Article / 06 October 2016 at 9:30 GMT

Revised Russian budget may show surprising rouble strength

Russia oil and gas expert
United Kingdom
  • Russian gov't to revise budget law for 2016
  • Current forecast has Urals oil at $50/b
  • Budget heavily favours defence industry

Moscow
The Russian government's new budget may correct erroneous past assumptions, 
but it comes with its own suite of issues as well. Photo: iStock

By Nadia Kazakova

Moscow has finally decided to bite the bullet and officially revise the country's budget law for 2016. The document was adopted in December 2015 and the mid-year revision in April was not officially signed into law. So Russia has been living with a budget based on an average Urals oil price of $50/barrel, a USDRUB rate of 63.3, and expected GDP growth of 0.7% (year-over-year).

Russia's 2016 budget assumptions for 2015-2016 with revisions, billion roubles:
x
Sources: www.minfin.ru, www.kommersant.ru

To be fair, the government has not been living in cuckoo world for the last nine months. The budget revision in April might not have been officially adopted, but it has been all but implemented – at least when it comes to the average oil price and the average exchange rate for the period. 

The actual Urals oil price average for the first nine months of 2016 was just under $40/b and the average USDRUB FX rate was 68.37, very close to April's draft forecast of 68.2. 

The newly revised budget for 2016 (effectively for Q4) seems to be based on these year-to-date assumptions on the oil price and the FX rate. It would imply that the government is content with an oil price in roubles of 2,730/barrel ($40 by 68.2) for the rest of the year. 

If the Urals oil price averages $45/b in Q4, it would mean that the rouble might average 60.6 – better than currently expected.

The problem with forecasting a stronger rouble is the budget deficit. Historically, the bulk of the expenditure (and the deficit) falls on the last couple of months of the year. As of end-August 2016, the federal budget deficit was RUB 1.52 trillion, just about half of the expected (under the revised budget) RUB 3.03 trillion in federal revenue shortfalls. 

This year, however, it might come down to more than just money printing in Q4 (followed by some of that money being absorbed by the central bank to keep inflation in check). The government is looking to sell some assets (a stake in the Bashneft oil company might be privatised in October), even if these assets are to go back to the state (if Rosneft buys 50.08% interest from the government). 

Financing is likely to come from outside the state banking sector, even if the resulting Rosneft debt will be all but accounted for as quasi-sovereign. 

The government has also raised its rouble debt ceiling by an extra 1 trillion to 9.8 trillion roubles, and plans to borrow up to 500 billion roubles in 2016. The government has borrowed RUB 226 billion as of end-August 2016. 

A more fundamental issue with the revised budget is its pivot. Kommersant, in fact, called it a budget of guarantees for the defence sector. Many observers pointed to the fact that budget cuts have affected pretty much everyone (on average, the cuts are around 10% or so) except for the defence industry. 

This sector has not just managed to increase its budget in absolute terms, but has also secured close to 800 billion roubles or so in state loan guarantees for long-term investment projects, according to Kommersant.

Changes in federal budget expenditure in 2016 budget, billion roubles:
x
 
Sources: www.kommersant.ru, www.minfin.ru, author's estimates

It has not just managed to increase its budget in absolute terms, but also secured additional funding through state loan guarantees for long-term investment projects, according to Kommersant


There is, as always, another interpretation of the events. The government sources have explained to rbc.ru that additional guarantees (RUB 850bn) are mostly for various long-term infrastructure projects (inc transportation, agriculture, etc. ) and do not cover new defence or military spending.

Changes in budget expenditure in 2016 budget, billion roubles
v
Source: www.kommersant.ru, www.minfin.ru, author's estimates

Even ex long-term guarantees, the Russian households are directly paying for the expanding Russian military sector this year while the spending on infrastructure, high-tech and medical industries - have been mercilessly cut back.

A rise in military expenditure might also partially explain a rise in classified budget expenditure. It amounts to RUB3.66 trillion or 22.3% of the total federal budget spending. Around three quarters of that is believed to be spent on national defence.

In the short run, defence spending could help to prop up the economy (probably partially explains a monthly rise in GDP in August against a plunge in consumer spending). Combined with a tight monetary policy, it could prop up the rouble.


In the long run, however, it is a different story all together.

A Russian MiG-15



















Russian households are now directly subsidising Moscow's military outlay. Photo: iStock

— Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector  
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