Russia may change from a net creditor into a net borrower, as the second of its three surpluses is expected to go negative next year. But with its tiny external debt and imminent application of the so-call fiscal rule, Russia can easily afford to live on the never-never for a few years, according to the new domestic ratings agency, the Analytical Credit Rating Agency (ACRA).
Despite the low level of foreign direct investment (FDI) and capital market investments, Russia has been a net creditor for most of the last 25 years. Russian companies have actively invested in the “near abroad”, the other countries of the Commonwealth of Independent States (CIS).
Experts at ACRA, said in a report: “If in 2008, the large budget reserves are allowed the state to act as a net lender, the use of the Reserve Fund will make it a net borrower,” reports RBK.
Russia has been dipping into its rainy day Reserve Fund to cover the federal budget deficit but this fund is due to run out of money sometime next year. Now the government is actively preparing to dip into its other sovereign fund, the National Welfare Fund, that was set up to meet future pension payments, but now will be used to support the economy and budget.
Russia's finance ministry said it will invest resources from the €73bn National Welfare Fund (NWF) more actively, Vedomosti reported on July 26. According to the daily, the ministry will direct RUB290bn (€4.1bn) of NWF funds to the Russian Direct Investment Fund (RDIF) as the government reshapes its finances following the combining of the NWF and the Reserve Fund. As of June 2017, the combined funds together amounted to just over RUB5.1 trillion (€73.3bn).
In addition to using its reserves, the government is planning to increase its borrowing to cover the shortfall.
“In the coming years, the volume of borrowing is planned at the level of RUB1 trillion per year and until the reserves begin to recover, the state will become a net borrower,” ACRA said in its report, adding the balance may go negative as early as 2018.
Triple surplus no more
The recession and crashed oil prices mean the supply of spare cash has dried up. For almost all of President Vladimir Putin’s 16 years in office Russia has run a triple surplus – federal budget, trade and currency account – which has funded this outbound investment.
Things started to go wrong in 2013 when the Russian economy reached full capacity and stopped growing, which resulted into the federal budget going into deficit. Russia ran a 1.2% deficit in the first half of this year of RUB489.1bn ($8.27bn), according to preliminary finance ministry estimates. The forecast for the full year is a federal budget deficit on the order of 2% of GDP.
More recently, the current account has turned negative. Russia had an excellent first quarter printing a $23bn surplus, but in the second quarter that turned into a small $300mn deficit – the first for years. Everything depends on what happens to oil prices over the rest of the year, but here too the outlook is poor after the Opec production cut agreed last year and re-confirmed earlier this year seems to be breaking down. Goldman Sachs is predicting $40 oil in the second half of this year.
“The third quarter current account could also be quite weak,” Aton Equity said on July 12, adding that “in this regard, ruble dynamics will now closely depend on movements in the capital account: it seems that capital inflow was the main factor that counterbalanced the weakening of the current account in the second quarter”.
The last of the three surpluses – the trade balance – remains in healthy profit. Russia’s economic problems are always mitigated by the residual income it earns from exporting raw materials – primarily oil and gas, but increasingly grain and arms are bringing in good money.
The report finished on a more positive note saying that Russia will probably remain a net borrower for only a few years. The re-introduction of the so-called fiscal rule in 2019 – that limits government spending to the amount it earns in revenue – should reduce the borrowing back to a level where Russia once again becomes a net lender after two years, according to ACRA. And the government is being prudent having recently set the budget assumption for the average price of oil at $40 rather than the $45 that former finance minister and co-head of the presidential council Alexei Kudrin was pushing for. That lower level means given the price of oil is expected to be a bit higher the federal budget should go into surplus again by 2020.
“Therefore, if the rule is adopted, the reserves will begin to accumulate, and the state will again become a net creditor. Now the reserves make 4% of GDP, and by 2020-2021 in our base forecast will reach 6% of GDP,” ACRA says.
Even if Russia become a net borrower for a few years, it can afford it as the state’s external debt is risibly small.
Currently, Russia’s sovereign external debt is RUB2.44 trillion ($41bn), or about 10% of its total international reserves and 3.4% of GDP. By comparison, most of the other countries in the region have a debt to GDP ratio that is in the high double digits.