Putin orders budget review as finance ministry lowers growth forecast

Jan 19, 2009, 15:22 GMT

Moscow - Russia signalled on Monday it would overhaul its 2009 budget against the backdrop of plummeting oil prices, Russia's main export commodity, and a forced devaluation of the rouble.

Russian Prime Minister Vladimir Putin on Monday ordered the finance ministry to review the 2009 budget, based on an average price of oil at 41 dollars per barrel.

'The Finance Ministry will have to introduce the necessary changes to the current budget for 2009 based on an oil price of 41 dollars per barrel,' Putin said during a televised government meeting.

The previous budget, which called for huge spending increases on infrastructure projects, social programs and defence, was based on an oil price of 95 dollars per barrel.

Putin's seemingly unshakable popularity has weakened as Russia's economy absorbs the blows of the financial crisis.

Analysts also speculate that the economic slowdown could fuel a split between Putin and his handpicked successor, President Dmitry Medvedev.

Finance Minister Alexei Kudrin projected Monday that Russia's economic growth could level off to between zero and 2 per cent this year as Russia allowed the rouble to devalue against the dollars for the sixth time this year.

The downturn is a huge blow to an economy that has grown at an average of 7 per cent in recent years, fueled by soaring energy prices.

Under Kudrin's conservative management, Russia locked oil windfalls of over 200 billion dollars into a rainy-day fund, which it will use to cushion the budget.

But Kudrin has warned that without a budget review the deficit could reach 1 trillion roubles (36 billion dollars per year). Along with government rescue measures, the deficit could dry up the reserve fund in a matter of years.

Economy Minister Elvira Nabiullina said earlier on Monday that the rouble will average 35.1 to the dollar this year if oil price remain at 41 dollars per barrel.

But Kudrin, speaking at a financial forum in Hong Kong, made bleaker forecasts, saying the price of oil could dip below 40 dollar s per barrel. He added the country would see inflation hit 13 per cent in 2009, up from 11.3 in 2008, amid the rouble slide.

As mass layoffs and salary cuts hit Russian cities, which have only experienced growth over the past nine years, the Kremlin may look for someone to take the blame.

Historically, this has been the prime minister. But many say Putin has been scheming to return to the post he held for eight years in the Kremlin - as the only man who can handle the job - should the situation grow worse.

But Medvedev last week criticized the government, headed by his political cohort Putin, for being too slow to adopt crisis-fighting measures.

'Many things have been implemented unjustifiably slowly,' Itar-Tass news agency quoted Medvedev as telling business leaders at a meeting on the effects of the slowdown.

Medvedev won last March's election riding the coat-tails of Putin's popularity after the latter endorsed him and said he would stand as his prime minister, essentially presenting a duel ticket.