With the price of oil still relatively low Russia may have to dig more into its cash reserve to meet obligations to social programs
Russia’s Prime Minister Dmitry Medvedev is getting worried. On Wednesday, Medvedev sounded alarm bells that a persistent budget deficit would lead to cuts in social spending at a time when incomes are stagnating beyond the major city centers, and the economy is still relatively flatlined.
Medvedev stressed that the budget process this year will be difficult with oil averaging under $50 per barrel. He warned parliament not “to be deceived by the improvement of the situation in the oil markets.”
Russia’s spending was based on oil averaging the year at $50. It only recently hit that price and is back to trading under that level for nearby Globex WTI futures contracts. Russian Urals prices are usually a bit cheaper.
“We have to evaluate our options, including assumptions about the price of oil, if we are to meet our obligations to social programs,” he said.
Next year, the Finance Ministry drastically reduced its budget estimates for oil from current levels to $40, a wise move considering Russia’s median price forecast for crude has missed the mark now for at least two years. Anton Siluanov, Russia’s FinMin, said the budget deficit should end this year at around 3% of GDP and then fall to around 1% of GDP if all goes swimmingly well by 2018.
Russia’s government is known as being hyper fiscally conservative when it comes to these things. Call it a fear of currency speculation on behalf of Western banks, or one post-Soviet economy crisis after the other, the Russians are resilient. But that resiliency, at the government level, is dependent on its cash position.
In May, the federal budget deficit eased to 350 billion rubles ($5.3 billion), equivalent to 5.5% of monthly GDP. Most of that decline was due to oil going from the high 30s to $51 a barrel as recent as May.
On the expenditure side, the year-to-date execution matches the previous year’s numbers to a tee, meaning Medvedev’s shot across the bow is a near miss, which is better than a direct hit. Social spending cuts may not be necessary after all, say analysts from VTB Capital in Moscow led by Alexander Isakov.
Isaklov says that if oil & gas revenues continue rising, then the budget outlook for the second half of the year makes Siluanovo’s 3% GDP deficit target doable. A miracle may be coming after all.
Oil & gas revenues totaled 364 billion rubles ($5.2 billion) in May, a 12% increase from April levels but a 20% decrease from the same period a year ago. The Urals oil price — which is the true benchmark for Russia — has already hit the 3,100-3,200 rubles ($47ish) per barrel target that is very close to the current budget law. If oil prices recover in the coming months, then the growth in oil & gas revenues into Russian government coffers will return positive by year’s end, VTB Capital says.
The Ministry of Finance sold part of its foreign currency reserves again last month to make ends meet. That said, as of the beginning of June, the reserve fund contracted to 2.55 trillion rubles ($400 million), losing almost 1.1 trillion rubles since the start of the year. The current budget law lets the government spend a total of 2.1 trillion from the Reserve Fund, which is different than the foreign currency reserves held by the Central Bank. Those funds stand at around $380 billion.
Some of this money is being moved around to plug up holes in the budget.
Overall, spending for the first five months of the year amounted to 6.1 trillion rubles, or just 3% behind last year’s number. On the one hand, this testifies to a significant decline in spending in real terms. But on the other, budget spending year-to-date has reached 38% of the total 16.1 trillion rubles allotted for 2016.
“This is exactly the same pace as last year, which hints that discussions of limiting spending have probably yet not translated into spending limit adjustments,” Isakov says.
Budget amendments won’t be considered until November. According to the recent federal law, the government has until November 1 to submit a draft federal budget for 2017 to the state Duma. As for the 2016 federal budget, Siluanov hinted that amendments were likely to be technical while not touching the key parameters — as warned by Medvedev — so long as oil doesn’t go back to the thirties.