Article / 09 October 2015 at 9:15 GMT

Russia spreads the butter ever more thinly in 2016

Russia oil and gas expert
United Kingdom
  • Russia's budget for 2016 sees drastic real wage cuts for civil servants
  • Real wages already down 8.1% in 2015
  • 2016 pay freezes set against likely inflation rate of 6.5%
  • Military spending cut slightly, but real pain among the population
  • Government effort to shore up social securities payments hints at cohesion fear
  • Tough decisions wait in H2 2016 with Kremlin hoping for an oil-price boost

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Russia will be cutting back on spending in 2016, but the military will be ok. Photo: iStock


By Nadia Kazakova

The Russian federal budget for 2016 is more or less an admission that the government can do very little but wait for a bounce in the oil price.

The budget for the next year is just holding together, even with drastic cuts in real wages for civil servants and a below-inflation rise in pensions. Hard decisions seems to be pushed until the second half of the next year, when the oil price might just go the right way — up. 

Officially, the economy is expected grow at 0.7% year-on-year in real terms with a $50/barrel Urals oil price in 2016. But it could be a bit of touch and go, depending how the economy will react to another drop in real income (down 0.5% y/y in 2016 vs 4% y/y in 2015) and real wages (0.2% fall y/y in 2016 vs minus 8.1% y/y in 2015).

Key parameters of the Russian federal budget, RUB billion
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Source: www.vedomosti.ru, www.gazeta.ru, www.rbc.ru, author's estimates for 2017-2018

For a large part of the working population, which includes civil servants, law enforcement and military personnel, there will be no rise in salaries next year, according to the draft budget. With inflation expected to clock up 6.5% in 2016, it means a 6.5% decline in real wages. 

Social payments (such as pensions) will increase by 4% on February 1. There is a promise for another rise in the second half of the year, to compensate for 12.2% inflation in 2015.

Again, for at least the first six months of the year, real pensions will go down.

Overall, the budget expenditure will rise only by 1.78% in nominal terms in 2016, as the government tries to stretch some RUB 13.5 trillion of revenues to cover RUB 15.9 billion in expenditure. 

The spending lines in the 2016 budget differ only marginally from 2015. There will be a bit more money spent on supporting the economy, a bit less on education and health. When compared to the 2014 budget, however, it is easier to see where government priorities lie.

Despite a freeze on salaries, the government spends more on itself, law enforcement and defence, than on the economy, education and health.

Russian federal budget expenditure in 2016 and changes compared to 2014, RUB billion
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 Source: www.gazeta.ru, www.budget.gov.ru

The budget deficit is set to hit 3% of GDP in 2016, a small improvement on a 3.6% deficit forecast for 2015. In rouble terms, the federal budget deficit will decline only slightly from RUB 2.6 trillion in 2015 to RUB 2.4 trillion in 2016.

The next year deficit will be mostly covered by the Reserve Fund, which is already being used in 2015 to cover this year budget shortfall. As a result, the Reserve Fund might shrink to around RUB 1.25 trillion by end 2016. Moreover, if next year revenues are short of the official forecast, the government can use an additional RUB 500 billion from the fund in 2016, more or less depleting it.

 Russian federal budget expenditure, deficit and the use of the Reserve Fund, $ billion
 Source: www.gazeta.ru, www.vedomosti.ru, author's estimates for 2017-18

The government will tap the debt markets to cover a small portion of the deficit in 2016 (just under RUB 400 billion), but there is a significant need for finance from 2017 onwards.

While the Russian government debt is very low at around 11% of GDP (RUB 8.9 trillion), the cost of external borrowing (at $50/b oil) might be relatively high. Tapping domestic savings market, on the other hand, would keep interest rates higher for longer, not a perfect scenario for a struggling economy.
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If Russia's pensioners thought this year was tough,
2016 could be a whole lot tougher. Photo: iStock


— Edited by Martin O'Rourke

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

4y
fxtime fxtime
I didn't realise how much health and education receive in comparison to Defence and Security enforcement....MacMillan in the UK used to compare these areas as a rule of thumb marker. eg the less you spend on education the greater the need for armed force recruitment and likewise healthcare if it is weak a need for social welfare increases. This is very old scheme stuff from just after the war period but an interesting rule of thumb.
4y
Nadia Kazakova Nadia Kazakova
I also think the current low spending on education/health stores much trouble for the future, and shows a lack of strategic vision.

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