Russia/oil: Russia should be in enviable fiscal health. Surging oil prices are adding tens of billions of extra dollars to the state’s revenue. But the government is spending this windfall almost as soon as it earns it, with worrying implications for the economy’s future.
With key elections approaching this year and next, it was inevitable that Russia would use part of its windfall to butter up voters. But the extent of the spending spree is stupendous. The finance ministry recently added $14.4 billion of extra spending to its budget projections for 2011 — and $30 billion to next year’s, about two per cent of GDP. Premier Vladimir Putin is pouring money into everything, from pensions to agricultural subsidies to defence.
The best measure of Russia’s addiction to oil is the break-even point — the price per barrel at which Russia balances its budget. It stood at $34 dollars as recently as 2007, hit $75 during painful 2008, and has risen steadily ever since — to $105 last year. In 2011, according to Russia's finance minister Alexei Kudrin, it will be $115. And it could even reach $120 to $122 a barrel, in the years 2012 to 2014.
Russia has based its budget for those years on a price of $95 a barrel, implying an annual fiscal deficit of around 3.5 per cent of GDP — which would double if oil fell to $60. Such a deficit may seem small by Western standards, but shallow capital markets make it difficult to finance.
Russia still has some fiscal reserves, funded by its previous wise policy of saving oil revenues. The budget’s rainy-day reserve fund is worth $26 billion, but has shrunk dramatically from $143 billion in 2008. The national welfare fund has another $92 billion. But this is supposed to shore up the chronically under-funded pension system, and is already being tapped to finance off-budget programmes.
Even Kudrin says Russia’s fiscal course is unsustainable. He says he wants to reduce the budget’s break-even point to $90 by 2015. A cold-turkey treatment would require $70 billion in budget cuts, and has no chance of ever happening.
Russia's spending spree means that at best, taxes will rise sharply in the future — depressing investment and growth, which are already suffering from recent tax hikes. At worst, the oil price will suddenly tank, the deficit will soar, investors will take fright — and Russia will feel sorry it wasn't more prudent during the years of plenty.
