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.

28/7/2014: Russia's Budgetary Framework 2015-2017

This month, Russian government approved the 2015–2017 Budgetary Framework, BOFIT issued a good summary of this and here are some of the main details.

The multi-annual framework is subject for frequent adjustments, but serves the purpose of introducing at least indicative / directional targets to fiscal policy.

Over the 3 years horizon, Russian Government aims for total (federal and regional budgets and social funds) revenues increasing at 6‒6.5% pa, slightly ahead of inflation forecasts. Oil and gas production taxes and export duties revenues are projected to rise in 2014, but remain flat thereafter. The Framework assumes roughly USD100/barrel price of Urals-grade oil.As the result, revenue share of GDP is expected to fall from 36.5% of GDP in 2013 to 35% in 2017.

One innovation - discussed for some time and yet to be adopted - is that the Government is considering given local (regional) authorities power to introduce local sales taxes.

The Framework projects government deficit rise slightly to around 1.5‒2% of GDP, driven primarily by regional not federal deficits. Federal budget deficit is projected at around 0.5% of GDP, well below the 1% Budget Rule ceiling.

Between 2014 and 2016, the Framework expects a rise in Government expenditure, but rates of increases are set below inflation rate. From 2016, spending as a share of GDP is forecast to fall gradually below 37% against 38% in 2013.

Capital investment spending will be funded by long-term lending from the National Welfare Fund - cumulative spending between 2015 and the end of 2017 will involve close to 1/4 of the National Welfare Fund (roughly 1% of GDP).

Federal debt (including government guarantees) is expected to rise closer to 15% of GDP by end-2017, of which debt will amount to around 10% of GDP. On net debt side, assets in Federal Reserve Fund are forecast to increase slightly. The combined value of the Federal Reserve Fund and the National Welfare Fund will stay just below 10% of GDP.

BOFIT provides a chart summarising the Budgetary Framework 2015-2017: