Russia May Burn Wealth Funds in 3 Years Without Cuts

Updated on
Anton Siluanov
Anton Siluanov, Russia's finance minister. Photographer: Andrey Rudakov/Bloomberg

Russia, poised to enter a recession, will burn through its rainy-day funds in three years if the government doesn’t change the budget structure, according to Finance Minister Anton Siluanov.

With oil prices at $60 a barrel, Russia’s economy may contract about 4 percent next year and have a budget deficit of more than 3 percent of output, Siluanov told reporters in Moscow today. The ministry will use these estimates and an exchange rate of 51 rubles per dollar to review the 2015 budget.

Russia is facing its first recession since 2009, and the contraction may last for two years, according to economists in a Bloomberg survey. Oil, its biggest export earner, is trading near a five-year low, compounding the effect of sanctions imposed by the U.S. and its allies over President Vladimir Putin’s annexation of Crimea in March. The deterioration puts Russia at risk of a downgrade to below investment grade, Standard & Poor’s said this week.

“If no decisions are made, we’ll burn through all the reserves in 2016-2017,” Siluanov said. “At one third of all budget spending, defense has too large a share. We need to reshuffle and restructure spending for infrastructure, education and so on.”

International Reserves

Russia’s international reserves, which include central bank’s reserves and two sovereign wealth funds, have shrunk by about one-fifth this year to $398.9 billion as of Dec. 19 as the Bank of Russia sought to defend the currency. Policy makers rolled out measures to ease foreign-currency refinancing as $120 billion debt payment looms next year after the U.S. and European Union limited Russia’s access to international capital markets.

The Reserve Fund held the equivalent of $88.9 billion as of Dec. 1, while the National Wellbeing Fund, created to cover long-term outlays for social spending, was equal to $80 billion.

The ministry has said it will use at least 500 billion rubles from the Reserve Fund to cover next year’s fiscal gap and plans to invest money from the Wellbeing Fund to boost banks’ capital and to finance infrastructure projects.

Oil is heading for the biggest annual drop since 2008 amid slowing global demand growth. Brent, the benchmark for more than half of the world’s crude, fell 0.3 percent to $60.06 in London today, dropping from $115 a barrel in was in June.

The ruble has lost more than 39 percent against the dollar this year, the worst performance after Ukraine among about 170 currencies tracked by Bloomberg. It has rebounded from a record low of 80.10 last week on the government and central bank’s measures.

Wider Deficit

The budget deficit will reach about 0.7 percent of gross domestic product in 2014 due to a 1-trillion ruble plan for bank recapitalization, according to Siluanov. Previously, the ministry saw a budget surplus of 0.7 percent, he said.

Parliament approved the 1 trillion-ruble plan as part of the government’s steps to prevent the ruble’s collapse from spreading into a banking crisis. Other measures include the doubling of insured deposits and a possible investment of as much as 10 percent of the National Wellbeing Fund to boost lenders’ capital.

(Corrects story published yesterday to show reserves are in billions, not millions.)
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