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. Last Updated: 07/27/2016

Abandoning a Commitment To Stability

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In the leadup to elections, it's not enough to try to give money to the needy. If an economy claims to be of the market variety, you have to help the markets as well. This might explain President Vladimir Putin's suggestion to invest state money in stagnating blue chip stocks.

The blue chips in question are, for the most part, oil and gas companies, and current sluggish stock markets reflect their problems. The taxation regime in the oil and gas sector has resulted in significantly lower profits for these companies in the last two quarters. An injection of funds accumulated from the taxation of extraordinary energy company profits into the markets might lead to some speculative rise in share prices, but is unlikely to produce the fundamental conditions necessary for stable growth in the future.

Putin's suggestion reflect sthe attitudes of a large number of government officials who are unhappy with the conservative policies of the Finance Ministry. Investing money from the stabilization fund in low-return foreign securities is low risk and helps avoid inflationary pressures at home. But opponents of this strategy believe it is possible to use the funds in such a way as to boost gross domestic product and reap better returns, without seriously boosting inflation.

Today, as the budget surplus shrinks and state expenditures continue to grow, there is rising pressure to break open the piggy bank, and Putin appears to be tempted.

In his state-of-the-nation address, he announced increased spending of about $27 billon, along with suggesting that state pension fund shortfalls could be covered with oil and gas tax revenues. He didn't directly refer to the stabilization fund, but many officials and analysts came away with the impression that the fund is no longer the sacred cow it once was, and that the time to start doling out its contents has arrived.

Investing or spending this money means converting the necessary foreign reserves to rubles, which will put upward pressure on domestic currency, as Finance Minister Alexei Kudrin pointed out in public comments on Monday and Tuesday. Meanwhile in 2007 the rate of growth in state spending is now outstripping income and GDP growth.

At the beginning of May, Putin was warning that a strong ruble could hurt Russian manufacturers. On Monday he seemed content that the Central Bank has done little to keep the ruble down. Apparently, the ruble has been left to its own devices. True, a reduction in the country's trade surplus might eventually allow the Central Bank to buy less foreign currency, which would reduce pressure on the ruble and inflation. At the same time, though, the pressure from government spending looks set to rise.

This appeared as an editorial in Vedomosti.