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A Change of Plans

Remember the oligarch rescue plan?  How the Russian government drew up a list of privileged companies and individuals to whom it would divvy out the stimulus funds (despite Putin’s speech at Davos)?  Well it seems that the Kremlin is going to change its plans and focus on directing its support directly to the banking sector … which seems like a response to the fact that political risk has slagged the economy, foreign investor confidence wiped out (by that, I mean the recent Fitch downgrading), and that many financial authorities have given up hope that public spending can last them through the crisis.  What is interesting is that despite “giving up” on its own economy, the Kremlin is focusing more than $10 billion on power politics and soft power in Central Asia – a risky move by the leadership.

From the Financial Times:

Russia’s planned policy change was revealed by Igor Shuvalov, the first deputy prime minister, who said the government was deliberately choosing to allow gross domestic product growth to fall to zero or below in 2009 to stabilise the economy and maintain foreign exchange reserves. Moscow was rejecting the advice of those economists who had suggested using the reserves to finance a budget deficit of 10 per cent of GDP to promote growth, Mr Shuvalov told investors at a closed-door meeting in Moscow.

According to those present, the deputy primeminister also said the state would invest “several percentage points ofGDP” in strengthening the banking sector, covering “possible futurelosses” and supervising a consolidation plan that would see the numberof banks cut from 1,100 to 500. Separately, Alexei Kudrin, the financeminister, confirmed during a visit to London that the state waspreparing to inject $40bn (€31bn, £28bn) capital into banks providedthat the money was channelled into the real economy. This would followlast year’s Rbs960bn package of subordinated loans.

Mr Shuvalovmade clear some key industrial companies would continue to getpriority, headed by military enterprises, Gazprom, the gas monopoly,electricity groups and the state railways. This is a far more tightlyfocused target than the previously announced list of 295 industrialcompanies deemed worthy of financial support that included oligarch-ledgroups such as Rusal, the aluminium company, and Norilsk Nickel, themetal combine.

While more loans to oligarchs are not ruled out,they are no longer in favour. Mr Shuvalov suggested that the stateshould not have lent $4.5bn to Rusal, Oleg Deripaska’s aluminium group,on the security of its 25 per cent stake in Norilsk Nickel, the metalscompany, when it was clear these shares were worth only $1.5bn.