MOSCOW (Reuters) – After easing its fiscal rules and raising taxes, Russia is running out of options to bolster public finances strained by the coronavirus pandemic and the collapse in the price of oil, its main export.
That could prove a headache for President Vladimir Putin as he seeks to fund a recovery and boost welfare spending for ordinary Russians before next year’s parliamentary elections.
Moreover, some analysts question whether Moscow can ultimately return to the tight fiscal regime which won it investor trust before the coronavirus emerged.
The slump in global demand caused by the pandemic has dragged oil prices down to around $40 barrel, roughly half what Russia would, in theory, need to balance its budget this year. The overall economy is expected to shrink as much as 5% this year.
Russia has stepped up borrowing, pushing debt up close to 20% of the economy. That may seem small compared with the triple-digit debt ratios of some advanced economies, but Russia’s reliance on oil revenues and its more limited access to borrowing means it has far less leeway.
In a bid to secure funds, Russia relaxed a 2017 rule designed to limit spending and earmark certain proceeds from oil sales for its sovereign wealth fund, a cushion that shields the economy from swings in oil prices and protects its currency reserves.
That fiscal rule was praised by global rating agencies and helped Russia regain its investment grade after losing it following its annexation of Crimea in 2014.
Softening that rule will provide more than $11 billion to help recovery next year. But it also exposed state finances more to energy market fluctuations, after years of trying to put them on a more stable footing.
The finance ministry forecasts that oil and gas revenues will account for 33.6% of Russia’s budget in 2023, up from 28.7% this year. The deficit excluding those revenues will grow to 9.2% this year from 5.4% in 2019.
“This year brought us a very strong increase in the federal budget’s dependence on oil prices,” said Natalia Orlova, chief economist at Alfa Bank. Russia would need oil prices to more than double to around $80-85 per barrel to balance its budget this year, she estimated.
With that unlikely, Russia needs to find funds elsewhere – quickly. It has trimmed military spending and raised taxes on companies and on Russians earning more than around $65,000 a year.
WILL FISCAL RULE EVER RETURN?
Analysts question whether Putin can deliver increased social spending before the 2021 elections and restore the fiscal rule as promised the year after.
To do that, “you have to be able to increase your non-oil revenues,” said Erich Arispe, sovereigns’ and supranationals group director at Fitch Ratings, explaining the need to raise taxes.
But higher taxes could slow any future economic recovery, whereas simply letting the deficit grow would create problems of its own.
Arispe expected Russia’s debt-to-GDP ratio to rise to 21.5% by 2022, compared with 53.9% among other countries in the ‘BBB’ category. Russia’s central bank and finance ministry have warned that this ratio should not exceed 20%, to avoid worrying investors.
Should Russia decide to borrow more – for example, to take the debt ratio to 30% of GDP – it could struggle to sell its bonds at all.
“Where is that 30% debt-to-GDP ratio going to come from? Certainly, the local market can’t provide all that volume,” Arispe said.
Foreign demand for Russian bonds, he said, was being curtailed by diminished demand for emerging-market assets and by concern Moscow could face further Western sanctions.
Something will have to give. Karen Vartapetov, analyst at Standard & Poor’s rating agency, believed the government would do all it could to return to the fiscal rule. Others are not so sure.
The strain that pre-election welfare measures will put on the budget would make it hard to restore the fiscal rule in 2022, said Vladimir Tikhomirov, chief economist at BCS brokerage.
“Russia’s budget policy is largely based on a combination of populism, higher taxes for the middle class and promises of constant financial support for the poor, which is considered to be an effective tool to support Russia’s ruling party in the election year,” he said.
(Reporting by Andrey Ostroukh and Darya Korsunskaya; editing by Mark John and Larry King)