Russian Fiscal Aim Seen Out of Reach as Putin Spares Defense

  • Government won't balance its budget before 2018, survey shows
  • Crash in oil prices puts pressure on Russia's public finances

Not even the prospect of leaving Russia’s budget in the red until 2018 will force reductions in social or defense spending, the two items that dominate government expenditure, a Bloomberg survey of economists showed.

Under the adjustments made public so far, the shortfall will exceed this year’s target of 3 percent of gross domestic product, according to 20 of 25 analysts in the poll, with only two predicting the government will run a balanced budget in 2017. A single respondent ranked cuts in social or defense expenditure among the three most important measures the authorities will take, while most economists predicted the government will primarily tap reserves to meet its needs in 2016.

The biggest oil crash in a generation has led to runs on the currencies of commodity-producing nations and backed their cash-strapped governments into a corner. While embarking on an austerity drive that’s without precedent during President Vladimir Putin’s 16 years in power, constraints on Russia include a parliamentary election this year and the challenges of selling state assets or borrowing abroad with sanctions introduced over the Ukrainian conflict still in place.

“The government won’t want to deplete reserves completely, spending cuts will be unpopular and so the budget gap will probably come in just a touch wider, with borrowing increased,” Christopher Shiells, a senior emerging-markets analyst at Informa Global Markets in London, said by e-mail. “Privatizations have been mentioned so much in the past and there is just not the appetite for them. Putin has little desire to relinquish control, plus sanctions mean that Western companies and banks will not want to get involved.”

Russia, which relies on crude and gas for about 40 percent of its budget revenue, stands to lose as much as 2.5 trillion rubles ($36.3 billion) in revenue if oil averages $30 a barrel this year, pushing the deficit above 3 percent, the Finance Ministry estimates.

Social outlays and spending on security and defense almost 60 percent of this year’s total. The government previously excluded spending on the military from cutbacks.

Russian officials maintain the deficit won’t exceed this year’s target even at an average oil price of $40 a barrel, or 20 percent cheaper than planned in the budget, after a shortfall of 2.6 percent in 2015. The nation’s main export blend Urals has averaged $31.99 in the first three months of the year, according to the Finance Ministry.

‘Long Period’

“It is highly likely that Russia will enter a long period of a negative budget balance of about 2 percent to 4 percent,” said Sergey Narkevich, an analyst at Promsvyazbank PJSC in Moscow. “After the sharp ruble devaluation at end-2014, the dependence between the Russian budget and oil prices moved to a new normal.”

The ruble is up almost 7 percent against the dollar this year after losses of 20 percent in 2015 and 44 percent in 2014. The 30-day correlation between the ruble and Brent has dropped from a record high reached in March to 0.8 on Tuesday. A reading of one would mean the two assets move in lockstep.

The deficit will widen to 3.8 percent this year and shrink to 2.9 percent in 2017, according to a separate survey of economists conducted March 24-30. This year’s budget amendments may be considered after the first quarter, according to the Finance Ministry.

Privatization, Dividends

The Finance Ministry has said it wants to raise about 1 trillion rubles selling stakes in state companies over two years. The cabinet, which has approved a 10 percent cut in outlays on non-protected budget items and is weighing a reduction of about 5 percent in military spending, is also nearing a decision to double dividends paid by state-owned companies on last year’s profit.

Uncertainty over the fiscal outlook is spilling into monetary policy. The central bank, which kept its benchmark at 11 percent in March for a fifth meeting, warned in its last rate statement that “some uncertainties surrounding budget configuration” are among reasons for lingering inflation risks.

Russia’s monetary policy will be “highly” correlated to the budget outlook, according to 32 percent of economists in the survey, with an additional 56 percent saying it will be “somewhat” correlated. When it comes to the budget, the central bank’s actions will mostly hinge on the deficit staying at no more than 3 percent and spending from wealth funds not exceeding 3.8 trillion rubles, a figure used in rate setters’ baseline scenario.

“The Kremlin’s budget configuration can constrain the central bank in its set of policy choices,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, Germany. “Once there is clarity of the Kremlin’s updated budget plans, the Bank of Russia may lower rates.”

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