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20 Apr, 2010 17:34

$100 billion outlay puts economy on road to recovery

Presenting a report to the State Duma, Prime Minister Putin said the country avoided the worst pitfalls of the past and that sustainable growth was returning, after $100 billion in anti-crisis spending.

The economy shrank by 8% and industrial production fell 11% but the PM’s analysis of the anti crisis measures not that the 2009 economic trough saw no mass unemployment and that average incomes actually rose. In short – Russia was hit harder than most developed economies in terms of output, but avoided the economic, budgetary and social meltdowns of Russia’s last economic downturns in the 1990s.

Prime Minister Putin was able to point to a disciplined approach to budgeting throughout the early and mid 2000s boom, and preparedness to act as the key difference this time around

“Earlier the external shocks used to throw our country backwards, but this time Russia was better prepared for the crisis. Russia behaved as a strong powerful country, which reacts actively to a situation and does not simply wait until circumstances are changed for the better.”

The government spent more than $100 billion in special measures, but most of this money has now been returned by banks and businesses with interest. Growth is returning, with Finance Minister Kudrin – architect of the financial defences which have stood Russia in better stead than many would have expected over the last two years – has further increased his 2010 GDP to 4%, while Prime Minister Putin predicted a return of pre crisis GDP growth within 2 years with the recession now over.

But the widespread sense of the worst is past should also come with a grain of warning about the risks of going to fast to soon. Roger Munnings, former head of KPMG Russia and the CIS, and now UK special trade representative believes overheating could again become Russia’s economic bane.

“There are problems when a country comes up to full capacity. It needs time to solve those problems. So, you know, my advice would be, don’t go for those growth levels quickly. There is also overheating in a number of other ways. Having said that I think it will return to growth and I think the long term prospect for the country is good.”

The Prime Minister said there would be further draw down of anti-crisis measures, although support would remain in certain sectors of the economy for as long as they're needed. Although, Vladimir Bragin, Analyst at National Bank Trust, believes the withdrawal of government support is nothing to fear as the economy is already standing on its own two feet.

“There is no point to say that government should pull out anti crisis measures, because there is nothing to pull out. Almost everything is not being used or will not be used very soon.”

Despite obvious signs of recovery it’s too early to celebrate. Russia is ranked 120th on the World Bank's list of attractive business climates due to low transparency and bureaucracy. Both the President and Prime Minister have made fighting red tape and graft an urgent priority. But these are old problems for Russia and have always held it back, so doing away with them would open up an entirely new potential for growth. 

Read also – Russia’s financial priorities: In two words, modernization and innovation