Moscow in need of new options to fund social spending

Cheap crude made Russia revise its policy of accumulating oil sales revenues for a rainy day. Some analysts doubt that the fiscal rule will be restored in 2022 as promised. Meanwhile, the Kremlin needs to maintain a certain level of social spending at least until next year’s parliamentary elections.

After easing its fiscal rules and raising taxes, Russia is running out of options to bolster public finances strained by the coronavirus pandemic and the collapse in the price of oil, considers Reuters. Oil prices are currently fluctuating around $35 barrel, which is much lower than Russia needs to balance this year’s budget. To fill the gap, Moscow relaxed the fiscal rule that allocates part of proceeds from oil sales to the country’s sovereign wealth fund. The rule introduced in 2017 was praised by global rating agencies and helped Russia regain its investment grade lost after the crisis of 2014.

While the national budget may receive more than $11 billion due to the softening of the rule, state finances are now more exposed to energy market fluctuations after years of trying to secure them. “This year brought us a very strong increase in the federal budget’s dependence on oil prices,” commented Chief Economist at Alfa Bank Natalia Orlova adding that Russia would need oil prices to jump to around $80-85 per barrel to balance its budget this year.

According to a forecast of the Ministry of Finance, oil and gas revenues are expected to account for 33,6% of Russia’s budget in 2023, compared to 28,7% in 2020. As the Kremlin needs to find funds elsewhere, it has trimmed military spending and raised taxes on business and those Russians that earn more than around $65,000 a year. However, higher taxes may slow future economic recovery, while letting the deficit grow will also create problems.

Although President Putin promised to restore the fiscal rule in 2022, some analysts question whether it will be possible. Karen Vartapetov, analyst at S&P Global Ratings, believes the government will do it best to return to the rule, while Vladimir Tikhomirov, chief economist at BCS brokerage, considers that the strain that pre-election welfare measures will put on the budget will make it hard to restore the fiscal rule in 2022.

To do that, “you have to be able to increase your non-oil revenues,” explains Erich Arispe, director at Fitch Ratings. He expects Russia’s debt-to-GDP ratio to rise to 21,5% by 2022. Russia has already increased its borrowing raising debt up to 20% of the economy. For other countries in the ‘BBB’ category, the average debt-to-GDP ratio amounts to 53,9%, so Russia’s figures may seem low. Nonetheless, Russia’s reliance on oil revenues and its more limited access to borrowing means it has far less leeway, states Reuters.

If Moscow decides to borrow more, it is likely to struggle to sell its bonds at all, says Arispe. He adds that foreign demand for Russian bonds is being curtailed by diminished demand for emerging-market assets and by concern Moscow could face further Western sanctions. “Certainly, the local market can’t provide all that volume.”

By Anna Litvina

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