Gavrilenkov: A Farewell to Common Sense
Evgeny Gavrilenkov, chief economist at Troika Dialog, says Russia’s medium term fiscal strategy looks unsustainable based on its latest borrowing plans.
Few months ago, we praised the return of the “common sense” in government thinking after Finance Minister Alexei Kudrin acknowledged that the breakeven oil price (i.e. the Urals price at which the budget balances) reached $95/bbl last year and warned against further increases in expenditures in order to reduce this dependence (see our “Chief Economist’s View – A Return to Common Sense” of May 24). This call received a seemingly positive response in government circles.
The reality, however, appeared to be very different. In mid-summer, while drafting the 2011-13 budget, the government amended the 2010 budget, thus inflating the base for future periods: expenditures were raised from R9.9 trln to R10.2 trln (note that a year ago, while drafting the 2010-12 budget, the government initially planned to cut expenditures in 2010 and bring them to R9.3 trln). In the meantime, the state issued a $5.5 bln Eurobond at end April, which in fact fueled the enthusiasm of the “spending lobby” (informally headed by the Economics Ministry), so that our worst fears materialized. In earlier notes, while forecasting strong growth and continuous disinflation (to below 6%) we made explicit reservations – disinflation and robust growth (around 5% this year and next) were possible assuming that government spending is not inflated and the Central Bank avoids interventions on the forex market. Inflation indeed decelerated to 5.5% y-o-y, while GDP growth reached 5.2% y-o-y in 2Q10. This growth and ongoing disinflation were delivered amid flat nominal federal budget expenditures (compared with 2009 spending).
But in mid-year, macroeconomic policy deteriorated sharply as the 2010 budget was again amended and expenditures for 2011-12 were raised. In early September, the government decided to increase 2011-12 federal budget expenditures even more to a respective R10.7 trln (up R0.3 trln from what was planned a couple weeks prior) and R11.2 trln (up R0.4 trln). According to current plans, expenditures will be raised to R12.2 trln in 2013. As a result, the government plans to balance the budget in the coming years with a deficit of around R1.8 trln ($60 bln) per annum, which should represent around 3% of GDP according to government thinking. A similar deficit is expected this year.