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New government to face economic challenges
The main issues will be the strengthening US dollar and rising inflation
The years of Putin’s presidency have been characterized by favorable economic conditions such as rising oil prices, a weakening dollar and low borrowing costs. However, things are starting to look less favorable, and Russia’s new government, which could still be headed by Putin, will have to develop infrastructure, pursue innovation and solve social issues amid such obstacles as rising inflation, a strengthening dollar and uncertainty on the global financial market.
Putin took care to ensure the continuity of Russia’s economic course, with the federal budget approved until 2011 and the country's socioeconomic development strategy stretching to 2020. The long-term program addresses people’s concerns of soaring prices, pension and housing issues and low living standards, says Elena Pakhomova, responsible for social research at All-Russia Public Opinion Research Center (VTsIOM). In terms of living standards, Russia is expected to catch up with the world’s developed countries in the long term, with per capita GDP projected to reach $30,000 in 2020 and between $40,000 and $50,000 in 2030). By 2020, Russia will be one of the world’s leading economies. However, economic conditions, both domestically and on foreign markets, have changed greatly since the announcement of these lofty and ambitious goals.
One of the key risk factors for the new government will be changes in how the global financial system functions. The global liquidity squeeze put an end to the era of cheap money and Russia needs foreign loans to keep its economy growing. In such a situation, improving the country’s investment climate will be a priority for the new government, and Medvedev could well become President thanks to his popularity among investors, experts say. “Russia will continue to borrow, but the inflow of foreign cash will be smaller than in the first half of this year,” noted Anton Struchenevsky, an economist at Troika Dialog. “As a result, liquidity will be growing at a slower pace, and the Central Bank’s role as Russia’s chief lender will increase,” he added.
Another challenge will be the strengthening dollar. The US currency has been weakening over the past few years, while the ruble has been gathering strength, which has attracted investment into the country. Now the dollar is expected to rise, again. “As it happened when Clinton replaced Bush senior, the budget policy could change and the dollar could rise with the coming of a new leader,” Struchenevsky reckons. For Russia, a stronger dollar would mean a smaller inflow of capital.
Spiraling inflation also is a big problem, which will complicate solving social issues, requiring higher budget spending. Inflation, which is expected to accelerate in 2008, will stall the government’s efforts to raise living standards.
“Whether they want to or not, Medvedev as President and Putin as PM will have to focus on anti-inflation measures,” believes Igor Nikolaev, chief strategic analyst at FBK. In March 2008, when the presidential election will be held, inflation will stand at 13 percent, Troika Dialog estimated. The government’s policy of concentrating on monetary anti-inflation measures has failed.
It was no coincidence that Dmitry Medvedev, whose nomination for the presidential post was supported by Putin on Monday, spoke of the need to convert the country’s economic achievements over the past eight years into real social programs. Putin, whom Medvedev suggested for PM, already promised to unpack the Stabilization Fund, allocating some of its funds for social needs. “We will not depend on external factors,” he stressed. Analytical department of RIA RosBusinessConsulting
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