Russia's non-oil deficit falling but not far or fast enough

Russia's non-oil deficit falling but not far or fast enough
Oil vs non-oil revenues and deficit in Russia's tax revenue and budget
By Ben Aris in Berlin May 18, 2017

Oil used to be the key factor in Russia’s budget income, and since prices collapsed at the end of 2014 the non-oil income has become more important.

Oil revenues have always made up about half of the finance ministry’s budget revenues as a percentage of GDP over the last decade. In absolute terms the amount of cash has risen steeply, but that has lifted the whole economy, keeping the proportion in the revenues about the same. (2009 was an exception, when it fell to 40% after oil prices fell briefly to $35.)

However, more recently oil’s share has fallen again but remains very volatile as a share of revenues, leaving the Kremlin to try and cope with very volatile income. In 2016, the share of oil revenues in the government’s income bounced between 25% (March, December) and 50% (May, November).

At the same time, the absolute amount of cash the Kremlin earned from oil exports remained relatively stable at just under RUB500bn (currently $8.64bn) per month for most of the last two and half years. This is because Russia has worked hard to make up for the fall in prices by increasing the volume of oil produced to a record 11mn barrels a day. More rises are now curbed by a deal with Opec signed at the end of last year and due to be renewed at the oil producing cartel’s Vienna meeting in June.

The role of oil is important to understand the deficit’s significance for Russia’s economic health. While the finance ministry is fully focused on funding the headline federal budget deficit – Russia is on course to run a 2% of GDP deficit in 2017 – the more important deficit is the non-oil deficit (what the budget deficit would be if all the oil magically disappeared).

Russia has always used its oil revenues to subsidise budget spending, so even in the boom years when it ran a nominal budget surplus, the non-oil deficit was actually negative and the finance ministry targetted 4% as a comfortable compromise between supercharging economic growth and building up reserves.

In crisis years the non-oil deficit balloons out as the government is forced to tap oil income and reserves to bail out the struggling economy. In 2009, the non-oil deficit reached some -13% of GDP, which is not sustainable.

In general, the non-oil deficit is a much better gauge of how well the finance ministry is coping with the crisis than the headline deficit and it has been doing a good job, although here too the government finances remain exposed to oil price fluctuation shocks.

The ministry started 2016 with a non-oil deficit of 13% in the first quarter, but during the rest of the year managed to wrangle it down to 9%, with a low of 6% in November before the traditional holiday season blow out in December when the non-oil deficit spiked to 20%.

This year is looking a little better as the finance ministry started with a 7.2% non-oil deficit in January, which rose to 12% in February, but once spring arrives, and assuming another good harvest this year, the finance ministry should be able to wrangle the non-oil deficit down again. However, without deep reforms and a return to strong growth the preferred -4% for the non-oil deficit will not be obtainable in the foreseeable future.