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    Russian Economy General News: #1

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    Post  sepheronx Fri Sep 06, 2013 1:05 am

    Austin wrote:Hope they could negotiate on the gas price quickly thats what is remaining and key piece of puzzle.
    They will, only a matter of time. You dont want to rush these things as China is looking for best price possible, which is only fair. They already inked a deal for $200+ billion for oil, so they are in need of good price for gas.
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    Post  Austin Fri Sep 06, 2013 4:48 pm

    Russia’s Sergei Storchak warns on corporate foreign currency debt

    Russia’s deputy finance minister has expressed concern about companies’ rising foreign-currency debt levels amid recent emerging market turmoil.

    The issue of foreign-currency corporate debt is a sensitive one for Russia, given its companies needed a $200bn government bailout during the 2008-2009 financial crisis after the rouble and stock markets plummeted.

    “The level of indebtedness in the corporate sector has become quite large – it is already bigger than the international reserves of the central bank,” Sergei Storchak told the Financial Times in an interview at the G20 in St Petersburg. The situation, he said, “required monitoring”.

    Russian companies’ foreign debt reached $628.4bn at the end of the first half, an amount equal to 30 per cent of Russia’s economic output, according to Interfax’s Centre for Economic Analysis. That is not much lower than the 35.4 per cent level at the peak of the global financial crisis in 2009.

    However, Mr Storchak said that the situation for Russian corporate borrowers was significantly better now than in 2009, given that deposits of companies and households dwarfed the debt levels of both. He added that Russian companies also appeared to be in a good position to renegotiate the terms of their debt with creditors.

    “We are not saying that the indebtedness has reached a critical level yet,” he said. “We need to follow and monitor the situation. But it is too early to sound the bell that the situation is totally dangerous.”

    Mr Storchak said Russian markets were unlikely to be significantly affected by any reduction in monthly asset purchases by the US Federal Reserve that had rattled emerging market peers such as India and Indonesia, and had not experienced any worrying volatility recently.

    “The financial market of Russia is too small to be largely affected . . . That is my evaluation. It of course is integrated in the global financial system but only to a certain extent. It’s like a tsunami. The further you are from the centre the smaller the waves are.”

    While currencies such as India’s rupee and Indonesia’s rupiah have tumbled more than 10 per cent since the US Fed first indicated that it might start tapering its monthly asset purchases in late May, the rouble has dropped just 6.5 per cent because Russia runs a large trade surplus.

    But Mr Storchak admitted that market volatility had forced Russia to hold back a long-awaited $7bn Eurobond placement. “We only want to go to the markets when we know we’ll get a result that is not worse than [our current borrowing conditions],” he said.

    In a sign that Russia is not immune to market woes, the economy ministry recently more than doubled its forecast for net capital outflows this year from $30bn to $75bn. However, Mr Storchak said he was not concerned about the situation, saying that capital outflows did not necessarily signify capital flight.

    “Maybe it is movements from one financial instrument to another, maybe it’s moving money from one bank account to another,” he said. “I don’t see any particular connection here with the political situation.”

    He added: “That’s what it seems to me. Although maybe in the future the problem will appear deeper.”Russia’s deputy finance minister has expressed concern about companies’ rising foreign-currency debt levels amid recent emerging market turmoil.
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    Post  Austin Sun Sep 08, 2013 6:29 am

    Russia's budget spending could fall by 5 percent

    Costs to the federal budget of the Russian Federation may be reduced by 5 percent, except compulsory social security costs. The proposal was made by Finance Minister Anton Siluanov in an interview to "Russia 24".

    "Spending a whole will not be trimmed, because, according to the budget rule, the expenses approved by the three-year budget, and this is particularly true for 2014-2015, not decrease. Therefore, taking into account the new goals and objectives, we propose a budget maneuver - primarily due to uniform reduction of all expenses, except for regulatory-related costs, those costs which are mandatory - such as pensions, scholarships, etc., "- he said.

    "We propose to cut spending by 5 percent for almost all, without exception, the ministries and departments. Such a unified approach will build a pool of funds, which will then be directed to the priorities set by the government in the near future" - said Siluanov.
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    Post  sepheronx Sun Sep 08, 2013 7:13 am

    Could would should. All words. I recall 2008 when there was a real issue for Russia and even then, spending barely dropped, if not at all.

