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Russian Government Feels Squeeze Of Tighter Sanctions

The ruble has recently plunged to a record low.
The ruble has recently plunged to a record low.

Russia is putting on a brave face by saying Western sanctions have little impact but there are ever more signs the sanctions are causing serious problems for the state budget.

The U.S. and EU sanctions, intended to force Moscow to stop its interference in Ukraine, toughened on September 12 to include barring key Russian state companies from Western financial markets and restricting Russian state energy companies' access to Western technology.

One sign of the tighter sanctions' impact has been the falling ruble, which plunged to a record low of 38.24 to the dollar on September 15.

Another sign is Moscow's plan to raid the country's pension fund to help create an "anti-crisis reserve" intended to supply cash to the state banks and oil companies cut off from Western lenders.

Russian Finance Minister Anton Siluanov said September 15 that Moscow would withhold some $8.2 billion in payments originally earmarked for the State Pension Fund in 2015 and redirect at least $2.6 billion of that sum into the new reserve. He also said an unspecified amount of surplus monies in this year's state budget would be added to create a reserve of "substantial size."

Among cash-starved state companies which have already said they need help is Russia's oil giant Rosneft.

Britain's daily "The Telegraph" reports the company has asked the government for a credit line of more than $40 billion to meet investment needs and refinance $29 billion in debt by the end of next year.

Dipping Into The Pensions

But the Russian pensions system is not the only state institution likely to be hit in the widening search for funds to prop up state firms.

Economic Development Minister Aleksei Ulyukayev said September 12 that "we will support our sanctions-hit companies by all means." He said the support measures could include direct budget allocations, the use of funds from the pension fund, or using funds from the National Prosperity Fund.

The National Prosperity Fund, one of two Russia's sovereign wealth funds, is a stash for energy revenues which is supposed to serve as a security cushion in case of serious economic downturns.

Yet even as Moscow appears ready to search everywhere for surplus cash, its ability to support its sanctions-hit companies could prove limited.

"A lot depends on what's happening to the oil price," says Ian Bond, director of foreign policy at the Centre for European Reform in London. "The budget and accumulation of surpluses in the two national wealth funds depends so much on the world oil price and at the moment it is rather too low for Russia to run a surplus."

The European Bank for Reconstruction and Development (EBRD) said in a report issued September 18 that it now predicts negative growth for the Russian economy in 2015. The EBRD forecast the economy would contract by 0.2 percent next year due to the impact of both Western sanctions and the sanctions that Moscow has imposed on the West in response.

Few prominent voices in Russia today dare to warn Russians of the worsening economic situation. But one is a former finance minister, Aleksei Kudrin.

He told a business conference in Moscow on September 16 that the government will not be able to support all state companies hit by Western sanctions due to its large state social spending commitments and the slowing economy.

Kudrin also said he expected the Russian economy to stagnate this year or weaken further before negative growth in 2015. By contrast, the Russian government forecasts 0.5 percent growth in 2014 and 1 percent growth next year.

Amid the economic crisis, the Kremlin has repeatedly said Russia has many opportunities for growth.

Deputy Prime Minister Arkady Dvorkovich told the same business conference in Moscow on September 16 that "turning to the East brings good prospects, especially for Russia's far east."

As an example, officials cite the $400-billion gas-supply deal signed by Russian President Vladimir Putin and China's President Xi Jingpin in Shanghai in May. The deal is to link Russia's huge gas fields to Asia's booming market for the first time -- via thousands of kilometers of new pipeline across Siberia.

Cash Flow Problem

Analysts, however, say it will be years before the deal actually generates a steady stream of revenue for Russia.

"The deal involves Russia in developing two new fields and building new pipeline infrastructure because there simply isn't the infrastructure to take gas from the western Siberian fields, in the areas that currently supply Europe, and to pipe it eastward to China," says Bond. "There would have to be major investments to do that and it couldn't be done overnight."

That leaves open the question of how far the government will go in looking for additional revenue immediately to aid its state companies.

A worrisome possibility emerged this week when the police launched an investigation against Vladimir Yevtushenkov, one of Russia's richest private businessmen and the head of AFK Sistema group, which owns the oil firm Bashneft and Russia's largest mobile-phone operator, MTS.

Some observers see the investigation of Yevtushenkov on charges of money laundering as an attempt to get hold of some of his capital assets.

"Russia is short of cash because of Putin's military ventures and because of the sanctions resulting from these military ventures," says Yevgeny Chichvarkin, a former Russian telecoms magnate who fell afoul of the Kremlin and now lives in London. "They want to pry Bashneft away from him and either merge it with Rosneft or turn it into a state firm."

"This has nothing to do with politics, it's a mere gangster story," he told RFE/RL's Russian Service. "Crimea was up for grabs; they took it. Bashneft is up for grabs; they will take it, too."