Russia must slash spending or face financial crash, warns minister

Russia must slash spending or face financial crash, warns minister
By bne IntelliNews January 13, 2016

Russia must learn to live within its much restricted finances or face an economic crash like that which wrecked the economy 18 years ago, Finance Minister Anton Siluanov said at the January 13 opening of the Gaidar Forum in Moscow. 

"Our task is to adapt our [2016] budget to the new realities," Siluanov said as he and other officials gave glum assessments on the back of plummeting prices for oil, Russia's main source of income. "If we don't do that, we will see a repeat of what happened in 1998-99," Interfax quoted him as saying, referring to the government default and economic crash that followed.

The Finance Ministry will draft and present amendments for the 2016 federal budget by the end of the first quarter, Siluanov said, as the cabinet prepares to cut the budget by at least 10% to cope with a deeper recession than expected.

With the government scouring areas for savings without touching military and other spending essential to its new self-assertive stance on the world stage, Siluanov said the country's budget could save up to RUB500bn ($6.5bn) if spending was cut by one tenth.

Before closing new contracts and taking on obligations all ministries will now audit their spending and postpone or cancel secondary priorities, he added.

On January 13, Kommersant daily reported that Deputy Prime Minister Igor Shuvalov will oversee  budget optimisation, with first suggestions expected as early as January 15.

Overall, the Gaidar Forum, first major economic forum in 2016, showed officials looking for a new "worst-case" consensus after projections of a $50-per-barrel oil price formed in late 2015 were already sharply surpassed in the new year.

The average price of oil budgeted at $50 for 2016 should be revised to $40 per barrel, Siluanov believes, not seeing any positive prospects on the oil market as it undergoes a "very rough rebalancing", with "no one planning to cut output".

Siluanov's deputy Dmitry Oreshkin estimated that at $40 oil, Russia's GDP could be around zero in 2016 compared with previous expectations of recovery to 0.1-0.5% growth.

Privatisations back on the table

Minister of Economic Development Alexei Ulyukayev does not see the main risk in oil prices dropping to $20 or $15 per barrel, but in a prolonged period of oil price stagnation, which "might last for years or decades".

Budget deficit planned at 3% of GDP in 2016 could reach 7-7.5% under a stress-scenario, said Ulyukayev, who used the Moscow event to promote privatisation of Russia's largest state banks VTB and Sberbank as additional sources of revenue.

Ulyukayev singled out the banking leaders as "very high quality assets" that "are attractive throughout the world", privatisation of which would fundamentally change the capitalisation crunch in Russia's banking sector as it weathers a recession and exclusion from foreign credits.

Drawing on the buzz phrase in government circles in recent months, the minister emphasised that Russia must now adopt to the "new normal" - an economic reality in which former growth drivers no longer exist.

Privatisation of VTB has been a rare success story in the largely failed privatisation effort in 2010-2014, accounting for RUB191bn (75%) of the total revenues of RUB256bn ($3.3bn at the current exchange rate) from the sale of state assets.

German Gref, the chief executive of Sberbank, in which 50% plus one share is controlled by the central bank, also previously called for the full privatisation of Russia's largest lender.

Russia's trumpeted one-trillion-ruble privatisation programme never got off the ground, partly because of reluctance in Kremlin circles to sell assets and stakes in its prize assets at prices that institutional investors might find attractive. The Kremlin's control over the economy has been growing since the 2008-2009 crisis, despite campaigns and policies to try to break up state monopolies and introduce more competition.

Gref, a former economy minister under President Vladimir Putin, told Germany's Handelsblatt newspaper in November that the government is "too heavily involved in the economy".

Savings in one pot

Meanwhile, ex-Finance Minister Alexei Kudrin, rumoured to be set for a new job in the government or Kremlin, urged to merge the sovereign Reserve Fund and the National Welfare Fund, arguing that "in the light of the challenges coming in the next 2-3 years we need to understand these assets and consolidate the management".

The Reserve Fund holding RUB4.2 trillion ($54.5 at current rates) is used as a fiscal cushion and at the current rate of expenditure can be almost completely exhausted by the end of 2016, Siluanov warned.

The Finance Ministry wanted to use RUB2.63 trillion to finish 2015 with RUB2.13 trillion or 2.9% of GDP deficit. It expects the fund to shrink in 2016 to RUB1.25 trillion, after it is tapped to cover financing for the federal budget deficit at below 3% of GDP ceiling.

"About RUB2.6 trillion [$40bn] will be cut from the Reserve Fund in 2015, more than a half," Siluanov warned in November, adding that "2016 might be the last year that we are able to spend from the reserves before they are depleted".

The RUB4.7 trillion-large NWF, which was initially planned to finance large infrastructure projects, remains intact amid the unprecedented fiscal squeeze.


Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.