    But there needs to be a spending drop in various sectors, especially construction since far too much money is siphoned off. There is as well the medical and education system that is over bloated as well as in desparate need of repair.

    They really need to look at their spending and have more people watching what other federal bodies are doing. Concept if SAP is brilliant as it sets a deadline, budget and as well a goal. The goal isnt usually fulfilled at 100% but even if something like SAP existed for medical care, education and infrastructure development, the 70% success of the goals would be a major step up then they have now. Which is a total blight of the system, next to the tax payers themselves...sorry, I mean the ones who dont pay their taxes.
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    Post  Austin Sun Sep 08, 2013 7:28 pm

    Unlike in Europe, Russia's economic slowdown is a self-inflicted wound. If Russia abandons in own version of austerity, growth will soon pick up - says analyst Ben Aris.

    Russia flirts with recession
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    Post  sepheronx Mon Sep 09, 2013 6:29 am

    Good article Austin, thank you.

    Russia Catches up to Portugal for GDP Per Capita Purchasing Power

    The irony, exactly 10 years as predicted, the Russian caught up with Portugal's GDP per capita at PPP. It is interesting to notice. And how much laughter and irony heard:
    PORTUGAL - $ ​​24682
    RUSSIA - 24631 $
    True to liberastov is comfort - it's buying power in today's dollars. It is therefore particularly "alternative-developed" economists prefer to consider in 2005 dollars. There are other data:
    Portugal - 20,135 USD
    Russia - 15,633 USD
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    Post  Austin Tue Sep 10, 2013 7:38 am

    "It happens that excessive military spending could lead to the collapse of the economy"
    http://vpk.name/news/96484_sluchaetsya_chto_izbyitochnyie_voennyie_rashodyi_mogut_privesti_k_kollapsu_ekonomiki.html

    - What, in your opinion, will be able to achieve a reduction in military spending or the Ministry of Defense will defend?

    - That the king is going - to fund guns or butter to buy. All there. And at every stage of historical development is dominated by either one view or the other. Who dominates the view that if you do not feed your army will feed someone else. It is an objective reality. At the same time there are times when excessive military spending led to the collapse of the economic development model. It is necessary to understand what is happening now, because sometimes military spending, on the contrary, give a stimulus to economic growth. Everything is priced in dynamics.
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    Post  flamming_python Tue Sep 10, 2013 10:06 am

    Can't agree with that.
    Military spending, despite its strain on the budget; is fueling a huge revival in military-industrial production (and therefore the multitude of other contractors, advanced materials suppliers & metallurgy demand, electronics, high-tech software, etc...)
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    Post  sepheronx Tue Sep 10, 2013 7:40 pm

    Absolutely right Python. The military industrial complex is what drove the engine development as well as composite material development. Then there is the fact that because of the mic, mcst still has work (and working on a new microprocessor based off of the development of the Elbrus e2k which was built for...dun nnnnna...military). As well, thanks to the composite material market, the civil aviation market has the technologies for making lighter materials for aircrafts like ms-21 and ssj.

    As well, Russia sells a lot in terms of military equipment which in itself, stimulates the industries.

    Now, the government needs to take their military findings in materials and tech and release it to civil market to really make gains.
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    Post  GarryB Wed Sep 11, 2013 3:50 am

    It is money being spent within Russia that will upgrade and improve infrastructure and create jobs which means income going into the economy as well as the workers will eat and buy clothes etc etc.
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    Post  collegeboy16 Wed Sep 11, 2013 9:43 am

    Can someone here give me an idea about how profitable is arms exports, ie is it like selling 10$ nikes for 200$ kind of profit margins?
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    Post  TR1 Wed Sep 11, 2013 10:30 am

    collegeboy16 wrote:Can someone here give me an idea about how profitable is arms exports, ie is it like selling 10$ nikes for 200$ kind of profit margins?
    Very profitable.
    However the question is how much do you spend on having a domestic military complex that can even produce top tier export gear. At that point profitability goes out the window. If you want an independent weapons complex (and Russia is really pretty much the only one outside of the US who has this ability) for policy reasons however that doesn't matter, and the export income is the icing on top of the cake.
    Government pays big money on factory modernizations, pays for development, all that good stuff.
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    Post  collegeboy16 Wed Sep 11, 2013 11:54 am

    TR1 wrote:Very profitable.
    Thats a given and not the type of answer i had in mind, i was expecting some figures since im not a very imaginative person.Wink 
    TR1 wrote:
    However the question is how much do you spend on having a domestic military complex that can even produce top tier export gear. At that point profitability goes out the window. If you want an independent weapons complex (and Russia is really pretty much the only one outside of the US who has this ability) for policy reasons however that doesn't matter, and the export income is the icing on top of the cake.
    Government pays big money on factory modernizations, pays for development, all that good stuff.
    Agree, though i think that if you have really good stuff and are prepared to sell it,then it should pay for itself.
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    Post  flamming_python Wed Sep 11, 2013 11:55 am

    TR1 wrote:
    collegeboy16 wrote:Can someone here give me an idea about how profitable is arms exports, ie is it like selling 10$ nikes for 200$ kind of profit margins?
    Very profitable.
    However the question is how much do you spend on having a domestic military complex that can even produce top tier export gear. At that point profitability goes out the window. If you want an independent weapons complex (and Russia is really pretty much the only one outside of the US who has this ability) for policy reasons however that doesn't matter, and the export income is the icing on top of the cake.
    Government pays big money on factory modernizations, pays for development, all that good stuff.
    At its most shallow level you are correct; and Russia needs a complete MIC regardless, with export orders only helping to support it at most - but you have to look at it from a wider perspective:

    Having an advanced industrial economy which brings out high-tech goods requires a lot of investment, and over a large period of time; before it would start giving a return.

    And that's what the government is doing when it pays for the factory modernizations, R&D, etc... it's making an investment, a more long-term one than you might expect.

    You are correct that the direct military export sales only partially cover these huge costs; overall the government is still losing money.
    But looking at countries as the US; it's apparent that the military-industrial complex, as well as other net-loss enterprises such as the space program - are nonetheless the great engines that drive the development of an sophisticated industrial economy.

    The investments that Russia is making through its budget expenditures on military orders from existing factories, setting up of new production, hiring of new talent, modernization of existing equipment performed by sub-contractors, etc... should not have their return value measured in terms of the amount of new export orders that all these processes help realize; but rather:
    - how many orders they create in secondary industries that deal in materials/electronics/shipbuilding/industrial machinery/software/etc... production
    - how many young technical specialists (scientists, engineers, machinery operators, welders, etc...) are hired & trained, and how much experience existing ones get (that they can then bring to the civil sector)
    - how much it raises the salary of high-end technical professions in Russia and to what extent it makes them a more enticing prospect for today's generation of Russian students as opposed to finance or management or other such bloated, over-saturated professions.

    Of course the best MIC deals are the ones where you get the best of both worlds; a joint R&D project on a weapon system for another nation; whereby the other nation foots half or most of the bill while your engineers and researchers still get experience, your factories potentially get orders and you end up with a ready weapons system at the end of it which you could give to your troops or sell abroad.
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    Post  Austin Thu Sep 12, 2013 1:19 pm

    Abu Dhabi to invest record $5bn in Russian infrastructure
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    Post  Rpg type 7v Sat Sep 14, 2013 3:07 pm

    so now gulf states which are running out of oil fast but still have large amounts of capital are going to invest and pump their oil from russia?? unbelivable.
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    Post  AlfaT8 Wed Sep 18, 2013 6:12 pm

    Russia’s Economy at Worst Since Global Crisis – Minister
    MOSCOW, September 18 (RIA Novosti) – Russia’s gross domestic product (GDP) is growing too slowly to pull the country out of its worst economic situation since the 2008 global financial crisis, the country’s economic development minister said Wednesday, and the stagnation is unlikely to improve in 2014.

    Alexei Ulyukayev said during a “government hour” meeting in the State Duma – the lower chamber of the national parliament – that the revised estimate of 1.8 percent year-on-year GDP growth for this year, which was announced last month, is “unsatisfactory.”

    “It seems to me that we haven’t had such an unfavorable situation in the last five years, since the crisis,” he said. “This year, for the first time, we have a level of economic development that’s below the world average… Unfortunately, we don’t see opportunities in 2014 to get up to the world average.”

    Ulyukayev noted that the economic slowdown began at the end of last year, and attributed the stagnation to “strong demand constraints” and lack of investment. According to the Economic Development Ministry, Russia will suffer $70 billion in capital flight this year, indicating a critical lack of demand for major investment projects, he said.

