(RBTH) Speaking at the Russia Calling Investment Forum, Russian President Vladimir Putin discussed the main direction in the development of Russia's economy. Analysts believe that Russia's main challenge will be keeping inflation under control - inflation that was partly brought about by the ban on food imports from the EU and the US.
Russia will continue expanding its cooperation with the BRICS countries, but will also maintain relations with the European Union, announced Russian President Vladimir Putin during the Russia Calling Investment Forum in Moscow on Oct. 2, organized by VTB Capital.
"We share the principles of the WTO (World Trade Organization), unlike some of the organization's founding fathers, and we will strive to develop Russia as an open market economy and will consistently solve the challenges set before us. The external restrictors only strengthen our decisiveness," said Putin.
According to Putin, the government's fundamental aim will be to balance Russia’s budget policy, and this year's events have only convinced the country's leadership of the rightness of its chosen course.
In particular, Russia will remain faithful to the budget rule according to which a part of the surplus profit from oil sales is moved into special funds: the Reserve Fund and the National Wealth Fund.
The general resource volume of these funds has already exceeded nine percent of Russia's GDP.
However, Putin admitted for the first time that Russia's inflation has gone beyond planned limits and reached 7.6 percent, mainly because of the price increase on foodstuffs, a result of the ban on food imports from countries that have imposed sanctions on Russia over its involvement in the Ukrainian crisis.
But Putin also said that monetary inflation had remained at five percent. “We have not augmented the fiscal burden and do not intend to introduce restrictions on the movement of capital," he said.
"The fundamental factors creating stability in Russia's economy are a non-deficit budget, balance of payments, as well as the Bank of Russia's decision to place the ruble on a free-floating regime."
Putin said that in the near future Russia will expand its relations with the Latin American countries and other members of the BRICS group (Brazil, Russia, India, China, South Africa) and it was as part of this policy that a record contract was signed in 2014 to supply gas to China. The creation of infrastructure for this project will be one of the most important building projects in the world, according to Putin.
Russian companies plan to carry out the projects with their key partners using national currencies. Gazprom Neft has already supplied the first installment of oil to China in return for payment in rubles.
Putin said that Russia will stimulate the creation of regional integrated associations, but will continue its work within the WTO framework and its collaboration with its biggest trading partner, the EU.
A host of problems
Russia's Central Bank Governor Elvira Nabiullina announced during the forum that the economic slowdown in Russia first and foremost bears a structural character, while the expectation of high inflation is leading to a growth in interest rates.
For this reasons, one of the Central Bank's main future objectives will be to target inflation and reduce the growth of prices. According to Nabiullina, in 2014 Russia's inflation will be almost eight percent; however, in the near future the Russian government is targeting a reduction to four percent.
High inflation is not the only problem with Russia's economy, however, as Russian Finance Minister Anton Siluanov pointed out: "On the one hand, geopolitical risks influenced investment expectations, on the other hand, oil prices began to fall," he said. "While in the first half of 2014, the price of Brent oil was $101 a barrel, now it is almost $91."
In such a situation, according to Siluanov, the government decided not to accumulate the volume of costs and not to stimulate an artificial economy, since that would have led to a growth of inflation.
"We also did not increase taxes, but rather began to restructure costs," he said, adding that part of the savings would be directed toward infrastructure, in particular, the development of Moscow’s aviation hub and the realization of projects in the Far East.
However, German Gref, the former minister of economic development and now president of Sberbank, Russia's largest bank, was against the decisions proposed by the government, arguing that the Central Bank's targeting of inflation is not an effective measure and the real rise in prices is substantially greater.
The former minister believes that the main problems with the Russian economy are the low quality of government regulation and the flow of capital abroad. Gref also spoke out against the ban on food imports from countries that have imposed sanctions on Russia, as well as the government's plan to substitute imports.
"We need to radically increase the quality of regulation, as well as force private companies to be more competitive," said Gref. "For now it is impossible, though: Half of our economy is monopolized."
Source: Russia Beyond the Headlines - http://rbth.com/business/2014/10/03/russia_to_continue_on_economic_course_despite_restrictions_says_puti_40347.html)
This article brings up a few interesting occurrences happening in Russia. Putin has masterfully utilized the sanctions as an excuse to restructure the economic sector. He wants an open market economy, which would open up the Russian business sector to anyone. This in turn would hopefully create more competition allowing Russia greater strength in the world economy. Also, it appears as though the sanctions has allowed the government to identify structural weaknesses in their economic plan, although some (German Gref) find that stronger regulation will be needed.