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26 Nov, 2008 13:45

Reserve Fund to plug budget while outlook clouds

Russia will draw on $35 Billion from its Reserve Fund to plug a hole in next year's budget. Finance Minister, Aleksey Kudrin, says the cash will compensate for falling oil prices and global recession.

Russia’s budget for next year is based on an average oil price of $70 per barrel. Finance minister Aleksey Kudrin has acknowledged on Wednesday that the actual crude price is likely to be lower, and spending Reserve Fund money is inevitable.

“We expect an oil price at around $50 per barrel. So we have to compensate a lack of oil money in the budget and support the regions that may have insufficient income. Plus we will support non-budget funds and offset tax cuts. That’s why we will have to spend $35 Billion from our Reserve Fund.”

That's a quarter of the total – leaving $89 Billion in the fund, which, according to Kudrin, is enough to plug the budget for three years. The ministry will revise its forecast for Russia’s economic growth and promises to announce new figures in December. Meanwhile investment giants have already run the numbers.

The European Bank for Reconstruction and Development has halved its growth forecast for Russia's economy next year – to 3%.  The Chief Investment Officer of Merrill Lynch, Gary Dugan, says even that is optimistic.

“We are looking at the oil price going down to $40 – 45 per barrel. That will bring Russia’s growth to half of what we’ve seen in recent times – 3- 3.5 % if everything else remain unchanged. But we also have  global recession and if the oil price goes down as low as $30 then, unfortunately, the Russian economy is looking at a contraction of GDP with a falling GDP of somewhere between 2 and 3 percent.”

Dugan says Russia’s economy is regarded as state controlled. According to Merrill Lynch that allows the Russian government to pump money into the real economy more efficiently, and could help Russia to recover from the crisis more quickly than other countries.

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