Russia’s $2.5 Billion Anticrisis Plan Designed to Balance Budget without Tapping into Reserves

Moscow is seeking ways to fulfill social obligations when oil prices are half as high as Russia had expected

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This article originally appeared at The Wall Street Journal

MOSCOW—Russia’s government has approved an anticrisis plan worth 170 billion rubles ($2.5 billion) for this year, seeking to balance the budget without heavy spending of its reserves, Finance Minister Anton Siluanov said Tuesday.

Moscow is seeking ways to fulfill social obligations when oil prices are half as high as Russia had expected. Western sanctions and a cut to the country’s sovereign rating add to Russia’s economic woes, making it almost impossible for Russia plug holes in the budget by borrowing on the global capital market.

A cut to some government programs will help to unleash funds for the anticrisis measures, Mr. Siluanov said Tuesday. According to the approved plan, budget spending won’t exceed previously agreed levels and may even decrease.

“Our task is to avoid reckless spending of Russia’s sovereign reserves,” Mr. Siluanov said.

Russia’s international reserves, accumulated over years of buoyant oil prices, fell by more than $100 billion in 2014 as the central bank attempted to save the ruble from falling to record lows. By mid-January, reserves had fallen below $380 billion for the first time since 2008.

Lower reserves would endanger Russia’s ability to service its debt, especially after the move by Standard & Poor’s on Monday to downgrade the country’s rating to junk.

Mr. Siluanov said the S&P decision was “excessively pessimistic” as it didn't take into account Russia’s strong points, such as its international reserves and low level of debt.

The rating downgrade is likely to have a limited impact on Russia’s internal financial system. Last week, the Bank of Russia issued an order that ignores the downgrade domestically, saying it will only use international ratings as of March 1 last year, a date before the annexation of Crimea and the beginning of the political standoff with the West.

Other top officials were more defiant in their comments on the S&P decision. Prime Minister Dmitry Medvedev said the rating downgrade was solely a “political instrument” which would have a negative impact globally.

Mr. Medvedev’s comment followed a threat from the West to impose fresh sanctions against Russia after a surge in fighting in eastern Ukraine killed around 30 civilians in the Kiev-controlled town of Mariupol over the weekend.

Although it isn’t clear when any new sanctions against Russia could materialize, Western penalties have so far proved to have a clearly negative impact on Russia, along with massive capital flight last year. This year, the sanctions are widely expected to push the commodity-dependent economy into contraction for the first time since 2009.

Mr. Medvedev promised a harsh response to any sanctions, particularly to the possibility that Russia might be locked out of SWIFT interbank payment system.

“I’d like to note that in case such decisions are made our economic and any other reaction will have no limits,” Russian news agencies quoted Mr. Medvedev as saying.

So far Russia has retaliated by banning food imports from countries that sanctioned Moscow in August, a move which hit Russian households by fueling inflation to double-digit readings.

“Geopolitical pressure on Russian assets is rising, as fighting in Ukraine is escalating and the West is urging to introduce new sanctions. Yet, our main concern is Russia’s reaction to the rating cut and new sanctions when introduced,” Danske Bank said in a research note.

Russia's finance minister Anton Siluanov speaking at a forum on Jan. 15. Mr. Siluanov on Tuesday said budget spending won’t exceed previously agreed levels and may even decrease.
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