bneWidget Russian budget calculator and $40 oil

bneWidget Russian budget calculator and $40 oil
By bne IntelliNews March 8, 2016

bne IntelliNews introduce a new interactive bneWidget that calculates what Russia's federal budget will be if you change the parameters of oil price and ruble to dollar exchange rate, or add new ruble and dollar revenues to the budget from areas like spending cuts or sovereign bond issues.

Oil prices touched on $40 per barrel on March 7 which means Russia could be on course to finish the year with a federal budget deficit of -3.3% of GDP, assuming the current exchange rate of RUB77 to the dollar and leaving all else equal.

That would be good news for Russian Finance Minister Anton Siluanov, who has been sweating out a new budget plan for $30-$35 oil. President Vladimir Putin has drawn a red line at a 3% deficit (RUB1.7 trillion or $23.6bn), and for Siluanov to meet this mark with $35 oil he has to find spending cuts or new sources of revenue worth trillions of rubles.

Russian Economics Minister Alexey Ulyukayev said in February that with $40 oil the deficit could reach 5.1% of GDP, or RUB3.9 trillion, which assumes an exchange rate of RUB68 to the dollar. The original budget plan passed in December assumed $50 oil which led to a deficit of 3%, but oil prices collapsed in January, forcing the rethink.

Siluanov has called for 10% cuts across the board, but even this won't be enough, as cutting spending by a tenth only generates RUB513bn ($6.6bn) and still leaves a hole in the budget worth several trillion rubles, depending on the exchange rate and eventual oil prices.

The minister's job is made even tougher by the fact that Putin has put military and social spending out of bounds as the president has a general election to win in September and a war to win in Syria.

Still, the bneWidget - which takes as a base assumption oil prices of $40 and exchange rate of RUB68 to the dollar - shows clearly that the state has lots of options open to it. Setting oil to $40 and the RUBUSD rate to RUB68 does give a 5.1% deficit, but if the currency is allow to slide to the current exchange rate of RUB77 to the dollar then the deficit falls to 3.3%, close to Putin's request.

Clearly Siluanov is not going to get the whole way to 3% without raising fresh revenue somewhere and he has several money-making schemes in the pipeline. From here, let's fix the exchange rate at the current RUB77 to the dollar for the sake of argument.

The first is a mooted $3bn Eurobond issue, which looks like it may go ahead and would add the equivalent of RUB231bn to the revenue, still far short of what is needed. However, adding this to the bneWidget and the deficit falls to exactly 3% of GDP.

Next up is a mooted privatisation programme where the state is getting ready to sell off stakes in some of its most valuable companies, including diamond monopolist Alrosa, shipping giant Sovcomflot and oil company Rosneft. There is much skeptism that the state will be able to sell anything in the current politically tense environment, but the whole privatisation package is supposed to worth a total of RUB1 trillion. If this is added to the slider then the deficit falls to 1.7%.

Even if the privatisation doesn't come off then another scheme is to force all the state-owned companies to pay 25% of their profits under IFRS. This has been a rule for a while, but many of the top companies have managed to wrangle exemptions or use their Russian standard accounts (RAS), which have far lower profit numbers compared to the IFRS norms. The Ministry of Economic Development estimates this could be worth almost RUB1 trillion as well for the budget. That would bring the deficit down to 0.4%.

And the state can always issue more domestic debt. Current the budget has room for RUB800bn worth of domestic debt issuance (in the form of the Finance Ministry’s OFZ bonds, which are also available to international investors through the international Clearstream settlement system). Adding this in puts the budget into surplus of 0.6%.

Of course, this is a best case scenario and it makes the probably unrealistic assumption that the exchange rate will stay at RUB77 to the dollar with $40. Keeping these saving and new revenues the same but reducing the exchange rate to Ulyukayev's prediction of RUB68 to the dollar if oil is $40, then the budget goes back into deficit, but only a mild 1.3% of GDP.

Probably the most realistic scenario at this point is an exchange rate of RUB68, $40 oil, the $3bn Eurobond is successful, the RUB800bn of domestic bonds are issued and about RUB1.5 trillion of new revenues is collected from all the schemes above. That would give a deficit of -2.9%, which is not brilliant but within the range acceptable to Putin.

Russia is not out of the woods yet, but clearly $40 oil is a huge boon to the government and makes balancing Russia's budget a lot easier. But everything will depend on where the average price of oil settles and what the concurrent exchange rate is. In general, the bneWidget suggests that each $1 oil rises shaves 0.7% off the deficit, but each RUB1 the exchange rate moves in the other direction adds 0.2% to the deficit.