By Kim Iskyan
In its 2010-12 draft federal budget, announced in late July, the Russian government calls for spending cuts, on the back of sharply reduced revenue expectations. Social program spending, primarily focused on maintaining the Kremlin’s popularity by dampening the impact of the economic crisis on the population, will increase at the expense of investment. The government foresees a 7.5% federal budget deficit in 2009 after nearly a decade of strong surpluses—and following sharp growth in the budget in recent years.
Meanwhile, underscoring the challenges that still lay ahead, in the second quarter of 2009 Russia’s economy contracted at the fastest pace on record, plummeting 10.9%, compared with a 9.8% decline during the first quarter of the year. Russia’s economy has contracted more than that of any other major emerging market bar Ukraine.
Workers at AvtoVaz, Russia’s largest auto manufacturer, went on strike to protest against lower wages. The company, which has received more than $1 billion in government support, is suffering as Russian auto sales continue to fall, posting a year-on-year decline of 58% in July.
US president Barack Obama and Russian president Dmitry Medvedev met in Moscow in early July for the much-ballyhooed “reset” in relations between the two countries. But aside from some arms agreements being signed, the discussions yielded few results. US vice president Joe Biden caused a stir a few weeks later when during a newspaper interview he characterized Russia’s economy and population as “withering.”
Aluminum giant Rusal said it was close to a new debt restructuring deal for the $7.4 billion it owes to more than 70 foreign creditors, following months of difficult discussions with creditors. Meanwhile, a British court ruled that Michael Cherney, a former business partner of Rusal majority shareholder Oleg Deripaska, can sue Deripaska in the UK, rather than in Russia, marking an important turning point in a case that could see Deripaska’s already-tenuous grip on his empire weaken even more.