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22.10.09
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Balancing The Books
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By Roland Oliphant
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As the nights draw in and Russians turn up their collars against the looming threat of winter, the country’s rulers turn once again to the task of drafting the budget for the coming year. Yesterday the State Duma overwhelmingly approved the first reading of Finance Minister Alexei Kudrin’s federal budget for 2010, effectively signing off on deficit spending funded by the first foreign borrowing in a decade.
It was actually United Russia, the ruling party, rather than the Duma, that approved Kudrin’s planned document. The opposition parties – the Liberal Democrats, Communists and Just Russia – unanimously voted against it, but United Russia’s 315-strong majority was more than enough to guarantee approval.
The document envisages spending some 9.89 trillion rubles ($340 billion) in 2010. Only 6.95 trillion of that will come from budget revenues. The rest, amounting to 6.8 percent of the GDP, will be made up of a combination of internal and external borrowing, and the virtual emptying of the Reserve Fund.
The deficit does not come as a surprise. Russia’s financial planners were forced into the red when oil prices collapsed in 2008. Consequently, the 2009 budget ran the first deficit in a decade, and the government has made it clear that it would rather continue that policy than risk the consequences of slashing public spending in the face of the crisis. ITAR TASS quoted President Dmitry Medvedev as saying that the continuation of deficit spending was a “deliberate” move in order to “meet all our basic social obligations.”
Experts are so far happy that the government is not indulging in an imprudent splurge. “For many years, of course, we lived without a deficit – revenues always exceeded spending,” said Alexander Shirov, of the Center for Macroeconomic Analysis of the Russian Academy of Sciences. “And in principle, a six percent deficit is big, but it’s not critical in the framework of one to two years.”
And so far the government has displayed impressive self-discipline when it comes to controlling the overdraft. “We can see from the experience of this year that the government seems to implement a tight budget policy,” said Natalia Orlova, the chief economist at Alfa Bank. “The budget deficit for this year was expected to be three trillion rubles, and we were at 1.4 trillion after nine months. They may spend another trillion before the end of the year, but they will be below three for sure.”
Put it on my slate
The deficit is meant to run for at least three years, according to Kudrin’s plans, falling to four percent of the GDP in 2011, and by another percentage point the following year. The government’s record thus far suggests it may be able to keep within those limits. But that will have little leeway if oil-prices fall again, especially if it empties the reserve fund. The document Kudrin presented to the Duma yesterday envisages burning through some 1.3 trillion rubles by 2011 to 2012, leaving just 48.8 billion rubles – around $1.68 billion – in the fund.
Oksana Dmitrieva, one of the leaders of the Just Russia faction in the Duma, told the BBC’s Russian Service after the Duma vote that “the government is betting solely on the growth of international oil prices.” Given Russia’s well-known reliance on the oil price, that is a commonplace, and attacking Kudrin for producing a budget that reflects the structure of the economy might be seen as vacuous. But the consequences are clear. “If oil prices fall further, the government will have to cut spending,” acknowledged Shirov. But, if the government can stick to its plans of slashing the deficit to three percent in three years, suggested Shirov, the overdraft could be maintained for several years. “A two or three percent deficit is normal – practically the whole world lives like this,” he said.
Besides looting the reserve fund, the deficit will be funded by both internal and, interestingly, external borrowing. If 2009 marked the first deficit in a decade, 2010 will mark the end of another ten-year run. Russia has not tapped international financial institutions for a loan since 2000, but Kudrin has said that he may approach the World Bank for three or four billion dollars. That’s not a disaster. But it is another sign that the dream of Russian self-sufficiency, if it was ever viable, is further away than ever. |
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