Putin's campaign promises pose economic challenges

NATALIYA VASILYEVA Associated Press Published:













Economists disagree.





Russia's economy grew by leaps and bounds in the years after Putin first came to power in 2000, mainly on the back of soaring oil prices. But back then, the government was able to balance its books with an oil price of only $60 per barrel. With the growing spending, Russia these days can avoid a deficit only if oil stays above $117. Urals crude is now trading at about $120.

Economists say the government may be able to afford the extra spending at this point, but it could hamper growth and leave Russia vulnerable in case of greater global economic turmoil or a drop in oil prices.

Russia has 1.8 trillion rubles ($61 billion) in a reserve fund, created from oil revenues that the government tucked away when prices were high. But even more money was sent out of the country last year, a whopping $84 billion in capital outflow, indicating a lack of confidence in the Russian economy and illustrating the difficulty the government faces in attracting needed investment.

Potential sources to cover the new expenses could include higher taxes on metals and mining industries and the privatization of some state-owned assets, as well as cutting costs and inefficiencies, according to Weafer.

Along with the campaign promises of higher wages for teachers and doctors, Putin's government has committed to spending 1.8 trillion rubles ($61 billion) this year alone to revamp Russia's armed forces. And military spending is set to grow by some 20 percent annually in at least the next two years.

Another touchy subject for Putin is Russia's relatively low retirement age of 55 for women and 60 for men.

Economists and even some Russian officials have insisted that the current pension system is unsustainable and will drain twice as much money from the budget in the coming decades unless the retirement age is raised. Putin, however, vowed throughout his campaign that the retirement age would remain unchanged.

Yulia Tsyplyaeva, chief economist at BNP Paribas in Moscow, said that while Putin's promises of higher salaries are feasible, the pension system poses a much more serious challenge.

"There is the question of how confident can a country feel when it transfers 5 percent of GDP from the budget to the pension fund, which runs a constant deficit?" she said.