Russia at 'Last Frontier' With Oil Tax as Kudrin Warns on Budget

  • Former finance minister sees mix of measures to tackle deficit
  • Russia needs to maintain buffer with wealth funds, Kudrin says

The architect of Russian fiscal policy under President Vladimir Putin is having a hard time watching the system he created come undone.

The budget is in a state of “shock” after officials failed to make timely decisions to temper spending and implement structural changes, especially on pensions, Alexei Kudrin, who was finance minister in 2000-2011, said in an interview in Moscow. That’s forcing the government to deplete its reserves even as outlays are falling fast, he said.

“It’s difficult for me to see the reserves whittled away,” said Kudrin, who helped introduce the policy of amassing the stockpile in 2004 by funneling windfall revenue from oil and gas sales. “A buffer for the most critical situations must remain. The number of uncertainties and risks is too vast.”

Russian budget policy is pushed to the limit as authorities grapple with a recession-hit economy crippled by a drop in oil prices, sanctions and a weakened currency. The government is embroiled in a debate over the policy response, weighing possible measures that include higher taxes on the commodities industry, cuts to social spending and increased domestic borrowing.

“Everyone has seen the limits of what’s possible,” said Kudrin, 54. Targeting the oil industry marks “the last frontier, a kind of dead end.”

‘Half-Measure’

The government will probably settle on a “half-measure” that may include “a little” tax increase, deeper spending cuts and adjustments to pensions, according to Kudrin. While the use of the Reserve Fund is justified when gross domestic product slumps with oil prices, the risk is that the government will spend the money without overhauling the economy, he said.

Kudrin, a longtime ally of Putin, left the government four years ago because of a public feud with then-President Dmitry Medvedev over military spending. He presided over budget surpluses between 2000 and 2008 and helped cut state debt to less than 10 percent of GDP after the country’s 1998 default.

Oil prices have plunged more than a quarter from this year’s closing peak in June. Russia’s currency dropped along with the country’s most important export earner and has lost almost 40 percent in the past 12 months against the dollar. That makes the ruble the worst performer among 24 emerging-market currencies tracked by Bloomberg.

Exhausting Reserves

Finance Minister Anton Siluanov has warned against continuing to rely on the rainy-day funds to cover the deficit. The Reserve Fund and the Wellbeing Fund declined by about $30 billion since Russia annexed Crimea from Ukraine in March 2014, which triggered international sanctions that limit access to global markets. Russia may exhaust the two funds in as little as 16 months if it continues to use them without spending cuts, Siluanov said Sept. 18.

The Finance Ministry has proposed maintaining budget expenditure at this year’s level, or about 650 billion rubles ($9.9 billion) less than planned earlier, to keep the deficit under 3 percent of economic output. The deadline for submitting the budget to lawmakers is Oct. 25.

Borrowing Options

To help cover the shortfall, the Finance Ministry is considering selling foreign-currency bonds on the domestic market next year to tap into dollar savings accumulated by companies, according to Deputy Finance Minister Sergey Storchak. The ministry is also “actively” developing an instrument for the public. Domestic debt sales next year will probably slightly exceed 1 trillion rubles, Storchak said Sept. 18.

The latest forecast published on the Finance Ministry’s website assumes about 600 billion rubles of net domestic borrowing next year.

Net borrowing of more than 300 billion rubles would be difficult for the financial industry to soak up, Kudrin said. Offering close to 700 billion rubles would represent “a shock scenario” and absorb all the free cash from the market, he said. Anything above that would be possible only with additional money printing, which would spur inflation and currency volatility even amid a crisis and worsening demand, Kudrin said.

Tapping external markets while under sanctions would be “very expensive” for Russia, especially with a non-investment debt rating constrained by penalties over Ukraine, Kudrin says.

“It is impossible to carry out a full-fledged investment policy in the country with the rating below investment grade,” Kudrin said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE