Putin orders budget stability
Spending plans take a back seat as the president seeks to shore up finances against the coming crisis
- JRL 2012-119
file photoThe address follows several months of uncertainty about what direction the new Cabinet plans to lead the economy, with observers questioning how plans for increased social spending would sit with orders to balance the budget by 2015.
In his first major discussion of the budget since returning to the presidency, Putin gave a clear message that while other commitments were not to be sidelined, the main priority is to shore up Russia's finances against worsening troubles in the euro zone, Russia's main export market.
"We must take into account any scenarios for the world and Russian economies and have the instruments and possibilities to react," he told the government and members of parliament in comments published on the Kremlin website.
"Therefore I ask you to put into the coming year's budget enough reserves to realize anti-crisis measures, if, of course, the need arises," he added.
Although Putin did not give any set figures for the reserve fund, Finance Minister Anton Siluanov told The Financial Times in June that Russia was ready to build up a buffer of around $40 billion in the next few years to protect the economy against a crisis.
The message shows Putin is taking heed of recent warnings about the danger for the Russian ruling elite of an economic crisis converging with growing social unrest. A recent report commissioned by former Finance Minister Alexei Kudrin predicted a period of "destabilizing" politics if incomes declined in Russia.
Putin emphasized the need to avoid budget volatility by diversifying the economy away from its dependence on oil and gas exports, which last year made up 50 percent of budget revenue.
He called for the reduction in the non-oil budget deficit to 5 percent from the current 10 percent of gross domestic product, a plan which Alfa-Bank analysts say would reduce the oil price at which the country balances its budget to $90 a barrel by 2018, from $100 a barrel in 2011.
"This achievement is seen as a prerequisite to maintain low inflation and to assure the relative stability of the exchange rate regime," Alfa-Bank chief economist Natalia Orlova said in a note to investors on Friday.
However, there was some vagueness as to how this would be achieved. One method, Orlova suggested, could be to increase taxation on the energy sector, a move that seems increasingly likely given Putin's order on Thursday to freeze corporate tax for the non-energy sector until 2018.
The president did not provide any clear answers as to how this increased focus on austerity would fit in with the raft of high-cost social spending measures he outlined ahead of the elections, noting only that these now needed to be implemented in "complicated conditions."
Maxim Oreshkin, chief economist at VTB Capital investment bank, said that it was possible to simultaneously shore up the economy against a crisis and increase social spending if the spending is carried out efficiently.
"There is certainly room to increase the efficiency of expenditures," Oreshkin told The Moscow News. "If the pension system issues are resolved properly when they are addressed in the fall, it will reduce the burden on the budget and free up space for other types of spending."
Siluanov said in his interview with the Financial Times that the government was working on a plan to erase the pension deficit in the next 15 years through pension reform. This, he said, would free up around 10 percent of budget expenditure currently spent on covering the pension deficit.
Alfa-Bank analysts were less optimistic, describing the combination of spending and austerity plans as "too ambitious to be true." They said it was more likely the Cabinet would try to keep the break-even oil price at $100 a barrel to finance the promised increase in social expenditures.
Keywords: Russia, Economy, Business, Budget - Russian News - Russia
file photoThe address follows several months of uncertainty about what direction the new Cabinet plans to lead the economy, with observers questioning how plans for increased social spending would sit with orders to balance the budget by 2015.
In his first major discussion of the budget since returning to the presidency, Putin gave a clear message that while other commitments were not to be sidelined, the main priority is to shore up Russia's finances against worsening troubles in the euro zone, Russia's main export market.
"We must take into account any scenarios for the world and Russian economies and have the instruments and possibilities to react," he told the government and members of parliament in comments published on the Kremlin website.
"Therefore I ask you to put into the coming year's budget enough reserves to realize anti-crisis measures, if, of course, the need arises," he added.
Although Putin did not give any set figures for the reserve fund, Finance Minister Anton Siluanov told The Financial Times in June that Russia was ready to build up a buffer of around $40 billion in the next few years to protect the economy against a crisis.
The message shows Putin is taking heed of recent warnings about the danger for the Russian ruling elite of an economic crisis converging with growing social unrest. A recent report commissioned by former Finance Minister Alexei Kudrin predicted a period of "destabilizing" politics if incomes declined in Russia.
Putin emphasized the need to avoid budget volatility by diversifying the economy away from its dependence on oil and gas exports, which last year made up 50 percent of budget revenue.
He called for the reduction in the non-oil budget deficit to 5 percent from the current 10 percent of gross domestic product, a plan which Alfa-Bank analysts say would reduce the oil price at which the country balances its budget to $90 a barrel by 2018, from $100 a barrel in 2011.
"This achievement is seen as a prerequisite to maintain low inflation and to assure the relative stability of the exchange rate regime," Alfa-Bank chief economist Natalia Orlova said in a note to investors on Friday.
However, there was some vagueness as to how this would be achieved. One method, Orlova suggested, could be to increase taxation on the energy sector, a move that seems increasingly likely given Putin's order on Thursday to freeze corporate tax for the non-energy sector until 2018.
The president did not provide any clear answers as to how this increased focus on austerity would fit in with the raft of high-cost social spending measures he outlined ahead of the elections, noting only that these now needed to be implemented in "complicated conditions."
Maxim Oreshkin, chief economist at VTB Capital investment bank, said that it was possible to simultaneously shore up the economy against a crisis and increase social spending if the spending is carried out efficiently.
"There is certainly room to increase the efficiency of expenditures," Oreshkin told The Moscow News. "If the pension system issues are resolved properly when they are addressed in the fall, it will reduce the burden on the budget and free up space for other types of spending."
Siluanov said in his interview with the Financial Times that the government was working on a plan to erase the pension deficit in the next 15 years through pension reform. This, he said, would free up around 10 percent of budget expenditure currently spent on covering the pension deficit.
Alfa-Bank analysts were less optimistic, describing the combination of spending and austerity plans as "too ambitious to be true." They said it was more likely the Cabinet would try to keep the break-even oil price at $100 a barrel to finance the promised increase in social expenditures.