* Calls for spending on priority tasks
* Won't dial back $700 billion rearmament plan
* Slowing economy, falling oil, squeezes state finances
By Darya Korsunskaya and Douglas Busvine
MOSCOW, June 13 Russia cannot afford to keep
raising state spending, President Vladimir Putin said on
Thursday, but it must find the money to fulfil the social
commitments he made on his return to the Kremlin last year.
Putin, in an annual presentation of the government's
three-year budget plan, said that "the possibility of constantly
and quickly raising state spending has been exhausted."
The 60-year-old leader won a third presidential term last
year with the help of aggressive pre-election spending hikes.
But a slowing economy and falling prices for oil - Russia's
main export earner - are now squeezing the public finances,
while foreign capital continues to flow out of the country.
The set-piece event offered Putin a chance to persuade
investors, who have been selling stocks, bonds and the rouble,
that he has a credible development plan after an election season
marked by rising urban discontent in Russia.
But Alfa Bank chief economist Natalya Orlova said Putin
failed to give much detail on how he would manage trade-offs
between investment and social spending. Nor did he outline key
"I am missing an understanding of where they want to
prioritise and what costs they are willing to accept," she said.
Russian stocks hit new one-year lows on Thursday while the
rouble picked up after an emerging markets sell-off, propped up
by central bank interventions aimed at dampening sharp market
The 10-year treasury bond firmed slightly, but its yield has
risen by nearly a full percentage point to 7.46 percent over the
past month amid concerns over when the U.S. Federal Reserve will
start to withdraw monetary stimulus.
Outflows of capital, and its increasing cost, have raised
concerns that Russia's $2 trillion economy may not pull out of a
soft patch. Growth slowed to just 1.6 percent in the first
quarter, less than half last year's outturn.
GROWTH AND DEVELOPMENT
Putin has accused the government of being slow to implement
a string of decrees he issued on taking office in May 2012 to
hike public sector pay, social benefits and regional development
programmes. Three ministers have since lost their jobs.
"It is necessary to optimise the budget's structure, to find
reserves and to redirect them towards the strategic tasks spelt
out in the decrees," Putin told senior officials.
"We should increase the share of spending on projects that
have the greatest impact on economic growth and social
Putin said he would not backtrack on plans to spend more
than $700 billion to re-equip Russia's armed forces through
2020. "We adopted this programme," he said. "We need to fulfil
it, but fulfil it effectively."
That is likely to put strain on a so-called fiscal rule,
designed to restrict new borrowing, that Moscow introduced only
"If you don't want to violate the fiscal rule, then you must
be ready to shift military spending to health and education,"
said Ivan Tchakarov, Russia economist at Renaissance Capital.
"This is not consistent."
The three-year fiscal package to be proposed by Finance
Minister Anton Siluanov foresees Russia running a budget deficit
until at least 2016, breaking Putin's pre-election promise to
balance the books by 2015.
Factoring in higher spending, the oil price at which the
federal budget would balance has risen to $115 per barrel. That
is above the $103 at which Brent crude, the benchmark grade used
in European markets, currently trades.
Putin has expressed concern over the outlook for Russia's $2
trillion economy, saying this week that forecast growth of 2.4
percent this year was below the level needed for stable
Putin ramped up federal spending by 17.8 percent last year
but under the government's current fiscal targets outlays will
grow by just 3.8 percent this year. The new spending package is
due to go before parliament this autumn.