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12 Jun, 2010 06:51

Russia's social largesse in a time of global austerity

Higher than expected oil prices have allowed Russia to cover this year's budget deficit, while boosting social spending. That's while neighbouring countries are doing the opposite.

Scenes in Greece – repeated across the continent. Labor protests are growing as people fear the debt crisis will deepen. From industrial Germany to finance oriented Lichtenstein – European governments are cutting social spending, while Russia – on the contrary – is still boosting it.

Yaroslav Lissovolik, Chief Economist for Deutsche Bank Russia, says Russia's budgetary strength sets it apart.

“I would argue that, today, Russia probably has one of the best sovereign balance sheets in the world.”

The level of state pensions in Russia has just reached the lowest levels of Europe, and salaries of many state workers – such as teachers – are no more than 200 dollars a month.

After years of excess oil revenues matched with a prudent fiscal policy – the government has boosted the volume of social spending but Vladimir Osakovsky, Head of Strategy at Unicreditbank, says it's too late and poorly allocated.

"The size of the social spending of the Russian budget is something which relates Russia to countries like Greece for example. It decreases the capacity of the Government to adjust federal budget spending to address the reduction in federal budget revenues." 

Analysts say the country must withdraw stimulus spending as soon as possible. It will be come harder over the next two years with both parliamentary and presidential elections. On the other hand, candidates will benefit from the perception that things are worse elsewhere and Yaroslav Lissovolik, believes it could also enable a boost to the Russian financial sector – making it more competitive.

“The restrictive measures in other parts of the world, say in the US, in Europe, associated with the financial sector could present an opportunity for Russia to stand out, and to actually improve some of the conditions of the financial sector and, thus, try to compete more actively with the developed markets.”

So far these problems in neighbouring states have not translated into positive news for Russian investors, stocks and the currency have not jumped. Those who buy the Russian story – are still waiting for their time to come.