Page 10 - RusRPTApr20

13% and corporate tax at 21% for the last two decades – amongst the lowest tax rates in Europe. During the boom years while the government ran a headline budget surplus, the non-oil deficit was consistently at about -4% of GDP. Even though Russia Inc was running at a profit, if you took out the de facto subsidy the Russian economy earns from just having oil then it was running at loss if you look at it as a business.
The oil subsidy has been a huge boon and allowed Russia’s economy to make continuous progress ever since Putin Russian President Vladimir Putin took over in 2000 when oil prices began to rise. It allowed the state to keep taxes low. It allowed wages to be increased by about 10% a year for a decade to bring public wages in line with private sector incomes. It allowed the Kremlin to complete modernise the military since 2012, while still meeting it social sphere and other public expenditure obligations. And it has paid for a total transformation of basic infrastructure to bring it more or less in line with the rest of Europe. Now that subsidy will help fund the RUB27 trillion ($400bn) spending programme for the national projects, while still meeting the social spending largess that Putin promised during his January 15 state of the nation speech.
During times of crisis the non-deficit blows up as the Kremlin digs into its reserves. During the 2008 crisis the non-oil deficit ballooned to 13% of GDP and spiked again in the 2014 crisis to about 9%. But since then the government has managed to bring it down to 5.7% in 2019 – almost back to normal levels – which is a considerable achievement. It says that Russia Inc is almost back to “normal” after multiple shocks over the last decade and a half.
Going forward and the current budget sees the non-oil deficit starting to increase again, rising to 6% this year and 6.7% in 2022. With the collapse of oil prices that is now almost certainly an underestimate.
The Kremlin intended to ramp up the subsidies to the real economy in an effort to get the national projects into place in the coming years, but even at a level of 7% this is still a fairly modest increase compared to what was spent in previous crises. As always Russia is trying to be prudent with its reserves.
The collapse of oil prices will screw up all these calculations. According to bne IntelliNews’ calculations a fall of $10 in oil prices in 2020 will lead to a reduction in the size of Russia’s economy of 1.2%. Tax revenues would fall by RUB1,445bn reducing their share in the tax take from 39.1% to 36.9% and increasing the non-oil deficit from 6% to 7.1%. This fall is enough to put the budget into deficit of RUB586bn, or 0.52% of GDP, from its current surplus.
But none of this is a disaster. A deficit of circa RUB500bn can easily be financed by just issuing more Russian Ministry of Finance ruble-denominated OFZ treasury bills, without tapping the NWF.
Even if the Ministry of Finance had to make up a RUB1.5 trillion hole in the budget each year, with RUB10,000bn in the NWF, the government can keep this up for seven years. That stands in stark contrast to 2016 when a RUB2 trillion deficit almost sparked a major financial crisis and forced the government to “privatise” a 19% stake in Rosneft, which later turned out to be a loan from Qatar.
Indeed, last autumn the Ministry of Finance released its scenarios for the next ten years gaming out super low oil prices and found economic growth falls to zero only at $40, and only if it stays there for a decade. Even at sustained oil price rates as low as $25, thanks to the reserves Russia can still happily function for as much as ten years.
The bottom line is that the oil price shock currently underway will be painful for the Russian economy, but the Kremlin has done its homework and is well prepared for the coming storm.
10 RUSSIA Country Report April 2020 www.intellinews.com