    As a result, Russia will continue to trail the other BRICS emerging economies – Brazil, India, China and South Africa – in terms of growth.

    “We’re going to have nearly the same rate as the United States, which is coming out of recession,” Ulyukayev said.

    Russia downgraded its 2013 growth forecast for the second time this year in August, when it slashed its estimate from 2.4 percent to 1.8 percent. April’s prediction of 2.4 percent was itself a revision of an earlier estimate of 3.6 percent growth.
    http://en.rian.ru/russia/20130918/183551015/Russias-Economy-at-Worst-Since-Global-Crisis--Minister.html
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    Post  Austin Wed Sep 18, 2013 6:30 pm

    Ministry of Finance: amount of debt in 2013 will amount to 12 trillion rubles ( ~ $ 360 Billion , 18 % of GDP Shocked )
    http://www.itar-tass.com/c16/881172.html

    MOSCOW, September 18. / ITAR-TASS /. The total public debt in 2013 will amount to 12 trillion rubles, of which domestic debt - 6.052 trillion rubles. This is stated in the materials of the Ministry of Finance of the Russian Federation for the meeting of the Russian tripartite commission for the regulation of social and labor relations. "In 2014, the amount of debt you plan to 13.1 trillion rubles, including internal - 7, 245 trillion rubles, in 2015 - 14 trillion rubles / inside - 8, 466 trillion rubles /, in 2016 - 14.3 trillion rubles / inside - 9335000000000 rubles / - explained in the document. Shocked 

    Budget receipts

    According to the materials, budget revenues in 2013 will amount to 12.898 trillion rubles, expenses - 13.387 trillion rubles.

    In 2014, budget revenues are expected to reach 13.604 trillion rubles, expenses - 13.977 trillion rubles. In 2015, revenues are planned at 14.535 trillion rubles, expenses - 15.361 trillion rubles. At 2016 revenues are planned at 15.905 trillion rubles, expenses - 16.391 trillion rubles, according to the documents.  

    Russia's budget deficit up to 2013 could reach 0.7% of GDP , or 489.2 billion rubles. This is stated in the materials of the Ministry of Finance for the meeting of the Russian tripartite commission for the regulation of social and labor relations.

    The paper notes that in 2014, the federal budget deficit could reach 0.5% of GDP, or 373.1 billion rubles. In 2015, this figure is planned in the amount of 1% of GDP / 826,300,000,000 rubles /. At the same time, in 2016 the budget deficit could reach 485.7 billion rubles, or 0.6% of GDP.

    Finance Ministry is waiting for reducing non-oil revenues

    The Ministry of Finance expects a decline in non-oil revenues of the budget of the Russian Federation in 2013 to 494.5 billion rubles to 6.446 trillion rubles. In 2014, the decline is expected to reach 724.8 billion rubles, compared with the approved budget for 2013-2015 to 7.059 trillion rubles in 2015, non-oil revenues will decrease by 952.7 billion rubles to 7.729 trillion rubles. In 2016, the volume of non-oil revenues expected to reach 9.041 trillion rubles.

    In this case, oil and gas revenues in 2013 and 2014 will grow at a slower rate, what will the volume of non-oil revenues decline. At the end of 2013 the Ministry of Finance expects that this figure will reach 6.452 trillion rubles / increase of 526.7 billion rubles in comparison with the approved plan / in 2014 - 6.545 trillion rubles / increase of 265.5 billion rubles /. In 2015, expects to reduce this figure by 127.5 billion rubles to 6.806 trillion rubles. In 2016 the figure will be at the level of 6.865 trillion rubles.

    The prices of Urals oil is projected Ministry of Finance in 2014 amounted to 101 dollars per barrel in 2015 - $ 100, in 2016 - $ 100

    The Office also predicts that the increase in the basic rate of mineral extraction tax on oil in 2014 may provide budget 89.1 billion rubles, in 2015 - 197.1 billion rubles, in 2016 - 331, 8 billion.

    Additional federal revenues from higher severance tax (a tax on mining) in 2014 from 216 the year will amount to 619.3 billion rubles, said the Ministry of Finance. Changes in the revenue base associated with plans to increase the severance tax rate in 2014 from 470 rubles per ton to 491 rubles per ton, with a consequent increase in 2015 - to 515 rubles per ton, and in 2016 - to 545 rubles per ton.

