UPDATE 1-Russian finance minister warns on spending as crisis deepens

14 Jan 2015 | Author: | No comments yet »

Ruble Falls 4th Day on Oil as Russia Concedes Junk Rating Likely.

MOSCOW (Reuters) – Russia’s finance minister called on Wednesday for a cut in planned spending to weather an economic crisis, warning of a more than $45 billion (29.65 billion pounds) drop in revenues this year if the average oil price is $50 a barrel.The ruble weakened for a fourth day as Russia’s economy minister acknowledged the government risks losing its investment-grade rating amid a slump in oil that is tipping the economy into a recession. In comments underlining the government’s growing concern at the downturn, Finance Minister Anton Siluanov said all budget expenditure should be cut by 10 percent except defence, a priority for President Vladimir Putin. Adding to the gloom, Economy Minister Alexei Ulyukayev said there was a “pretty high” chance Russia’s credit rating would be downgraded to junk and a deputy, Alexei Vedev, said he expected inflation to peak at 15-17 percent in March/April.

A steep fall in the rouble, low prices for its main oil export and Western sanctions over Moscow’s role in the Ukraine crisis have hit Russia’s economy hard, and Siluanov said overall expenditure in 2015 must increase by 5 percent, not the 11.7 percent previously budgeted. “The state cannot have the kind of spending it used to have with economic growth … (and) with the oil price at $100 per barrel,” Siluanov told a conference of state officials, economists and business chiefs. “We need a radical turn in economic policy,” said German Gref, the head of Russia’s biggest bank, Sberbank, demanding a “breakthrough” to improve the dire investment climate, stymied by state pressure on business and weak rule of law. Oil’s 60 percent collapse from last year’s high is pushing the economy toward recession after U.S. and European Union sanctions over Ukraine shuttered foreign debt markets for Russian companies. A downgrade by S&P could trigger more outflows from Russian assets, according to Yury Tulinov, head of research at OAO Rosbank, Societe Generale’s local arm.

The yield on five-year local-currency bonds, known as OFZs, fell 12 basis points to 17.52 percent, paring the year-to-date increase to 211 basis points. “If S&P cuts, they may have to close their positions, sell OFZ bonds, convert the rubles they receive into dollars and take them out of the country,” he said in e-mailed comments. Brent crude, which contributes about 50 percent of Russia’s state revenue together with natural gas, slid 0.4 percent to $46.40 a barrel, the lowest since March 2009. Support from the Finance Ministry “does make sense under the assumption of oil rebounding from current levels,” Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow said by e-mail.

To contact the reporters on this story: Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net; Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

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