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2 Oct, 2007 02:08

Budget surplus and liquidity - Russia's economic airbag

Capital outflows rise, industrial output slows, but Russian politicians and economists are confident the country is weathering the global credit crisis.

With financial institutions around the world struggling to find the liquidity they need, Russian banks and companies are finding it harder to obtain loans.

With foreign investors withdrawing cash from Russia, the government is being forced to provide support.

The Russian government is convinced its economic development will not be hindered by the global credit crisis, that has led to liquidity problems throughout global markets.

“The state of the Russian economy allows us to effectively control the effect of these events and guarantee normal development” stated Russian President Vladimir Putin.

“Russia has very stable long-term prospects. And we have a kind of airbag in the form of our reserves,” pointed out on the September 6 Andrey Klepach from Economic Development Ministry.

But much of the Russian economy exists on foreign credit, with Russian companies taking a record $US 30 billion of credit from abroad in the first half of this year.

With those loans now harder to find, and foreign investors playing it safe, Russia is far from immune from the global credit squeeze.

The Russian authorities have already had to act to boost liquidity. The Central Bank had to pump cash into the banking system, as foreign investors fled Russia's capital markets, taking more than $US 5 billion with them.

The reduction in investments has come alongside a slowdown in industrial output, but there is still only minimal risk to the wider economy.

“This is a problem for the stock markets, for the fixed income markets, but for the economy as a whole it is not that big of a problem. If this problem intensifies, if we see panic bank-runs or things like that, of course things will change, but I really do not expect anything like this to happen. So for the next several years, actually, we are pretty covered” insists Vladimir Osakovsky, broker of Aton Company, Moscow.

Key to that optimism is Russia's budget surplus, giving it the ability to provide liquidity.

So, Russian banks and companies may have to get used to the state filling the gap left behind by a lack of foreign credit.