    Excise revenues

    Budget revenues of the Russian Federation on the indexation of excise taxes on tobacco products in 2016 will amount to 88.5 billion rubles, Finance Ministry predicts. Also, according to the forecast office, gains from changes in excise taxes on alcoholic beverages by volume of ethyl alcohol of more than 9% in 2016 will amount to 5.7 billion rubles.

    Proceeds from privatization

    The Finance Ministry expects to gain from privatization in the years 2014-2016 455.2 billion rubles.

    In 2014, privatization, according to the Ministry of Finance of the project, which was presented today in the Government, will receive 196.8 billion rubles, / in the budget for the 2013-2015 income from privatization in 2014 was estimated at 330 billion rubles / in 2015 - 158.5 billion rubles compared to the previously approved amount of 595 billion rubles, in 2016 - 99.9 billion rubles.
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    Post  Austin Wed Sep 18, 2013 6:34 pm

    So with Finance Minister Projection Russian Debt at todays GDP of $ 2 trillion in 2016 it will be $443 Billion of ~ 22 % of GDP

    Last year in 2012 the debt to gdp ratio was 11 % and by 2016 it will Double to 22 % , so in 4 years doubling of debt Shocked 
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    Post  sepheronx Wed Sep 18, 2013 8:21 pm

    So you wont believe them when their predictions show growth but will believe them when they theorize about debt?

    Anyway, they are borrowing for development in social structure while maintaining a debt that is payable. I think they are aiming at creating a high.living standard and personal growth so that they could eventually aim at domestic development and sales vs ones from abroad. So the question remains is if will be domestic debt like Japans or foreign debt.
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    Post  sepheronx Thu Sep 19, 2013 3:17 am

    Treasury: Russia's budget surplus in January-July amounted to 736.9 billion rubles

    The surplus of the total budget of Russia (including the regional budgets and off-budget funds) in January-July amounted to 736.95 billion rubles., According to the Federal Treasury.

    Budget revenues in January-July amounted to 13 trillion 574.9 billion rubles., Expenses - 837 950 000 000 12 trillion rubles.



    The federal budget surplus (excluding regional budgets and extra-budgetary funds) for the seven months amounted to 287.22 billion rubles. Federal budget revenues reached 7,000,000,000,000 330,010,000,000 rubles., Expenses - 7,000,000,000,000 042,780,000,000 rubles.
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    Post  sepheronx Thu Sep 19, 2013 3:37 am

    AlfaT8 wrote:Russia’s Economy at Worst Since Global Crisis – Minister
    MOSCOW, September 18 (RIA Novosti) – Russia’s gross domestic product (GDP) is growing too slowly to pull the country out of its worst economic situation since the 2008 global financial crisis, the country’s economic development minister said Wednesday, and the stagnation is unlikely to improve in 2014.

    Alexei Ulyukayev said during a “government hour” meeting in the State Duma – the lower chamber of the national parliament – that the revised estimate of 1.8 percent year-on-year GDP growth for this year, which was announced last month, is “unsatisfactory.”

    “It seems to me that we haven’t had such an unfavorable situation in the last five years, since the crisis,” he said. “This year, for the first time, we have a level of economic development that’s below the world average… Unfortunately, we don’t see opportunities in 2014 to get up to the world average.”

    Ulyukayev noted that the economic slowdown began at the end of last year, and attributed the stagnation to “strong demand constraints” and lack of investment. According to the Economic Development Ministry, Russia will suffer $70 billion in capital flight this year, indicating a critical lack of demand for major investment projects, he said.

    As a result, Russia will continue to trail the other BRICS emerging economies – Brazil, India, China and South Africa – in terms of growth.

    “We’re going to have nearly the same rate as the United States, which is coming out of recession,” Ulyukayev said.

    Russia downgraded its 2013 growth forecast for the second time this year in August, when it slashed its estimate from 2.4 percent to 1.8 percent. April’s prediction of 2.4 percent was itself a revision of an earlier estimate of 3.6 percent growth.
    http://en.rian.ru/russia/20130918/183551015/Russias-Economy-at-Worst-Since-Global-Crisis--Minister.html
    We are not getting the full story. This guy should be fired seeing as what his title is, and what he isn't doing. As well, last I heard, it was $90B in capital flight, as well, foreign investments are higher now than they were before.

