MOSCOW - Strong oil prices and capital inflows will create policy headaches for Russia's next government as it seeks to prevent the economy from overheating, curb inflation and put state finances on a sounder footing, senior officials said on Tuesday.
With just over a month to go until Prime Minister Vladimir Putin is sworn in as president, Economy Minister Elvira Nabiullina raised her forecast for the average oil price this year to an unprecedented $115 per barrel.
That will sustain a current account surplus that last year reached $100 billion, or around 4 percent of gross domestic product, and tempt the government to continue spending freely as it did in the run-up to the presidential election.
The formation of a new government will also end months of political uncertainty prior to the March 4 vote, encouraging investors who had been pulling money out of Russia to dip back into its stock and bond markets.
Russia’s successful placement of $7 billion in five-, 10-, and 30-year Eurobonds will lead to follow-on issuance by large firms, while underperforming Russian stocks may attract bargain hunters, said a top central bank official.
"It is possible that we will enter a situation of twin (capital and current account) surpluses, as we saw in 2006-2007, and this will create huge liquidity on the domestic market and inflationary risks," said Alexei Ulyukayev, first deputy chairman of the central bank, told a conference put on by Moscow’s Higher School of Economics.
Inflation hit a post-Soviet low of 3.7 percent in February, but that figure was flattered by base effects and delays to hikes in household utility bills intended to create a feelgood factor before the presidential vote.
Those effects will wear off from mid-year, when utility bills will also go up, making it tough – but still possible – to hit the central bank’s year-end inflation target of 5-6 percent, Ulyukayev said.
He signalled that policymakers would keep interest rates unchanged at their monthly meeting early next week.
The current range of 225 basis points between the central bank’s main policy rates – the one-day fixed repo now at 6.25 percent and its 4 overnight deposit rate – was "comfortable" for the market, he said.
OIL-FIRED
The government ran a budget deficit in the first two months of the year as public sector pay rises and pre-election spending kicked in, but Finance Minister Anton Siluanov told the same conference that the balance turned positive in March.
The federal budget ran a surplus of 125 billion roubles ($4.3 billion) last month, bringing down the deficit for the first quarter to 120 billion roubles.
Russia’s 2012 budget, based on an oil price forecast of $100, foresees a federal deficit of 1.5 percent of GDP.
Nabiullina sounded a note of caution on oil prices, saying they would fall from their current highs. "In all probability we are at the cyclical peak for oil prices," she said.
She left her 2013 and 2014 oil forecasts unchanged at $97 and $101 per barrel respectively. Around half of federal revenues are generated by oil and gas levies.
Failure to shake off its resource dependence could condemn Russia to long-term growth rates of 2-3 percent, Nabiullina said. Private-sector economists, meanwhile, say the economy already appears to be overheating even though they only expect it to grow by 3.7 percent this year.
SAVING FOR A RAINY DAY?
Even though current oil prices at $125 per barrel are favourable for the world’s top energy producer, that is only just above the level at which the budget would balance in 2012.
Putin’s commitments to boost defence and social spending will force up that level in the coming years, leading policymakers like Siluanov to call for the re-introduction of a ‘fiscal rule’ to govern future state spending.
The rule was abandoned during the recent financial crisis, and Siluanov is now considering a framework by which the budget should balance based on a 10-year average of oil prices.
"Whether oil prices are low or high, we still have to pay wages," he said. "And if the oil price falls to $80 per barrel, where do we get the money to fulfil our commitments?"
Siluanov received support from his still-influential predecessor Alexei Kudrin, who said the 10-year rule should be phased in by mid-decade to ease the necessary fiscal adjustment.
"If we used the 10-year average (now) we would have to balance the budget at an oil price of $60-$70," said Kudrin, adding that making the transition by 2015 would mean the average price would rise to $80-$90 per barrel.
