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5:21 AM RUSSIA MACRO-POLITICS: GAMBLING ON STABILITY

http://www.russiaotherpointsofview.com/ September 30, 2013 FINANCIAL ANALYSIS  Weafer_photoby Chris Weafer "Eskimo:  "If I did not know about God and sin, would I go to hell?” Priest:     "No, not if you did not know” Eskimo:  "Then why did you tell me?” Annie Dillard (Pilgrim at Tinker Creek) Battening down the hatches. Having spent all summer talking about the need to lower debt service costs and stimulate growth in the flat-lining economy, the recent policy decision by the Central Bank, and the government’s proposal to cut budget spending to avoid expanding the deficit, points to a near 180 degree turn in strategy. The key assumption. Instead of trying to boost growth with spending and policy initiatives the government seems intent on maintaining stability while trying to pull inflation towards 5.5%. The thinking appears to be that A) the economy will show some recovery over the next four months because of the base-effect from a weak 2nd half in 2012, B) the global recovery will pick up pace and help Russia’s export industries, and C) lower inflation and stability will create the right backdrop for organic recovery in 2014. That’s a heck of an assumption to make. Inflation will surely fall to less than 6% by the end of this year and the Central Bank should be able to maintain the ruble within a defined range of (probably) R/$31.5–R/$34.0. Global recovery, especially in emerging markets, still has a flashing question mark as regards timing because of the uncertainty of the Fed’s actions, the return of Washington bickering over budgets and deficits and a probable period of fresh concerns in the eurozone (see later). The consumer sectors are more at risk. The bigger question mark is over the impact on domestic growth from the decision to cut budget spending in 2014–2016. The breakdown of cuts is still to be finalized but it seems that the bulk of the cuts will be borne by the "soft-targets” rather than by sectors represented by powerful lobby groups, e.g. defense. A scale back, or freeze, in public sector salary increases and in the pensions system may be replicated by other industries keen to use the excuse to improve profitability. That may directly hurt the consumer sectors which have been the engine of growth in the economy for many years. The revised budget plan for the next three years is expected on October 1st.

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