Russia Fiscal


Reality check prompts the government to change budget plans for this year

The government announced on 2 March that it would present new fiscal projection for this year and next in an effort to shore up the deteriorating economic situation and worsening economic prospects. The economy has been affected by a number of structural problems, but the economic deterioration has been exacerbated by the Western sanctions that have been imposed on Russia in response to the Ukrainian crisis and the sharp fall in oil prices that began in the second half of 2014. Amendments to the 2015 budget passed the first reading in Russian’s lower house of parliament on 27 March.

According to the Ministry of Finance, budget revenues are now expected to be RUB 12.5 trillion this year, which represents a 17.5% reduction compared to the Ministry’s original projection and a 14.1% decrease over the previous year. Meanwhile, expenditures are expected to stay at RUB 15.2 trillion, which will then push the fiscal deficit from the previously-expected RUB 431 billion to RUB 2.7 trillion—or from 0.6% of GDP to 3.8% of GDP. For 2016, the new figures suggest that revenues will recover to RUB 14.0 trillion and expenditures will fall to RUB 15.0 trillion. The Ministry of Finance continues to expect that the budget will be balanced in 2017.

The government’s new calculations are based on revised projections for oil prices, which are foreseen averaging USD 55 per barrel in 2015, USD 65 per barrel in 2016 and USD 70 per barrel in 2017. In addition, the government expects the economy to contract 3.0% this year and sees the ruble trading at an average RUB 60 per USD. In the previous budget, which many analysts had already considered too optimistic, the government had assumed that the oil price would average USD 100 per barrel in 2015, while it projected economic growth of 1.2%.

The Ministry of Finance also indicated that the new budget deficit (now projected at RUB 2.7 trillion, equivalent to 3.8% of GDP) would be covered by the country’s Reserve Fund, rather than by raising debt. The government expects that the RUB 4.7 trillion Reserve Fund will cover about RUB 3.0 trillion in total spending. That will, however, require the parliament to increase the ceiling on annual spending from the Sovereign Wealth Fund, but it is unlikely that the Duma will alter the plan. As a result, the total value of the Reserve Fund is expected to fall by over 60% this year.

In the geopolitical arena, although the new Minsk peace agreement—better known as Minsk II—that was signed on 12 February appears to be holding for longer than the last agreement, most analysts and observers have concluded that it is fragile and will not hold for very long. In order to de-escalate tensions, observers agree that further rounds of negotiations are required and that additional steps have be implemented. Should the violence in the Eastern regions of Ukraine continue and diplomatic talks fail, Western countries are likely to prolong, and perhaps even increase, economic sanctions on Russia. Should this occur, the Russian government would have to make further spending cuts and increase borrowing in order to run a similar deficit beyond 2015 as the Reserve Fund is expected to be depleted this year. This would be very costly, given the country’s worsening sovereign credit rating.

The government’s new fiscal deficit projections are more in line with those of FocusEconomics panelists who expect the fiscal balance to incur a deficit of 3.0% of GDP in 2015. For 2016, participants in the Consensus see the fiscal deficit falling to 1.9% of GDP.

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Russia Fiscal Chart

Russia Fiscal April 2015 1

Note: General government balance as % of GDP.
Source: Central Bank of the Russian Federation (CBR) and FocusEconomics Consensus Forecast.

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