    Something isn't right. National reserves are up, currency is up in trading, gold reserves are up, and development is higher than ever before. What is their opinion of lack of demand for major investment projects? Titanium Valley, Skolkovo and all other technoparks, the invested Pharmapark outside of Tomsk, the industrial parks, are all pretty recent development and investment projects. So either this guy is flat out lying (which could be the case to try and make it look like he isn't incompetent) or more money is being stolen.
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    Post  sepheronx Thu Sep 19, 2013 4:25 am

    Tariff freezing in 2014 to bring 40 billion ruble benefit to population
    MOSCOW, September 18 (Itar-Tass) - The benefit for the population from freezing of tariffs in 2014 will reach 40 billion rubles, for enterprises - 130 billion rubles, Russian Economic Development Minister Alexei Ulyukayev said at the “government hour” in the State Duma lower house of parliament. He also noted that the agreed level of Russian Railways’ (RZD) shortfall in income as a result of freezing of tariffs of natural monopolies in 2014 would amount to 77 billion rubles.
    Additional budget revenues in dividends from Rosneftegaz after Rosneft stake’s sale can reach 423.5 billion rubles
    MOSCOW, September 18 (Itar-Tass) - Additional federal budget revenues in the dividends from OJSC Rosneftegaz, Russian company that manages state assets in oil and gas industries, as a result of the sale of a stake of 19.5% minus one share of OJSC Rosneft, Russia’s oil major, can reach 423,5 billion rubles (about $13.1 billion), the materials of the Russian Finance Ministry prepared for a meeting of the Russian tripartite commission on the regulation of social and labor relations read here on Wednesday.
    Russia’s budget to get over RUB 600 bn in additional revenue in 2014-2016
    MOSCOW, September 18 (Itar-Tass) - The Russian budget will get 619.3 billion roubles in additional revenue from raising the extraction tax in 2014-2016. The Finance Ministry said on Wednesday, September 18.

    The tax will be raised from 470 roubles per tonne to 491 rouble per tonne in 2014, to 515 roubles per tonne in 2015, and to 545 roubles per tonne in 2016.
    RF govt to discuss 3-year budget, minimum wage hike
    MOSOW, September 19 (Itar-Tass) - The government of Russia, at its meeting here on Thursday, will consider a draft Federal budget for 2014 and for the 2015-2016 plan period, a government press service official said.

    That the document would be examined was announced by Prime Minister Dmitry Medvedev on Wednesday when he was declaring open a session of the governmental commission on budgetary projections. "Our laborious work to balance the budget out in the light of the slowdown in economic growth in Russia and recession in Europe is drawing to completion," he said.

    Upon recalling that expenditure on some budget items is tobe cut down by not less than five percent, Medvedev emphasized that this would not apply to the "protected items" as well as to expenses on the implementation of the presidential decrees issued in May.
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    Post  Austin Fri Sep 20, 2013 9:44 am

    Russian Government Approves 2014-2016 Budget

    MOSCOW, September 20 (RIA Novosti) – The Russian government on Thursday approved the draft budget for 2014-2016, Russian Prime Minister Dmitry Medvedev said.

    The budget is based on the Urals oil price of $93 per barrel in 2014 and $95 per barrel in 2015 and 2016.

    According to previously announced figures, the 2014 budget deficit will stand at 391.4 billion rubles ($12.4 billion, 0.5 percent of GDP), with incomes of 13.569 trillion rubles ($428.6 billion) and expenditures of 13.96 trillion rubles ($440.1 billion).

    In 2015, the deficit will more than double and stand at 817 billion rubles ($25.8 billion, 1 percent of GDP), with incomes of 14.545 trillion rubles ($459.3 billion) and expenditures of 15.362 trillion rubles ($485.2 billion).

    The deficit will drop to 485.8 billion rubles ($15.3 billion, 0.6 percent of GDP) in 2016, with incomes at 15.906 trillion rubles ($502.4 billion) and expenditures at 16.392 trillion rubles ($517.7 billion).

    The premier said the budget was quite austere, because it is based on the real economic situation in Russia and global markets.

