Russia's dwindling deficit

By bne IntelliNews February 25, 2011

bne -

The biggest impact from the crisis has been that Russia Inc. went from making money to losing it. After a decade of fat surpluses, Russia's budget went into deficit in 2009 to end the year with a whopping 6.8% gap.

The reappearance of deficits - Russian ran a budget deficit of 8-9% of GDP for most the 1990s - was like tipping a cold bath over the Kremlin as it undermines one of the country's key strengths: the government has used the copious surpluses to subsidise the economy by slashing taxes to make them among the lowest in Europe.

However, the deficit hasn't so far derailed Russia's development. Thanks to the prudence of Deputy Prime Minister and Finance Minister Alexei Kudrin, the state had siphoned off the windfalls when oil was trading near $150 per barrel into a Reserve Fund, building up $600bn in reserves, and used this to plug the gap in revenues for the last two years. Still, for the first time since 2000 the government has had to work for its living and it's not a knack the Kremlin has mastered.

The slow pain inflicted by the deficit was supposed to continue to 2015, when the ever-prudent Kudrin said he could reduce it to zero. Thing is, it looks like Russia is going to get there a lot sooner than even the most optimistic had dared hope. At the start of 2010, economists were predicting that Russia would start 2011 with a 6-7% of GDP deficit, whereas the actual deficit for 2010 came in at 3.8%. According to some economists (and no one wants to say it out loud), the deficit could be gone by the start of next year, clearing the way for state-assisted growth and a return to the 6%-plus expansion that Russia enjoyed for most of the last decade. "We think that budget performance will be much better than expected in 2011, and our estimate suggests that the budget deficit could be below 2.0% of GDP by the end of 2011," says Anton Nikitin, an economist with Renaissance Capital. "We do not rule out the possibility of the budget deficit falling below 1.0% of GDP by November-December 2011."

Kudrin has already put a raft of measures into place to bolster the state's finances that are already paying dividends, and the recovery in the price of oil also helped. Economic growth accelerated to 4.9% on year in the last quarter of 2010 and the full-year figure came out at 4.0%, exceeding everyone's forecasts. The official growth forecast for this year is 4.0% again, though analysts universally expect 5.0% or more.

Instead of exhausting the reserve fund, by the end of February the government hadn't touched the RUB770bn ($26bn) still in the kitty and economists now believe the state won't have to take any more out of it this year.

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