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Vladimir Putin hands new PM mandate to begin spending spree

Mikhail Mishustin, Russia’s new prime minister, made his reputation collecting money for Vladimir Putin. His next challenge will be working out ways to spend it.

Mr Putin tapped Mr Mishustin from relative obscurity to lead a sweeping government overhaul. The former tax collector now has a mandate to throw cash at the country’s moribund economy, tapping an Rbs 8tn ($128.5bn) nest egg he helped build in a bid to stimulate growth and shore up public support for Mr Putin’s administration.

Analysts say Mr Putin is changing Russia’s constitution to allow him to retain power indefinitely after he is required to step down as president in 2024. The Kremlin is rushing to approve the desired changes at breakneck pace: parliament voted unanimously to approve the first draft on Thursday, though they may not be finalised until Russia puts them to a “people’s vote” later this year.

Mr Putin is also mindful, however, of the need to tackle a fall in living standards that pushed his approval ratings to record lows in 2019.

To this end, Mr Mishustin has overhauled the leadership of Russia’s social ministries and demoted fiscal conservatives in favour of officials who advocate more public spending.

“Putin thought some more energetic people would be able to get things done. He knows there is a problem and really wants them to push for economic growth,” a person familiar with the discussions told the Financial Times. The new prime minister sacked some officials so quickly they did not have time to gather their belongings, the person added.

The cabinet changes are a bid to make headway with a $515bn state investment programme that failed to take off under Dmitry Medvedev, Mr Mishustin’s predecessor. “The formation of the new government seals the case for ramped-up spending,” said Ivan Tchakarov, chief Russia economist at Citi. “The [new] cabinet has strengthened concerns that a long-held tradition of fiscal prudence may need to be sacrificed.”

We expect an intensification in construction activity across the country to take place already this year
Natalia Orlova, chief economist at Alfa-Bank.

Since 2014, when western economic sanctions in response to Russia’s annexation of Crimea and an oil price slump hit the country’s economy, the Kremlin has shown fiscal conservatism, cutting back budgets and hoarding cash even as crude recovered. The consequent healthy reserves and two years of budget surpluses have impressed economists and foreign analysts.

But the resulting five years of falling real incomes and annual growth below 2 per cent in gross domestic product have hit households. Partly as a consequence, Mr Putin’s trust ratings have fallen to decade lows — a situation the Kremlin wants to rectify before critical parliamentary elections in 2021.

The new cabinet demonstrates the intent. Anton Siluanov, the hawkish finance minister, has kept his ministry — but his powerful title of first deputy prime minister has gone instead to Andrei Belousov, a former Kremlin adviser who supports fiscal stimulus.

The demotion of Mr Siluanov means that “fiscal consolidation is no longer a priority”, said Natalia Orlova, chief economist at Alfa-Bank. “[But] while we expect budget expenditure to grow faster, we do not expect this will necessarily lead to a shift from the budget stability.”

“Siluanov, in our view, is a recognised fiscal conservative,” said Stanislav Murashov, economist at Raiffeisenbank, pointing to Mr Siluanov’s support for the “budget rule” — a policy that since 2017 has led Russia to squirrel revenues from any oil sold at more than $40 a barrel into a national wealth fund.
Officials in the previous government had discussed spending some of the Rbs 8tn accumulated through this process but were wary of stoking domestic inflation.

“Belousov spoke out several times against the budget rule in its various incarnations precisely because it limits budget stimulus,” Mr Murashov added. “In his new position, he may raise the issue of weakening the rule.”

If the threshold for accumulating revenues were raised by $3 to $4 a barrel, it could mean an additional Rbs500-600bn for the budget at the expense of the fund, Mr Murashov estimated.

Mr Mishustin’s key task is to get a grip on Russia’s so-called national projects, an Rbs 25.7tn ($415bn) spending programme over six years to revamp infrastructure and modernise the country’s economy. Official data show that spending last year fell well short of targets.

The appointment of Mr Belousov, an architect of the programme, and the transfer another proponent, former economic development minister Maxim Oreshkin, into the Kremlin as a powerful adviser, reinforced the sense that Mr Putin still views National Projects as the best way to drive growth, Ms Orlova said.

“We expect an intensification in construction activity across the country to take place already this year,” she said.

Mr Mishustin, cognisant of the need to move quickly, on Wednesday ordered his cabinet to propose revamped plans for implementing the national projects programme by February 20.

But some warn that the new premier will soon realise that ramping up Russia’s tax collection through improved technology and digital tools was an easier task than opening the spending valves amid cabinet infighting, bureaucratic inefficiencies, and disagreements over the role of private companies in the national projects.

Valentina Matvienko, speaker of the upper house of parliament, said last year that the main programmes had only about 15-35 per cent of the allocated funding and called them a “complete mess”. Alexei Kudrin, a Putin confidant who heads the audit chamber, said in December that more than half of provincial governments believed their goals to be impractical or even impossible.

“The new government is left with 1.2tn roubles unspent last year by the previous government — what should have gone into national projects,” said one foreign ambassador in Moscow. “That is in addition to the planned spending this year. It has a Herculean task to spend [it all].”

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