You're reading: Russia on self-help drive to stop spending oil profits

MOSCOW - Russia's commitment to economic reform will soon be tested by a plan to place its fragile public finances on a stable footing - primarily by weaning them off the ups and downs of the global oil market.

Various proposals are being floated, but the main idea is to cap the amount of money energy-rich Russia can spend from its oil profits, saving windfalls instead.

In the first major policy initiative since Vladimir Putin’s election as president in March, the Finance Ministry is advocating a new "fiscal rule" to tie government expenditures to the average oil price over the previous 10 years.

It will be the first item on the agenda of the new government to be appointed in May – and an early indicator of Putin’s economic policy priorities at the outset of his six-year presidential term.

"The first and most important task is guaranteeing the budget’s predictability and stability – here we need rules," Finance Minister Anton Siluanov said recently.

"We need (spending) ceilings because … 50 percent of our revenues come from oil and gas. It’s a substantial risk to the stability of the whole budget system."

The ministry’s idea is that above the 10-year average oil price, surplus oil tax revenues would not be spent, but husbanded for the future through Russia’s two sovereign wealth funds.

The ministry also wants the government to cut spending by 2.5 percent of gross domestic product by 2016, and limit annual borrowing to no more than 1 percent of GDP per year, according to a draft proposal leaked to the Interfax news agency.

UNDER FIRE

But these austere plans are already coming under fire from other senior officials.

Earlier this month, Kremlin economic adviser Arkady Dvorkovich criticised the idea of using the 10-year average oil price, favouring a softer three-year rule floated by the Economy Ministry.

The spat highlights the dilemma Russia faces in stabilising government finances, whilst meeting the generous spending commitments – variously reckoned at between 1.5 percent and 5 percent of GDP per annum – made by Putin before last month’s election.

"The decision to establish a fiscal anchor is welcome," said Odd Per Brekk, the International Monetary Fund’s senior resident representative in Russia.

"The main question is finding an effective and well-defined anchor."

All the proposals fall short of measures recommended by the IMF and World Bank. They have repeatedly called on Russia to reinstate its old fiscal rule, which targeted the so-called non-oil budget deficit.

Russia originally aimed to prevent this deficit – a measure of the underlying fiscal stance that excludes oil and gas taxes – from exceeding 4.7 percent of gross domestic product.

But it threw this rule out of the window in 2009 in response to the global economic crisis.

Since then, a surge in government expenditures has caused the non-oil deficit to balloon to 10 percent of GDP – and the oil price at which the budget balances to rocket from below $40 per barrel in 2007 to around $115 per barrel today.

Rating agency Standard & Poor’s has estimated that were the oil price to fall to $60 per barrel – an unlikely but not impossible scenario – the overall deficit would blow out to an alarming 8 percent of GDP, 8 percent of GDP, reversing an apparently healthy 0.8 percent surplus last year.

The advantages of a fiscal rule go beyond protecting government finances from the seemingly remote prospect of an oil price collapse.

A more pressing concern is that as long as Russia spends its windfalls from high oil prices, its fiscal policy is pro-cyclical – exacerbating the chronic boom-bust cycle that is the bane of its commodity-driven economy.

"The short-term risk for Russia is that the economy will overheat once more," said Clemens Grafe, Russia economist at Goldman Sachs, "and the main reason for that is fiscal policy."

FISCAL SAFEGUARDS

While the Finance Ministry is talking tough, its proposals would still leave the budget vulnerable to an oil price shock for several more years.

Under the ministry’s plan, the budget’s break-even price would decline gradually to $90 by 2016, after which the 10-year rule would kick in.

"Russia would do well to try and be more ambitious than these numbers," said Kaspar Richter, chief Russia economist at the World Bank.

The Finance Ministry’s proposal to cap government borrowing tightly would help address criticisms that the oil-price rule doesn’t go far enough.

"Although (an oil-price rule) may seem intuitively simple, it is actually not a comprehensive rule. You need to supplement it with an additional borrowing ceiling and a spending ceiling," said the IMF’s Brekk.

But such ideas won’t go down well with the other factions in Russia’s government, opposed to unpopular spending cuts.

And drawing up a new fiscal rule on paper will be the easy part: The real test will come when Russia tries to stick to it.

"Ultimately what probably matters most," says Richter, "is that you implement this rule in a determined fashion."