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Russia Said to Break Budget Discipline to Finance Crimea

President Vladimir Putin
President Vladimir Putin, facing first-quarter capital outflows that about doubled from a year earlier, has defied U.S. and European Union sanctions over the annexation of Crimea, amid the worst standoff since the Cold War. Photographer: Andrey Rudakov/Bloomberg

Russia will dip into its rainy-day wealth funds next year to finance Crimea, the Black Sea region absorbed from Ukraine, even as the economy faces stagnation, said four people with knowledge of government discussions.

Crimea will be the only exception to the budget rule passed last year to bolster the sovereign funds and help check state spending, one of the people said. Funding for the region, home to Russia’s Black Sea Fleet, will reach at least 130 billion rubles ($3.6 billion) next year, another of the people said. All four asked not to be identified as planning is confidential.

Russia’s Finance Ministry has fought for budget discipline as the economy slows toward recession and inflation outpaces targets. President Vladimir Putin has defied U.S. and Europe sanctions over the annexation of Crimea in the worst standoff since the Cold War, while first-quarter capital flight doubled.

“We consider it impossible to increase budget spending given the considerable geopolitical risks,” Finance Minister Anton Siluanov said today at the ministry’s annual meeting. “One-time injections of budget funds aren’t capable of setting the economy on a path of sustainable growth.”

Economic expansion may slow to less than 0.5 percent this year or approach zero, Siluanov said. Capital flight may ease this quarter, he said. Outflows jumped to $50.6 billion in the first three months of the year from $27.5 billion a year earlier, central bank data show.

Budget Fight

The Finance Ministry may lose its fight to keep the budget rule unchanged. Prime Minister Dmitry Medvedev said at the meeting today that he wants to hear the Economy Ministry’s “interpretation” of the budget rule at their annual meeting.

One option under discussion is expanding the allowed deficit to 1.5 percent of gross domestic product, which may make an additional 400 billion rubles available for spending, one of the people said.

Russia had a surplus of 0.7 percent of GDP in the first quarter, according to Finance Ministry data. The government had planned for a 0.5 percent deficit this year, while Siluanov has since said the budget may be balanced due to ruble depreciation. The ruble has weakened 8.7 percent this year, the second-worst performer among 24 emerging-market currencies.

Debt, Instability

Under the current rule, spending is based on estimated income, excluding extra revenue from oil and gas sales, with a deficit of no more than 1 percent. The extra oil and gas revenue is channeled to the Reserve Fund, one of Russia’s two sovereign funds, until it reaches 7 percent of gross domestic product.

Changes to the spending rule would lead to greater deficits, debt and instability, Tatyana Golikova, the head of the Audit Chamber, said today at the meeting in Moscow. Golikova, a former deputy finance minister, is one of the few official voices backing up the ministry’s conservative approach to the budget.

The government’s use of the sovereign funds would be separate from the 130 billion rubles allocated from the budget this year to raise state pensions and salaries in Crimea.

“Failing to observe the budget rules during stagnation is a strategic mistake,” Alexei Kudrin, a member of Putin’s economic council and a former finance minister, said by phone. “The government is tapping reserve funds instead of pursuing reforms. Augmenting the budget deficit at a time when we cannot borrow on the market is wrong.”

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