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Russia tightens budget to reduce oil price risk

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July 6, 2012, 8:03 p.m. | Russia and former Soviet Union — by Reuters

Russia will keep a tight grip on budget spending to reduce an excessive reliance on oil and gas revenues.
© AP

MOSCOW - Russia will keep a tight grip on budget spending to reduce an excessive reliance on oil and gas revenues, according to a draft three-year budget plan reviewed by the new government on Friday.

The fiscal strategy cuts projections for both revenues and spending, rowing back on fast spending growth that has helped Russia to resist global economic weakness and smoothed President Vladimir Putin's return to the Kremlin.

It also targets a balanced budget by 2015, although a fiscal rule being phased in to reduce the government's dependence on oil and gas taxes is far less strict than the one in place before the global slump of 2008-09.

"Experts are already calling next year's budget tough, and probably with justification," Prime Minister Dmitry Medvedev told a cabinet meeting.

Russia, the world's largest oil producer, relies on oil and gas taxes to cover half of its federal revenues and has been able to ramp up spending in recent years as crude prices have held over $100 per barrel.

With the global economy weakening and oil prices wobbling, the latest draft fiscal plan envisages that in 2013 the federal government would spend 13.4 trillion roubles ($408 billion), while anticipating revenues of 12.3 trillion roubles.

FISCAL RULE

That arithmetic would trim both sides of the fiscal equation, compared to expansive spending plans made before December's parliamentary election and the presidential election in March that returned Putin for a third presidential term.

The projections are 300-400 billion roubles lower than in the previous three-year budget plan, in line with a budget rule designed to reduce its sensitivity to oil price fluctuations.

Whereas the budget was previously based on the forecast oil price, the new plan bases income and expenditures on the average oil price during previous years.

"This is a serious instrument that will allow us to minimise the dependence of our budgetary system on the price of hydrocarbons and of course preserve internal stability," Medevedev said.

The fiscal plan envisages that in 2013, expenditures would be based on the average oil price over the previous five years, rising to 10 years by 2018.

If the actual oil price is above this long-run average, extra revenues would not be spent, but saved in Russia's Reserve Fund, designed to protect the budget against oil price shocks.

Current budget plans assume an average oil price of $97 per barrel in 2013 and $101 per barrel in 2014. In contrast, the new fiscal rule implies an oil price of $92 in 2013, $93 in 2014 and $94 in 2015, Finance Minister Anton Siluanov told the cabinet.

Despite the lower oil price assumption, the projected federal deficits were unchanged, amounting to 1.5 percent of gross domestic product in 2013, falling to a modest deficit of 0.1 percent by 2015.

Siluanov said that while next year's budget plan envisages a rise in nominal expenditures, spending would remain flat in real terms, with only small rises pencilled in for 2014 and 2015.

"All additional expenditures have to be found from structural reforms, within the framework of the existing significant accumulated volume of budget expenditures," he said.

OIL DEPENDENCE

But Russia's plan to keep a tight grip on spending does not fully address concerns about its dependence on oil prices.

The International Monetary Fund and World Bank have called on Russia to reinstate a fiscal rule under which the non-oil deficit, a measure of the fiscal stance excluding oil taxes, would have been reduced to below 5 percent of GDP by mid-decade, from above 10 percent of GDP today.

Under the latest budget plan, the non-oil deficit would decline only gradually, to 10.1 percent of GDP 2013 and 8.6 percent of GDP by 2015, Medvedev said. "Despite the small (budget) deficit, the size of the non-oil deficit remains at a high level," he said.

Analysts said the tough fiscal plan may also be hard to implement in practice and subject to future revision.

"A compromise will be reached at some point between the variants (proposed by) the Ministry of Finance and the variants of other ministries, which want to get higher spending," said Yulia Tsepliaeva, chief Russia economist at BNP Paribas.

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