Russia Tempted To Ease Fiscal Rule And Spend More

Russia entered 2020 with a spending backlog of around 1% of GDP, which the new cabinet may now start unwinding. With the budget breakeven oil price below $50/bbl there is some space to increase spending. A potential easing of fiscal rules remains a key question as it affects FX interventions and state borrowing plans.

Russian budget surplus strong in 2019 on strong non-fuel revenues, restrained spending

According to preliminary government estimates, the Russian federal budget surplus reached 1.8% of GDP in 2019, or RUB2.0 tr, which is slightly below the Bloomberg consensus forecast (of three analysts) but very close to our RUB1.9 tr expectations. While the surplus shrank compared to 2.6% GDP seen in 2018, it is not a sign of deterioration in Russia's fiscal position:

  • The key reason for the contraction in the headline surplus was the $5-6/bbl drop in the average annual oil price that led to the decline in oil & gas revenue by 1.3 pp of GDP to 7.3% of GDP
  • Non-oil revenues increased by 1.2 pp of GDP to 11.2% of GDP mostly due to the 2 pp increase in the VAT rate
  • Expenditures were up by 0.7 pp of GDP to 16.7% of GDP in 2019, which is still below the 18-19% of GDP seen in 2012-17 
  • The non-oil & gas deficit of the Russian budget shrank by 0.5 pp to 5.5% of GDP, budget breakeven oil price (a measure of the vulnerability of the Russian budget to the oil price) declined from $49/bbl in 2018 to $48/bbl in 2019, the lowest reading since 2007

Figure 1. Russia's fiscal position strengthened in 2019 on VAT rate hike and restrained spending

(Click on image to enlarge)

Source: Finance Ministry, ING

2020 budget plan may be revised to incorporate higher spending

Overall, the 2019 budget report highlights the decline in macro risks, which has been the Russian government's key priority over the last five years. However, with the recent government reshuffle ahead of parliamentary elections scheduled for 2021, this approach might be adjusted in favour of a somewhat more relaxed fiscal approach. Therefore, over the coming weeks,investors should expect some indication from the government as to what will be the scale of extra spending.

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