beyondbrics

By Stefan Wagstyl and Catherine Belton

The Kremlin is preparing to crank up public spending in advance of parliamentary elections next month and a presidential vote next spring that is almost certain to see prime minister Vladimir Putin return as president.

But opinion polls suggest that, while there’s no doubt about a Putin victory, a spending splurge won’t necessarily be popular with voters. And the payola comes at a serious cost – Alfa Bank estimates the break-even oil price for the 2012 budget will be $126 a barrel. That’s more than three times the 2007 level.

Vedomosti, the paper part-owned by the FT, reported in its main story on Tuesday that Putin would have an opportunity to hand out 200bn roubles (US$6.6bn) ahead of the presidential elections.

Vedomosti reports that it has seen amendments to the budget for 2012-14 ahead of its expected second reading in the Duma and spotted that the government is seeking authorisation for 200bn roubles to be redistributed for social aid and support for enterprises.

The story isn’t clear where the money is coming from. But it cites a government official as saying that this is the first time the government would be given the right to redistribute spending for social needs, and that the 200bn roubles could be called a “pre-election fund”.

However, the official is quoted as saying that it’s not yet a forgone conclusion the money will actually be spent, and another official is cited as saying that the funds could be used “only if there is a worsening of the socio-economic situation.”

All this comes as Christine Lagarde, the International Monetary Fund managing director, is visiting Moscow, and has warned that Russia should not raise social spending, especially not in the run-up to elections.

The 200bn rouble plan comes on top of a 400bn rouble boost to military salaries, announced on Monday by president Dmitry Medvedev, who said pay would rise 2.7 times next year, instead of 1.6 times as previously planned. That raises the cost of the proposed increases to 900bn roubles. That’s real money.

Alfa Bank said in a note: “This suggests that the 2012 breakeven [oil price] may be close to $126/bbl vs. $118/bbl previously projected and $108/bbl this year.”

As well as inflating public spending, the proposals will put pressure on inflation. While this now stands at 7.2 per cent, near its lowest levels since Soviet times, it will struggle to fall much further. Alfa is sticking to a 7.2 per cent inflation target for 2012.

Meanwhile, the promise of extra spending does not have the same appeal to voters as it did a decade ago when Putin first took power in an impoverished country. As political analyst Mikhail Vinogradov told Vedomosti “the higher the incomes of the people, the more critical they are of the authorities.”

The Levada Center, a respected polling agency, on Monday released survey results showing Putin’s approval rating falling to its lowest level in more than a decade and support for his ruling party dropping.

Some 61 per cent of respondents expressed approval for Putin, down from 66 per cent a week earlier and the lowest since 2000. President Medvedev’s approval rating also plunged, to 57 per cent from 62 percent the previous week.

Reuters reported that Levada deputy director Alexei Grazhdankin said the declines may be a delayed reaction after Putin and Medvedev revealed on September 24 that they plan to swap jobs next year.

The poll results suggest the ruling United Russia party might lose its two-thirds majority in the Duma’s lower parliament house on December 4.

Putin remains a racing certainty for the presidency. But it could be more difficult for him to keep control than it has been in the past 10 years. And that’s with oil at around $115 a barrel. If oil prices were to plunge, there could be trouble.

Related reading
Russia: out of the shadows, FT
Capital flight: bad now, worse to come, beyondbrics
Russia’s central bank: hands tied, beyondbrics
Election uncertainty leaves Russia paralysed, FT