Russian Minister Urges Deficit Spending to Beat Sanctions

Monday, 25 Aug 2014 09:28 AM

 

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Russia's economy minister urged Monday an easing of budget rules to allow a bigger deficit to finance investments needed to overcome Western sanctions.

"With a responsible planned increase in the budget deficit we would unleash a new wave of economic stimulus, which is so important in this tense geopolitical situation," Economy Minister Alexei Ulyukayev said.

His remarks came in a commentary in the business daily Vedomosti.

"We have a real opportunity to set right the work of key sectors of the economy and it is very important that we use it," he added.

Even without the sanctions the West has imposed over the Kremlin's annexation of Crimea from Ukraine and its suspected support for pro-Russian rebels, the Russian economy has slowed to a crawl in recent quarters.

The government had already been debating how to react, with tax rises one of the possibilities under consideration.

Ulyukayev said the Russian economy was now "balancing between stagnation and recession which excludes tax hikes as a possible response."

He diagnosed weak domestic demand and weaknesses in the Russian economy as the real problems, not the unfavorable international outlook.

Cutting spending to balance the budget would only depress domestic demand further.

Ulyukayev praised fiscal rules by the government which have forced it to keep the deficit below one percent of gross domestic product and save a portion of oil revenues.

However, he said this policy was no longer so attractive as "we have lost the ability to stimulate the economy with fiscal policy at a moment when we are close to recession."

Russia reacted to Western sanctions by imposing a ban on most food imports from the EU and United States.

Russian officials exuded confidence the country won't go hungry, but only recently said the farm sector will need an 636 billion rubles ($17.6 billion) of investment to compensate for the banned foods.

Officials have said Russia now has the chance to reduce its dependence on foreign countries.

Ulyukayev suggested raising the deficit to 2.0 percent of GDP.

He noted that Russia's sovereign debt was only 11 percent of GDP, and that the central bank could buy up some of the debt.

Addressing concerns that this could drive up inflation, the minister noted that unless Russia invests to produce its own food it will have to accept price increases from finding other imported products.

Ulyukayev cautioned however that great care would have to be taken to ensure that the money invested was effective.

© AFP 2014

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