    “We will have to cut our expenditures, but not to the detriment of our main plans. Well-thought-out use of funds, a kind of budget rationalism should become obligatory for the whole budget system,” he said.
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    Post  Austin Sun Sep 22, 2013 6:37 pm

    Some views on Fed Tapering continuing

    Bernanke won’t taper, unless bond market or dollar collapses
    by Shanmuganathan Nagasundaram Sep 19, 2013

    In what had to be one of the most eagerly-awaited announcements of the year, US Fed Chairman Ben Bernanke announced his decision not to taper his bond purchases for now. In my thoughts on this topic written a couple of months ago, QE or no QE, I had said that Bernanke cannot taper “meaningfully” – not only at the September meeting, but ever. No drug addict can give up drugs without first experiencing withdrawal symptoms – which can be painful. It is easier to continue imbibing drugs even if they ultimately kill you. Bernanke won’t do a meaningful taper unless he does a U-turn in terms of his economic beliefs and accepts a collapse of the bond market and a deep recession as a solution to the US’s problems of excessive debt and excessive consumption – which seems unlikely.

    The other situation in which he may taper is if there is a full-blown US dollar currency crisis. I am not saying that the chances of a mild taper to the tune of $5-10billion a month is very low. In fact, I thought that Bernanke would taper a bit and the revolt in the bond market, with its cascading effects on the housing market as well as government finances, would have made him reverse course. With the Fed being almost the only buyer in the treasury market, any taper would have caused the rates to rise substantially. Even talk of a taper has caused rates to almost double from slightly over 1.5 percent a few months back to nearly 3 percent today. (It was 2.69 percent for 10-year bonds yesterday after the Fed announcement). The media would have portrayed the taper, if it had happened, as a tightening exercise. That’s how low the expectations of the media have been set by central banks – not only by the US Fed, but also by its counterparts in other parts of the world. Most central banks, including our own RBI, are running massively accommodative policies whose deleterious effects have only just started playing out. And yet, all that we can hear in terms of expectations from the government, industry bodies and the media channels are requests for further easing.

    So what should Bernanke have done? Bernanke should never have lowered the rates to zero in the first place and indulged in this exercise of bond buying. It was the monetary easing by the previous Fed Chairman, Alan Greenspan, that led to the housing bubble with all the accompanying imbalances in the US economy. This round of easing has been greater, by a wide margin at that, and so the consequences are going to be that much worse than in 2008 when the current bubble in treasuries/ bonds, fiat currencies and “confidence in governments” bursts. Given where we are at, the best course for Bernanke would be to wind down the bond buying programme, do a Paul Volcker on rates, and raise them substantially to generate savings. At the same time, he should force the government to cut back on its expenses. Given the near $20 trillion acknowledged national debt, even a 5 percent rate would put the interest outgo at $1 trillion, forcing the US government to massively scale down its unfettered spending programme. Ofcourse, there is zero chance that Bernanke will do that and so we will continue to witness the train wreck in motion, as has been the case for the last several years. The action in the treasury market is likely to be interesting in the months ahead. While most participants would expect the yields to fall over the short to medium term, I think the opposite is likely to happen. The initial reaction that we have witnessed in bonds all over the world is merely a “head fake”. After all, continued quantitative easing (QE) should logically imply a lower purchasing power for each existing unit of the currency and it’s quite natural for the markets to expect a higher return for holding onto something that is likely to lose its value over a period of time. So this is what is likely to happen: yields, after softening for the next few days, are likely to begin to rise and Bernanke or his successor would be forced to increase the bond buying programme to $100 billion a month from the current $85 billion to buy more treasuries to decrease the yields. As I wrote in the previous article, $100 billion a month will happen before $50 billion a month – and with this continued stimulus distorting the markets to a greater degree, a sustained improvement in the economy or the labour markets is never going to happen. As Ludwig von Mises of the Austrian School would love to compare, any economy on a central bank-induced cheap credit binge is like a drug addict… with time, one needs greater and greater dosages to even maintain the status quo. Any cleansing process of this addiction has to start with the rather painful, but much needed, withdrawal symptoms. In the case of the US economy, these symptoms would include substantially higher bond yields, resulting in a very deep recession, a massive reduction of government expenditure, a cleansing of malinvestment in the bubble sectors and reallocation of freed up resources on a market-driven basis. The path that Bernanke has put the US on is very different. He has taken the route of greater doses of stimuli that would allow him to temporarily postpone the withdrawal symptoms, but would ultimately cause the death of the patient. That has been the case for the last several years, but this time it indeed is going to be different. The patient under question is not only the US economy, but the US dollar as well. Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. He is also the India Economist for the World Money Analyst, a monthly publication of International Man. He can be contacted at shanmuganathan.sundaram@gmail.com

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