Russia to return to budget rule as oil dependency grows

By bne IntelliNews March 23, 2012

Graham Stack in Kyiv -

Russia is to return to the budget rule principle, Presidential Aide Arkady Dvorkovich told reporters on March 23, as concern over the country's growing exposure to oil prices grows.

The budget rule, as it existed before 2008, limited the amount of gas and oil sector revenue that could be used for budget expenditure to 4.7% of GDP. It was suspended in 2008 as part of the government's measures to stimulate the economy in reaction to the impact of the global financial crisis.

"We have actually returned to the principles we used before the crisis, in particular it refers to budget discipline,' Dvorkovich said, according to RIA Novosti. "Previously, the budget rule was canceled, but we have a decision by the president and prime minister under which we are to go back to the budget rule, it is now being formulated and will be accepted," the official said, although he failed to specify the level at which new budget rule will be implemented.

Russia's oil and gas revenues enabled the country to implement effective anti-crisis stimulation measures without running up high sovereign debt, although the budget did dip into deficit. However, lifting the restrictions on the use of oil and gas revenue for budget expenditure, as well as the series of populist spending commitments that the government embarked upon to keep the electorate sweet, has seen the country's exposure to oil price fluctuation increase to dangerous levels.

As a result, although the budget is currently balanced, the country is in fact running a non-oil and gas budget deficit of 11%. The oil price at which the federal budget balances is now around $117 per barrel, compared to around $45 at the outset of the global financial crisis.

"The high federal budget oil price balance does still reveal how significant structural weaknesses are increasingly being built into public finances," writes Tim Ash of Royal Bank of Scotland in a research note. "Even a moderation (of the oil price) to $75 per barrel - above the average oil price in 2009 - we estimate could move the federal budget into the red to the tune of RUB3.8 trillion or around 6.5% of GDP." According to Ash, the impact of such an oil price drop would cause recession in Russia and a non-payment scenario similar to 2008.

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