Bank of Russia Spreads Blame for Inflation as Budget Wobblesby
Nabiullina, Siluanov turn focus to curtailing inflation risks
Budget imbalances `decisive' for rates, finance minister says
After months of dodging inflation shocks from trade wars, geopolitics and a crash in oil, Russia is zeroing in on a risk closer to home.
No longer content to take the sole blame for inflation, Bank of Russia Governor Elvira Nabiullina on Thursday drew “special attention” to inflation threats linked to the budget. Speaking at the same conference moments later, Finance Minister Anton Siluanov couldn’t agree more.
“The lack of balance in the budget is to a great extent decisive in determining the future trend in the movement of the key rate,” Siluanov said. “Failure to lower the budget deficit largely acts as a constraint for cuts in the key rate.”
Looking to enlist support before a tussle over the budget in the run-up to a parliamentary election this year, Nabiullina and Siluanov are making the case for coordination between fiscal and monetary authorities and elevating the fight against inflation as a priority for both. The central bank overshot its target for price growth in 2015 for a fourth consecutive year and has conceded it’s at risk of missing its 4 percent goal in late 2017 after turmoil in the oil market and the ruble.
A closer alignment of policies would mark a dramatic shift in Russia, where the Finance Ministry has historically had the upper hand. Until 1995, the central bank directly extended loans to fund the federal budget deficit and parts of the economy. As pressure mounts on the government to stabilize public finances after the widest shortfall since 2010 last year, the Finance Ministry and the Bank of Russia are increasingly speaking in one voice.
“We think there is an acute need to work out a program that will allow to balance the budget system in the medium term,” Nabiullina said. “Without that, the budget will be a source of risks both for the economy and monetary policy.”
Russia, which relies on oil and gas for about 40 percent of its budget revenue, is struggling to keep the deficit within the government’s target of 3 percent of economic output in 2016. The government is reviewing this year’s fiscal plan, which was based on an average oil price of $50 a barrel. The nation’s main export blend Urals averaged $31.99 in the first three months of the year, according to the Finance Ministry.
A rebound in oil prices in recent weeks has boosted the ruble, which is up more than 11 percent against the dollar in the past three months. It traded 1.1 percent stronger at 67.25 versus the U.S. currency at 4:47 p.m. in Moscow.
The longest recession in two decades is forcing the world’s largest energy exporter into difficult choices. After embarking on an austerity drive that’s without precedent during President Vladimir Putin’s 16 years in power, constraints on the government include the election to the State Duma, the lower house of parliament, and the challenges of raising capital while sanctions introduced over the Ukrainian conflict are still in place.
“The central bank and the Finance Ministry are helping one another by taking the same position,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone. “The Duma elections this fall are a risk, which is why any real reduction in spending may only take place in the fourth quarter.”
Under the adjustments made public so far, the deficit will exceed this year’s target, according to 20 of 25 analysts surveyed by Bloomberg, with only two forecasting the government will run a balanced budget in 2017.
“It’s probably time to think about a new budget rule,” Bank of Russia First Deputy Governor Ksenia Yudaeva said Friday at a forum in Moscow. “Without that, the budget will be a source of risks both for economy and financial stability.”
For this year, Russia has suspended the so-called budget rule, which went into effect in 2013 and sought to limit spending based on average long-term prices for crude. Applying the mechanism in 2016 would have forced the government to draft this year’s budget based on an average oil price above $80 a barrel.
The Finance Ministry is developing a new rule that will calculate a cutoff level for spending at an oil price between $40 and $50, Deputy Finance Minister Maxim Oreshkin said on Wednesday.
“The dependence on energy exports and fiscal policy challenges complicate monetary policy,” economists at the Institute of International Finance including Ondrej Schneider said in a report. “Fiscal and financial concerns conflict with the inflation target, as they require different policies and paths for the exchange rate. As the central bank maneuvers between the conflicting goals, its policy becomes difficult to predict.”
Worries over the fiscal outlook have already spilled over into monetary policy. The central bank, which kept its benchmark interest rate 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.
A financial system awash in liquidity shows how monetary and fiscal policies already overlap in Russia.
As the Finance Ministry taps one of its two sovereign wealth funds to finance the deficit, it channeled 2.6 trillion rubles ($38 billion) from it into the economy last year, with another 2 trillion-ruble transfer budgeted for 2016. The buildup of liquidity is allowing lenders, net borrowers from the central bank since 2011, to wean themselves off its funding. That’s pushing down money-market rates without any shift in monetary policy by the central bank.
“Even if we don’t change the key rate, an automatic easing of monetary conditions will happen in economy in general,” Nabiullina said on Thursday.