Russia entering a ‘full-fledged economic crisis,’ ex-minister says

December 22, 2014, 2:18 PM UTC
Pedestrians walk past a board listing foreign currency rates against the Russian ruble outside an exchange office in central Moscow on December 16, 2014. The Russian ruble set a new all-time record low on Tuesday after bouncing back briefly despite an emergency move by Russia's central bank to raise interest rates to 17 percent. AFP PHOTO / KIRILL KUDRYAVTSEV (Photo credit should read KIRILL KUDRYAVTSEV/AFP/Getty Images)
Photograph by Kirill Kudryavtsev — AFP/Getty Images

By Darya Korsunskaya

MOSCOW — Russia’s government has pushed the country into an economic crisis by not tackling its financial problems fast enough, former finance minister Alexei Kudrin said on Monday, warning the full effects would be felt next year.

Kudrin — a darling of investors who is credited with building Russia’s $170 billion worth of sovereign wealth funds — added that sanctions over Ukraine, not falling oil prices, were primarily behind the collapse of the ruble and warned that Russia risked seeing its debt downgraded to junk status in 2015.

“Today, I can say that we have entered or are entering a real, full-fledged economic crisis. Next year we will feel it clearly,” the former minister told a news conference.

“The government has not been quick enough to address the situation … I am yet to hear … its clear assessment of the current situation.”

Kudrin, one of few to criticize President Vladimir Putin, quit in 2011 in protest at proposals to increase defense spending.

He has since criticized Putin’s response to Western sanctions imposed following Russia’s annexation of Ukraine’s Crimea region and its subsequent support for loyalist fighters. But the two men are still believed to be close.

Russia has been hit by what Economy Minister Alexei Ulyukayev called a “perfect storm” of plummeting oil prices, sanctions and a flight of investors’ capital, made worse by a lack of structural reforms that means the economy is overwhelmingly dependent on oil revenues.

Government officials have tried to minimize the impact of sanctions on the country and its ruble currency — which plunged last week despite a hike in interest rates to 17 percent. Putin has claimed “external factors” like oil were the key culprit behind the country’s “tough times.”

But on Monday Russia announced plans to impose a heavy tax on grain exports since ruble volatility and high global prices have caused exports to spike. Russian news agencies reported Prime Minister Dmitry Medvedev told a meeting with officials that the country needed to hang on to its stocks.

And though the country’s top oil firm Rosneft said it had made a $7 billion debt repayment from its own cash reserves, easing some investors’ worries, Russia’s central bank said it would have to bail out mid-sized Trust Bank with 30 billion rubles ($544.54 million) to stop it going bankrupt.

Kudrin said falling crude prices only partly accounted for the plunge in the rouble — which has fallen particularly steeply since autumn as concerns increased that the sanctions would prevent Russian companies from meeting debt obligations because they cannot access Western capital.

Kudrin forecast a series of defaults among medium and large enterprises, — though banks were more likely to be supported by the state — which is likely to result in rating agencies downgrading Russia’s debt to “junk” status.

Most agencies have put Russia this year one notch above junk status.

“Russia will get a downgrade,” Kudrin said. ” It will enter the ‘junk’ territory.”

Kudrin said he believed that between 25 and 35 percent of the decline in the rouble — down some 45 percent against the dollar so far this year — could be attributed to sanctions. The rest, he said, was down to a stronger dollar and investors’ mistrust of Russian authorities and their actions.

The ruble ticked up slightly against the dollar on Monday and the RTS index of dollar-denominated shares rose more than 4 percent as Brent crude prices rose 2 percent to above $62 per barrel.

While the currency may stabilize in the first quarter of next year, its decline will likely help to push inflation to a rate of 12-15 percent in 2015, Kudrin said. The central bank envisages next year’s inflation at around 8 percent.

And even if the price of oil rose to $80 per barrel, gross domestic product was still likely to fall by more than 2 percent in 2015, Kudrin said. At $60 per barrel GDP would decline by 4 percent or more, he added, echoing the central bank’s latest assessment, published last week.