Russia’s finance ministry has been raising fresh revenues to fund President Vladimir Putin’s RUB8 trillion spending extravaganza that he outlined in his latest May Decrees that are designed to make a “breakthrough” for Russia’s economy. Thanks to the rise in the prices of oil and a new expanding borrowing programme the state will have the money, but the big unresolved question is how to spend it effectively.
Amongst the proactive measures that the finance ministry has introduced to bring in more cash is an increase in the VAT rate from 18% to 20%, a phased in increase in the retirement ages, a change to the mineral extraction tax (MET), and a demand that state-owned enterprises (SOEs) pay 50% of their profits as dividends.
In addition to these extra revenues, the Ministry of Finance this week announced a large increase in borrowing — a new direction for Russia, even if the overall debt level will remain extremely modest by international standards. Russian First Deputy Prime Minister and Finance Minister Anton Siluanov elaborated on plans to raise RUB5 trillion ($80bn) over the next three years from the domestic market and another $13bn on the international capital markets, on July 11.
“According to the plan state public debt will grow to 15% of GDP in 2019, 16% in 2020 and 16.6% in 2021, which would be still a relatively low number,” said Raiffeisen Bank's Gintaras Shlizhyus in a note.
Putin’s plan calls for approximately an extra RUB2 trillion of spending a year on top of the budget plan through to 2024 when he stands down. However, just the 2% added onto VAT will cover about a third of that: the tax hike is worth an extra RUB633.5bn next year rising to RUB678bn in 2019 and RUB728bn in 2020.
The savings from the pension age increase will take longer to make themselves felt. The changes to the rule kick in in 2020 when the state will save a mere RUB9.3bn, however, already by 2021 the savings will jump to RUB156.3bn and will climb from there.
Clearly the existing three-year budget law needs to be revised. The plan has the following pairs:
2018 revenues of RUB15.26 trillion ($256bn) and expenditures of RUB16.53 trillion ($277bn) resulting in a deficit of RUB1.3 trillion ($21.8bn)
2019 revenues of RUB15.55 trillion ($260bn) and expenditures of RUB16.4 trillion ($275bn) resulting in a deficit of RUB819.1bn ($13.7bn)
2020 revenues of RUB16.3 trillion ($273bn) and expenditures of RUB17.15 trillion ($287bn) resulting in a deficit of RUB870bn ($14.5bn)
Adding up the new revenues which are worth around RUB2 trillion a year, plus the RUB1 trillion a year in deficit spending that will be more than covered by the approximately RUB1.5 trillion a year in new borrowing (almost all from domestic sources) and the numbers seem to add up.
But while the Ministry of Finance has been working on raising new revenues it has said very little on how this money will actually be spent. It is already pretty clear that this year’s RUB15.2 trillion of spending will actually come in closer to RUB18 trillion, and that is going to happen every year from now on as all the May decree projects get under way.
Government announcements already made indicate that over the next six years the state is proposing to spend on road projects (RUB8.42 trillion), demographics (RUB3.55 trillion), infrastructure (RUB1.79 trillion) and the digital economy project (RUB1.31 trillion). Dividing this evenly over six years that is a total of RUB2.5 trillion of extra spending on just these projects, and there is another RUB6.8 trillion of spending over the same period for national projects, health care, demography, education and science.
Based on these numbers a better guess might be for an extra RUB3.5 trillion of spending a year on top of the approximately RUB16 trillion a year that is already pencilled into the current budget.
That is a lot of new money sloshing around the system. The key to this programme will not be raising enough fresh revenues to pay for all these plans, but preventing waste. After four years of federal budget deficits where the Ministry of Finance only just managed to cover its costs, the budget already covers the essentials and much of the fat has been cut. However, there are no checks or controls for the new programmes and given the endemic corruption and atavistic oligarchs preying on the state budget the trick will be overseeing the new spending.
This is probably why the Kremlin has appointed two political heavyweights to two bodies specifically tasked with auditing and spending vast amounts of state cash.
Former finance minister and co-head of the presidential council Alexei Kudrin has been appointed to the head of the Audit Commission, which was initially seen as a demotion for the man that steers Russia through the boom years and managed to ring-fence $600bn in reserves that subsequently saved Russia’s economic bacon in the 2008 crash. The Audit Commission has never played a very important role but clearly its star is rising now. The former head Tatyana Golikova was made deputy prime minister and will oversee all the May decree social spending – a massive promotion. Kudrin is already asking for extra powers to audit, among other things, the Central Bank of Russia, and he is clearly already planning to pay much closer attention to regional budget spending.
The other new beefed up body is Vnesheconombank (VEB), the one-time sovereign debt manager now transformed into the state’s de facto development bank. Igor Shuvalov left the government in the recent reshuffle to head up VEB that has been rapidly accumulating resources since he took over. Formerly the third most powerful man in Russia after the president and prime minister, with his appointment VEB has also been promoted into the top tier. It is now in charge of a new RUB3.5 trillion infrastructure development fund, will be given a pension fund mandate to marshal even more resources and is likely to get RUB1 trillion of fresh capital to pay for all the new plans.
The wild card in all these calculations is the price of oil. The current budget plan still assumes an extremely modest $40 average oil price, despite the fact that the average has been over $60 all year, and since April it has been over $70 following US President Donald Trump’s decision to reimpose sanctions on Iran. So it even seems that there is quite a bit of wiggle room in the plan. But even if oil prices fall again, the Kremlin always has the option of just taking its foot off the gas again.