Budget gets revised for worst case scenario

Declining oil prices and a sharp slowdown in the global economy have prompted the Russian government to review the 2009 state budget. The Finance Ministry expects a sharp decline in economic growth.

Russia is revamping the state budget to reflect the new reality. Oil – Russia’s main export product – has dropped roughly 70 % from a July record. Prime Minister Putin says this means big changes.

“We prepared the budget last August, before the crisis hit Russia, so it was based on the oil price of $95 per barrel. The average now is $41 dollars per barrel. We were also counting on the global economy growing at the rate of 4% a year.”

The Economic Development Minister Elvira Nabiulina took the “better-safe-than-sorry” approach, saying her pessimistic scenario includes a 13% inflation and a rapidly shrinking economy, based on global economic forecasts.

“We should take a more pessimistic scenario of the state of the global economy as the basis for correcting this years budget. This would be a negative growth of 0.3%. This estimate is based on the expectations that the U.S. economy will contract at the rate of 2.6% while the European economy could shrink by 2.3% in 2009.”

Declining oil revenue also spell bad news for the industrial output – prior to new years it saw the sharpest decline in a decade. Russia's ruble took another big hit on Monday, reaching 32.9 rubles to the dollar – its lowest point since December 1997.

Evgenny Nadorshin, Chief economist at Trust Bank says the so-called controlled devaluation poses a major threat to the economy, as it forces many to put their businesses on hold.

“Its significantly more profitable to buy foreign currency, not to invest your Roubles into turnover capital, not to pay salaries, not to pay to your counterparty. But, your natural, your primary economic activity is blocked, it is stalled.”

Russia faces a 2009 budget deficit of up to 10% of its GDP if oil price averages around $30 a barrel.