Bailout To Cost Trillion Rubles

The government will spend 1 trillion rubles next year from its financial safety cushion, the Reserve Fund, as a result of the global economic crisis, Finance Minister Alexei Kudrin said Wednesday.

The figure, equal to about $36 billion, would account for about one-third of the fund's contents, which the country has been putting aside out of windfall oil and gas revenues since 2003.

Kudrin also indicated that the spending would continue at about the same pace in 2010-2011.

"We have created a serious cushion of stability and security for the budget," Kudrin told members of the Federation Council. "It will work for more than three years."

Kudrin first announced just last week that the government might dip into the Reserve Fund to cover federal and regional budget shortfalls. At the time, he said the cost would be more than 500 billion rubles.

Prime Minister Vladimir Putin since then has proposed a 4 percent cut in profit taxes and a slate of other business incentives to take effect next year to stimulate economic growth.

The introduction of these measures would mean foregoing another 550 billion rubles in revenues, the Finance Ministry said afterward.

Kudrin said the total cost of fulfilling all the obligations would be 1 trillion rubles, adding that the government should not make any further spending promises.

Speaking to the upper house of parliament before it approved the tax proposals, he put the current balance in the Reserve Fund at 3.6 trillion rubles.

President Dmitry Medvedev, on an official visit to Brazil, signed the bill into law 2 1/2 hours after the Federation Council vote, Interfax reported.

The subsidies to regional budgets will go to those heavily dependent on tax revenues from the production of oil and metals, commodities that have fallen steeply in price as a result of the global crisis, Kudrin said last week.

The decision to tap the Reserve Fund represents a significant turnaround in a short period of time, indicating just how quickly the economic outlook has worsened. As recently as Oct. 16, the Finance Ministry said it was counting on $95 per barrel of oil next year and had no plans of dipping into the fund.

Urals, the main Russian export blend of crude, has consistently traded at a range of $40 and $50 a barrel over the past few weeks.

Valery Mironov, chief economist at the Development Center, a think tank, said that dipping so deeply into the Reserve Fund was not a bad idea.

"It's possible to tolerate this for one year and see what happens," he said. "Perhaps we won't spend a third of it every year."

He said that, if the fallout from the crisis does not show any sign of receding next year, the government could then look at cuts in budget spending.

The size of the outlay from the Reserve Fund might also reflect government thinking that the bigger the aid package, the faster the recovery, said Danila Levchenko, chief economist at the brokerage Otkritie.

In his presentation to the Federation Council, Kudrin also explained the rationale behind the recent rise in the Central Bank's refinancing rate, a move that ran counter to that by most of the world's central banks as they try to boost liquidity.

He said that higher rate would lead banks to raise the interest they pay to individual depositors, who he described as the main source of liquidity. To be effective, he said the rates would have to remain higher than inflation, which was already above 12 percent for the first 10 months of the year.

What's more, he said, the move discouraged banks and companies from converting rubles into dollars, easing pressure on the domestic currency.

Kudrin said he expected the Central Bank to lower the refinancing rate in the second half of next year, by which time most government officials are saying they expect the worst of the economic storm to have blown over.