Russia’s Awesomely Hawkish Ministry of Finance Has Broken the Country’s Addiction to Oil

In the boom years Russia needed oil prices at at $115 to stay in the black. Now it's fine with $54

Moscow – the home of fiscal hawks

After several years of losing money, Russia’s government went into profit again in January running a RUB190bn ($3.4bn), or 2.8% GDP surplus. The crisis of the last years forced Russia to go cold turkey and has finally broken its addiction to oil.

In the boom years the Russian budget needed oil prices to be more than $115 per barrel to make a profit, but since then cost cutting, a crack down on corruption and an unsung revolutionary reform to the tax system – there has been massive investment into a state-of-the-art tax service IT system that have increased revenues by 40% — means as bne IntelliNews has reported Russia Inc went into the black in 2017 as the break even price has fallen to $53 a barrel, according to Oleg Kouzmin, chief economist for Russia at Renaissance Capital. The average price for oil in 2017 was $55.44 and so far this year the average price in January was up to $66.23.

The surplus was helped by higher oil prices, but the crisis has lead to a huge shake up of the tax system, which is working more efficiently and expanded its sources of revenues.

Consolidated budget revenues (federal, regional and municipal, plus social funds) increased by over 13% y/y. Higher oil prices helped increase revenues via oil & gas tax income (up 23%) whose share rose to close to a fifth of total budget revenues, but this is still way down on the 50% it used to be.

“The tax system reforms have lead to other budget revenues to rise by 10%, which is rapid even if the data was adjusted for inflation. Revenues from corporate profit taxes and goods excise taxes rose especially fast,” Bank of Finland Institute for Economies in Transition (BOFIT) says.

Budget spending also grew but at a more modest pace, up by 6% in January y/y. Most of this went into social security spending, which rose to over 10% and the share increased to over 36% of total budget spending. But serious savings were made by cutting back on military spending, which has skewed the budget for most of the last few years towards a deficit.

However, the biggest change to the budget has been the re-introduction of the so-called budget rule since the start of January. This dictates that any revenue earned from oil exports when the price of oil is over $40 must be squirreled away in the sovereign reserve fund. The practical impact of this rule is the link between the ruble exchange rate and oil prices gets broken as oil can’t rise above $40 as far as the currency is concerned.

It also means Russia will start accumulating gross international reserves (GIR) again: reserves were already up to $450bn in January from a April 2015 low of $356bn. However, as far as the Ministry of Finance is concerned the real benefit is the budget rule will put a floor under the wild swings the Russian economy has always been prone to; Russian Finance Minister Anton Siluanov says he wants to build a “second Norway.”

The Russian government will do what needs to be done to stay in the black — whatever that may be. Something totally unheard of in the US

“We have got stability now,” Siluanov said at during the Gaidar forum in January. “But we have to go beyond that. The growth and the fall of the deficit is welcome but what it brings is not just stability, but predictability. That is the point of the budget rule; its not there to accumulate reserves. Its there to increase the predictability of the economy for business and for investors.”

Source: bne Intellinews