RIA Novosti
September 22, 2008
Kudrin warns Russia to tighten its belt
MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - This week, the collapse of the Russian stock exchange, and the emergency measures taken by the Central Bank and the Finance Ministry to save the national banking system eclipsed one major event.
On September 16, Deputy Prime Minister and Finance Minister Alexei Kudrin presented the federal budget for next year to the Duma's profile committee. He said that the price of Russian oil should not go lower than $70 per barrel. If it does, the security of Russia's budget system will come under threat. This will be much more critical than the crash of the stock exchange or credit problems.
There are optimists in the Russian government that believe that in 2009 our oil will cost $95 per barrel. However, cautious Finance Ministry officials planned the budget based on $78 per barrel, just in case. Thus, next year's budget should have an income of 10.93 trillion rubles. Considering that planned expenses are 9.02 trillion rubles, its surplus will be 1.9 trillion rubles. Moreover, an additional 300 billion rubles will be transferred to the Reserve Fund (RF) and to the National Prosperity Fund (NPF).
Kudrin emphasized that profits from oil will not be as high as in the past. He believes they reached a peak this year, and will not be as high in the near future. Indeed, the export price for Urals crude is fluctuating at around $90 per barrel, whereas in June and July it was being exported at between $120-$140 per barrel.
Oil prices may continue to decline because of the problems with the world economy, and lower demand for energy sources in industrialized countries. The Kudrin-quoted price of $70 per barrel is the limit for a deficit-free budget. In other words, if the price of oil is $70 per barrel, budget expenses will be equal to revenues, and the budget will have no deficit. But we will have to forget about a surplus, not to mention additional transfers to the RF and the NPF.
If the price of Russian oil falls below $70 per barrel, money will have to be taken from the Reserve Fund to cover the budget's deficit.
It is possible, though, that on the eve of the budget discussion in the Duma, Kudrin wanted to somewhat scare the deputies who increase federal expenses every year. The real level of a deficit-free budget may be lower, but Kudrin is right in his own way.
Only two years ago, the budget was drafted based on an oil price of $61 per barrel (which was very high at the time), and the deficit-free budget price of oil was $38-$40 per barrel. Even then, sound economists warned that oil prices cannot increase indefinately, and that branch lobbyists should tame their appetites. Nevertheless their pressure resulted in the permanent growth of government expenses and so required oil prices essential for a deficit-free budget to increase accordingly.
However, there is reason for optimism. Reports from the world oil markets show that the Russian budget should not have major problems during the next year. It was feared that the collapse of American Lehman Brothers could crash the entire U.S. economy, and that the demand for oil in the United States would sharply drop. The American WTI price dropped to $92 per barrel on September 16, but on Friday the 19th of September, it went up to $98. According to the most recent forecast of the Goldman Sacks bank, the average WTI price in 2009 will be $123 per barrel. This means that the price of Russian Urals crude, which is $6-$8 less than WTI, will also remain high.