Russian govt finds itself under social spending pressure in election season

Russian govt finds itself under social spending pressure in election season
Russian pensioners.
By bne IntelliNews August 17, 2016

The Russian government will discuss either indexing pensions by 8.6% on September 1 or making a one-time payment to pensioners, Vedomosti reported, citing sources in the government.

Despite the ongoing efforts to consolidate the budget amid the unprecedented fiscal squeeze, the government might have to give in to increasing social spending as the two-year election season starts, with parliamentary elections set for September and a presidential election in 2018.

The Russian government needs to find RUB2 trillion ($31bn) from somewhere to plug the gaping hole in the federal budget, as the country runs its first deficits since President Vladimir Putin came to power, bne Intellinews wrote on August 9.

And while previous statements by officials, including the infamously memed Prime Minister's Dmitry Medvedev's “There's no money, but you hold on”, suggested that Russians might have to bite the austerity bullet, it could be that the Kremlin will plump for fiscal risks to the political ones.


“We view it [pension indexation] as a litmus test for previous cabinet calls for a tighter budget,” Natalia Orlova of Alfa Bank commented on August 17.

“This [pension] hike was not previously accounted for in calculations for the 2017-2019 budget drafts and would thus cause a deterioration of next year’s budget parameters,” Alfa Bank argued.

Should the government decide to make a second pension increase this year in September, Alfa expects the Central Bank of Russia to react by keeping the policy rate unchanged, despite weak lending growth and signs of deflation in August.

The indexation of the pensions would cost the budget about RUB140bn ($2.2bn), but would be less burdensome than a one-off compensation, as it would not increase the base for future indexations in 2017, Aton Equity commented.

“Together with the news that Bashneft's privatisation has been postponed (which should have been a major source of budget deficit financing this year), the potential pension indexation is a sign of escalating budget risks,” Aton warned.

Aton analysts also agreed that additional indexation would undermine the chances of a CBR rate cut in September, which would be negative for OFZ federal bonds that had priced in an interest rate cut this year.

“Diminishing sources of deficit financing also raise the chances of an increase in OFZ supply next year, which may add negative sentiment to the market,” Aton said.