Country Report Russia May 2009

Outlook for 2009-10

• The ruling "tandem" between the president, Dmitry Medvedev, and the prime minister, Vladimir Putin, could face a difficult test in its efforts to contain the social and political fallout from the economic downturn.
• Despite the new US administration's wish to start afresh in its dealings with Russia, it will take a long time to improve the substance of relations, as the two sides have significant differences on a range of issues.
• The government seems increasingly wary of bailing out private companies and is now focusing on providing general help to the economy. Only a few firms can count on state aid with debt repayments.
• Real GDP is forecast to contract by 5% in 2009, reflecting sharply lower commodity prices, restricted access to external financing and reduced external demand. A recovery to 2% growth is expected in 2010.
• Lower oil prices and reduced domestic demand will help to contain inflationary pressures.
• Under the impact of the economic downturn, the budget is forecast to shift into a large deficit in 2009, of over 8% of GDP. The current account is expected to switch to a small deficit in 2009, but to return to surplus in 2010.

Monthly review

• MrMedvedev has sought in recent weeks to bolster his credentials as a liberal reformer, giving an interview with the critical Novaya Gazeta newspaper and meeting with civil society representatives.
• Bilateral talks with the US on reducing nuclear arms have been launched. However, relations with NATO have taken a fresh turn for the worse because of tensions over Georgia and a spy scandal.
• The Russian Central Bank (RCB) and the government are working on plans to help to recapitalise the banking sector.
• Parliament has approved the revised 2009 budget, which targets a deficit equal to 7.4% of GDP, based on a 39% cut in the revenue forecast and a 7% increase in the expenditure target.
• In late April the RCB cut the refinancing ratethe first time it has done so since mid-2007taking it down by 50 basis points, to 12.5%.
• The Ministry of Economic Development has made a substantial revision to its first-quarter GDP estimate. It now estimates that real GDP fell by 9.5% year on year, compared with a previous estimate of a contraction of 7-8%.
• Industrial output data for March were disappointing, and the unemployment rate has risen more sharply than expected, reaching 9.5% in the first quarter.

Source: Country Report