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5 Russian Actions Affecting Its Economy

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Russia hasn’t been a happy place, economically, for some time, what with sanctions over Crimea, the falling price of oil and the cascading value of the ruble. While its own actions are to blame for a number of its woes, others—such as oil prices—are not something it can control, however much Vladimir Putin might want to.

Of course, none of these problems exist in a vacuum, and Russia’s been taking action on various fronts in an effort to cope with sanctions or boost its unfortunate economy. Here’s a look at the top five, and what’s playing out—or might—as a result.

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1. Ruble rumble.

The ruble, after losing about half its value in December against the dollar and the euro, came roaring back between February and early April. Experts are divided on whether the upward trend will continue, since the ruble gained more than the price of oil—a factor to which it is usually tied—but sanctions remain in place, as does tension over Crimea.

During the ruble’s plunge, wealthy Russians sought to move money outside the country or spent it on luxury items before retail markets readjusted pricing to account for the currency’s fall. The Russian government stepped in to do what it could to strengthen the currency, and the reversal in direction was so abrupt that some banks are warning Moscow to limit the ruble’s ascent.

With the increase in value, capital outflows have slowed, according to Fitch Ratings, but the situation is still far from rosy. Fitch said in research, “Fiscal buffers are … being eroded as the bulk of financing of this year’s deficit, despite a revival in government debt issuance, will come from the Reserve Fund. The economic outlook remains weak.”

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2. Third cut in interest rates this year.

Russia’s central bank has cut interest rates for the third time in 2015, bringing them down by taking action on the temporary rally in the ruble and a slowdown of inflation. It also indicated that it will do more, if necessary, to try to fight the country’s recession.

In December Russia’s interest rate was 17%, but in January the bank surprised markets with a two-point cut. As the ruble went up, interest rates went down; February saw another point reduction, and this latest cut sent rates a further 1.5 points lower to 12.5%.

Now that the ruble is not an immediate crisis, the central bank is turning its attention to the Russian economy—and probable further rate cuts. In a statement, it said, “Amid ruble appreciation and a significant contraction in consumer demand in February–April 2015, monthly consumer price growth is declining and annual inflation is tending to stabilize. As inflation risks abate further, the Bank of Russia will be ready to continue cutting the key rate.”

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3. Food import ban likely to be extended.

In retaliation for sanctions, last year Russia imposed a ban on food imports from the U.S., EU and other countries that was originally due to expire on August 7. The country has been investing in its own “food security,” focusing on a goal of self-sufficiency in the production of meat, milk and vegetables.

An EU summit in June is set to consider whether to extend sanctions, and Russia has indicated that its own food import ban is likely to remain in place if sanctions are not lifted. The fall of the ruble had driven up the cost of imported foods, but its subsequent partial recovery and falling import prices has actually supported the ban.

At present, at least, Russia intends to continue agricultural support until self-sufficiency is reached over the next 5–10 years. Putin has named a new agriculture minister whose purpose is to boost Russian production of food for domestic consumption.

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4. IFC fund money pulled back.

Russia is pulling its money out of the IFC Russian Bank Capitalization Fund. The fund, run by the World Bank’s International Finance Corp., hasn’t approved any Russian investment projects since last May, although there has been no official suspension of investment in Russia. And since Russia needs capital at home, it’s asked for a total of $245 million back.

Vnesheconombank, a Russian state corporation used to support and develop the Russian economy and to handle the country’s state debt and pension funds, expects $203 million back by the end of June. More funds will be returned to VEB, it said in reports, from the Macquarie Russia & CIS Infrastructure Fund after the fund’s investment period concludes at the end of August.

That said, VEB isn’t bailing on the IFC fund altogether, and has asked the fund to broaden its approach and invest outside banking to, it said in a statement, “keep its strategy effective in crisis conditions.”

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5. Pension funds will finance infrastructure projects.

With funding from external sources pretty well cut off thanks to sanctions, the Russian government is going to use money from its funded pension system to finance infrastructure projects within the country.

Under the Russian system, the funded part of pensions, coming from the uniform social security tax, is invested at the employee’s choice in either the nonstate pension fund (NPF) or the Pension Fund of the Russian Federation (PFR) that is managed by VEB.

Prime Minister Dmitry Medvedev announced in reports in late April that pension funds are a “source of the long-term money to support investment under the conditions of international financial markets being closed for Russia.”

According to Finance Minister Anton Siluanov, speaking at a government session, those pension moneys can be used to finance even private projects, such as construction of the Yamal LNG plant in northern Siberia, the country’s largest liquid natural gas project.

Alexander Safonov, a vice rector of the Russian Presidential Academy of National Economy and Public Administration, has also said in reports that another project that might benefit from pension fund investment is the reconstruction of the BAM-2 railway line from the Far East to the European part of Russia. That would provide greater rail capacity toward China, Japan and South Korea.

Safonov also said that Rosneft is looking for pension funds as a source of investment to develop the Arctic shelf.

Valery Vinogradov, adviser to the president of the National Association of Non-State Pension Funds and head of the Center for Pension Market Information Communication, put the amount of pension fund savings and reserves at more than 4 trillion rubles ($77.9 billion) altogether—comparable with the volume of Russia’s sovereign wealth fund.

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