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collateral for expensive short-term borrowing from the CBR. After two months of growing worries, the CBR stepped in, took the banks over using the new bank stabilisation fund, and abruptly ended the crisis.
While some have criticised the government for closing the Garden Ring banks and see it as a ruse for the state-owned banks to increase their market share – the state now owns some 70% of banking assets as a result – the problem with the Garden Ring banks is they had all bought pension funds and using their cash to pump up their balance sheets. That was fine as long as pension premium payments continued to rise, but when this sector reached maturity the pyramid would crumble. The Garden Ring banks were a systematic crisis waiting to happen.
There are a few more banks to close. Several years ago Putin said he believed the optimal number of banks was 300, and pointed to the German system as the model for Russia.
The banking sector has now entered the end game. If the CBR continues to close banks at the same steady pace it has been then Russia will reach this target in about 2020 and the clean up will be over. The next phase will then begin: the privatisation of the sector as the CBR attempts to sell all the formerly commercial banks it picked up in last year’s crisis that are currently residing in the Bank Sector Consolidation Fund and more sales of stakes in Sberbank and VTB bank.
2.5 Health up in budget spending, defence down
At the end of October, the Federal Budget for 2019-21 passed its first reading in the Duma. Lobbying in the committee stage could lead to changes, nevertheless we can draw some preliminary conclusions on where government spending is heading over the next three years.
The headline takeaway is that after several years of real-terms cuts, public spending is set to rise after inflation. However, fiscal policy remains conservative: expenditure is projected to increase by around 17% by 2021 compared with 2018, but after inflation that is equivalent to only around a 4% increase. Indeed, federal spending is projected to decline further as a share of the total economy, from 17.2% of GDP in 2018 to 16.9% in 2021.
The draft budget appears to signal a re-orientation in spending away from security and defence towards social priorities.
Health and education are the big winners, with nominal increases of 55% and 22% by 2021 respectively. By contrast, spending on defence and “national security and law enforcement” is set to increase by 5.5% and 10.6% respectively, probably equivalent to real-terms cuts in both areas.
Total spending on the defence and security bloc will fall to 4.6% of GDP in 2021, from 4.9% in 2019.
Caution is needed in assessing total spending, as large sections of the budget are classified (spending equivalent to 3% of GDP or 17% of the total budget according to the Gaidar Institute). Moreover, as Mark Galeotti notes, some defence spending gets absorbed in other areas. Also, while the government is increasing central spending on health and education, it is planning a real-terms cut in inter-budgetary transfers around 10%, which may impact the quality of services in poorer regions.
Another notable loser from the draft budget is the agricultural sector, which will see spending on the state support program fall by almost a tenth in nominal terms in 2019-21. Interestingly, for all the noise and debate about information
13 RUSSIA Country Report December 2018 www.intellinews.com