#10
Moscow Times
November 20, 2001
Ministers Fret Over Diving Oil Prices
By Victoria Lavrentieva
Staff Writer
As oil prices continued to slide Monday, senior governmental officials looked increasingly worried that the trend could jeopardize next year's economic forecasts.
The government's press service Monday moved quickly to counter impromptu remarks made Saturday by Science and Technology Minister Ilya Klebanov, who told journalists that, in light of the slump in crude prices, it was "time to think about [cutting] the [2002] budget."
DPI, the government's information department, said in a statement that the remarks were "politically unacceptable" and that Klebanov, who is also deputy prime minister, "was misunderstood by journalists."
"The government is not discussing the possibility of a budget [cut]," DPI said.
The 2002 draft budget, which is the first post-Soviet budget with a surplus, was universally hailed for its fiscal prudence when the government presented it to the State Duma in September. It has already passed two of four required readings, and starting all over again with a leaner version because of falling oil prices would be a humiliating blow to the government and its efforts to wean itself off petrodollars.
But with a price war looming as Russia continues to rebuff OPEC demands to cut output, economic forecasts laid out in the budget are looking less likely to be achieved.
The 2002 draft budget is based on a minimum price of $18.50 per barrel of Urals crude, which dropped 3.86 percent to $15.21 Monday. It sets budget revenues at 2.13 trillion rubles ($67.6 billion at the predicted average ruble rate for the year of 31.5 to the dollar), and spending at 1.95 trillion rubles, leaving a surplus of 1.63 percent of gross domestic product. It also envisions an annual inflation rate at 10 percent to 13 percent.
The last time Klebanov, who oversees the arms industry and has no formal training in economics, voiced his opinion on a major macroeconomic issue he was also promptly shot down. But unlike last year, when he called the passage of a 13 percent flat tax on income "temporary," which damaged the government's increasingly liberal reputation, analysts said his comments on the budget may be an indication that others are thinking along the same lines.
"The government is certainly more nervous now than it was before [OPEC decided not to cut production unless Russia and other major non-cartel producers did the same]," said Alexei Zabotkine, an economist at investment bank United Financial Group. "The main evidence of this is that the Economic Expert Group within the Finance Ministry was told to work out a budget scenario based on an oil price of $15 per barrel," he said.
While the budget is based on a minimum price of $18.50 per barrel of oil, its optimistic scenario is $23, at which point the government can create a contingency fund to help meet ballooning debt payments in 2003. Every dollar difference in the price of oil translates into roughly $1 billion in budget revenue.
Analysts said that the last thing the government wants to do is sequester the budget. The only two years that was done were 1997 and 1998, when prime ministers rotated every half year until the financial crisis hit in August.
"It is politically unacceptable," said Alexei Moiseyev, an economist with Renaissance Capital investment house, echoing DPI's statement.
Most analysts said that the current draft budget will survive if oil prices stay above $15 per barrel. "While the oil price has often been seen as a proxy for the health of the Russian budget, the country is currently well positioned to endure a period of low oil prices, given its solid budgetary position, continued economic growth and high level of Central Bank reserves," Renaissance wrote in a research note Monday.
Troika Dialog, another investment bank, said the Russian budget looks healthy as long as oil prices remain in the $16 to $18 per barrel range.
Mikhail Zadornov, a former finance minister and current deputy head of the Duma's budget committee, went further, saying Friday that there wouldn't be any major budget problems as long as oil stays above $12, although at that level the rate of GDP growth would slow and Russia would likely need to resume borrowing from the International Monetary Fund -- something it is hesitant to do.
Russia has not borrowed from the fund since the summer of 1998 and has decided to pay some $1 billion of its debt to the IMF this year, ahead of schedule. IMF chief Horst K?hler has said that Russia could rely on IMF emergency financing in the event oil prices drop sharply.
Adding to the downward revisions, Finance Minister Alexei Kudrin told reporters in Canada over the weekend that next year GDP may underperform the government's most pessimistic forecast.
"If the oil price is lower than $18.50 a barrel, growth could be a little bit lower than 3.8 percent," Reuters quoted Kudrin as saying at the Group of 20 nations summit in Ottawa.
Also in danger is the $3.5 billion reserve fund, which has been established to meet debt payments in 2003, when Russia's obligations swell to $10 billion.
If the budget passes as is and oil continues to fall, the government has other options it can use to balance its payments, such as accelerate privatization, tap the Central Bank's reserves, and increase borrowing on foreign and domestic markets.
Another possibility, which is more potentially explosive politically, is to accelerate the ruble's devaluation or use inflation to cover budget expenses by printing extra rubles. Analysts said this last option is the worst, as it would hurt everyone.
"A budget cut will hurt only political groups and some executives, but if inflation goes up it will hurt everyone in the country," Zabotkine said. "I would call it the measure of last resort."
"Two-thirds of Russians consider price growth to be the main problem in their lives," Moiseyev said.
One good thing about low oil prices, analysts said, is that Russia would be more likely to convince the Paris Club of creditor nations to restructure its $39 billion Soviet-era debt, $4 billion of which comes due next year.
Prime Minister Mikhail Kasyanov said Friday that while Russia did not intend to seek debt relief from the Paris Club in the next two years, the "issue remains, and should not be forgotten." He added: "We have achieved a new level of trust in our relations with the West, and this should be the basis of political conclusions."
"If the Russian budget is struggling with its debt service burden as a result of a sharply lower oil price, then Russia now has the right to favors from its official creditors," Renaissance wrote in reaction to Kasyanov's comments.
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