nation in a televised address that state spending would not be cut.

Many parts of the economy, which relies heavily on public spending, will be affected, though Russia's vast military modernization program and spending on infrastructure reforms will remain untouched as the country tries to reassert its power in the face of the West.

That means Russians, who have seen the cost of imports jump as a result of the fall in the ruble, can expect more increases in the cost of living.

Inflation could hit an annual rate of 17 percent in the spring, the deputy economic development minister, Alexei Vedev, was quoted as saying by the Tass news agency. Last year, inflation was 11.4 percent, the highest rate since 2008.

The Russian ruble, which lost about half of its value last year, was down another 1 percent in afternoon trading in Moscow, to just above 66 rubles per dollar.

Russia's central bank has acted to stabilize the ruble and limit inflation. It raised interest rates sharply last year and intervened directly in currency markets. Higher rates, however, will hurt the domestic economy, as they make borrowing more expensive.

While government spending will still rise overall this year, it will do so only by 5 percent, as opposed to the previous plan for 12 percent, Siluanov said.

He said that if oil prices average $50 a barrel this year, government revenues will be around $45 billion lower than in an earlier budget plan. The price of international crude oil was below $47 a barrel on Wednesday, near a six-year low.

Meanwhile, the World Bank on Wednesday sharply downgraded its predictions for Russia's economy, foreseeing a 2.9 percent contraction in 2015.

As its prospects darken, Russia is highly likely to see its bond rating downgraded to "junk" status by Standard & Poor's in coming days, said the economic development minister, Alexei Ulyukaev.

Speaking at a conference alongside Siluanov, Ulyukaev asked Russians not to panic.
"In a crisis situation, the main thing is to preserve mental calm ... and most of all to think about your own health and the health of your family," he said.

Natalya Orlova, an analyst with Alfa Bank, said the government will be keen to direct cuts away from high-employment sectors if possible, and instead target new projects and services.

With some areas of the Russian economy protected from budget cuts, others face pain:

The government is well aware of the risks of cuts to the healthcare system, a potentially explosive prospect after layoffs at Moscow hospitals sparked protests in November. At least 5,000 people took to the streets in Moscow to protest those cuts, which could see up to 10,000 doctors removed from their jobs in the capital.

— Education is also in need of "structural reforms," Siluanov said, suggesting it could take a hit as well. Like the healthcare system, education retains a reputation for Soviet-style working practices and often decrepit facilities.

— It was not immediately clear what the impact would be on state pensions, a key issue in a country with an aging population and relatively low retirement ages. Putin last month approved a plan to increase the state pension fund's budget by over 11 percent in 2015 to almost 7 trillion rubles ($106 billion). The pension fund has on occasion been diverted to support government spending in other areas, most notably a transfer of 243 billion rubles in July to support the economy and develop the disputed region of Crimea.

— Defense spending will remain untouched as the Russian government seeks to modernize its military. The Kremlin allocated 20 trillion rubles to buying military equipment from 2010 through 2020.

— Infrastructure spending will also likely be immune to cuts. One key upcoming project is to build a bridge connecting the Crimean peninsula, which Russia annexed from Ukraine in March. The project is provisionally valued at 228 billion rubles (about $3.5 billion).