31/5/15: Russian Fiscal Performance: Red Alert in Jan-Apr 2015

Russian Government finances are showing some serious signs of strain in April, lagging the 1Q 2015 outruns. In 1Q 2015, public revenues (the consolidated budget including federal, regional and local governments, state social funds) rose only 1% y/y in nominal ruble terms. Adjusting for inflation and ruble revaluations, this suggests real contraction of around 9-10 percent. Over the first four months of 2015, export duties returns and production taxes in oil & gas sector were down more than 20% y/y with 1Q 2015 decline of 15% y/y. Ex-oil & gas revenues, consolidated revenues were up 8% in ruble terms (nominal) in 1Q 2015.

Real trouble, however, is brewing on spending side. 1Q 2015 consolidated expenditures rose 20% y/y in nominal terms, with defence spending rising 50% y/y in 1Q 2015 and 45% in the first four months of 2015. Pensions and Social Security expenditure rose by around 30% y/y. Nominal spending on education and health remained largely unchanged.

The consolidated deficit for 1Q 2015 was 2.5% of GDP.

Source: Bofit

Now, some of the expenditure items were significantly front-loaded, especially for housing expenditure and defence. Which means that over the rest of 2015 we might see some moderation in these lines of spending and weaker adverse impact on deficits. Still, things are not exactly encouraging, neither in terms of structural nature of imbalances nor in terms of sustainability of such spending given the levels of official reserves.

5/5/15: Good Bonds, Bad Rules & Russian Deficits

Neat chart via @sobberLook showing Russian 2-year bonds yields out through today:

The blowout is over, but at 10.9% still ahead of anything 'normal' and remains pressured. To me, real test will be around 9.7% levels and then again around 9%.

Meanwhile, on a supportive side of things, Russia is about to decouple its budgetary balance estimates from the 3-year (back) average oil price rule, by switching to RUB denominated oil price benchmark. Which will improve the deficit calculations by bringing some reality to assumptions underlying the budget.

As the result of the switch, Budget for 2015 will see a correction in built-in oil price of RUB2,915, Budget 2106 - of RUB1,938 and Budget 2017 of RUB 760. Thereafter, the effect should be weaker, with Budget 2018 estimated impact is for price decline of RUB60. Current rule implies that Budget 2016 was to be estimated using oil price of USD89 per barrel, against the Economy Ministry forecast of USD60.  In 2015, Budget is computed using base line price of USD94 against the economic forecast (for the Budget) of USD55. Higher budgeted oil price implies higher spending, while revising the benchmark price down as per new proposed rule implies lower spending and, thus, lower deficits. So, in return, budget cuts and balancing of the budget, will be spread over longer horizon and will allow to more conservatively use Russian foreign exchange reserves.

More on this here: http://www.vedomosti.ru/newspaper/articles/2015/05/05/minfin-pridumal-kak-viiti-iz-lovushki-byudzhetnogo-pravila.

11/4/15: Inflation, Wages Controls and Ruble: Welcome to Q2 Start in Russia

Russian inflation reached 16.9% in March, year-on-year, highest since 2002, despite slowing month-on-month inflation. March inflation came in at 1.2% m/m, lower than 2.2% m/m in February.

Slower m/m trend is down to Ruble re-valuation, so assuming no renewed speculative attacks on the currency, annual rate of inflation should be down at year end, around 10-12 percent range, or broadly in line with 11.4% annual inflation registered in 2014.

One key policy instrument to contain inflation (and also to correct for the adverse effect of ruble strengthening on budget balance - see below) is the decision by President Putin to suspend the legal requirement for automatic cost-of-living (COLI) adjustments to public sector wages. The decision, signed on April 6th will allow the Government to avoid hiking wages for 9 months through December 2015. President Putin's amendment also covers some of the COLI requirements on social payments adjustments. Overall, public wages and social benefits will increase in 2015 only to reflect the Budget 2015 assumed medium-term inflation target - 5.5%, well short of the actual inflation that is projected to range between 11 and 13 percent this year.

On the subject of Ruble valuations and budgetary pressures: Russian Federal Budget is set in Rubles. As Ruble strengthens against the USD and EUR, exports revenues-related taxes fall, imports declines are moderated and external surplus on trade account declines. This means potential pressure on Government deficits. Last year dramatic devaluation of the Ruble, while causing hysterical reactions abroad, actually helped the Government to achieve near balanced budget (with a deficit of just around 1 percent of GDP). This time around, the pressure is reversing.