Page 6 - RusRPTApr20

2.0 Politics
2.1 Russia has enough in reserves to fund budget deficit for a
decade
Russia’s Ministry of Finance said that Russia has enough money in its National Welfare Fund (NWF) to fund budget short falls for a decade, Finance Minister Anton Siluanov said on March 9. The Central Bank of Russia (CBR) has also temporarily suspended the budget rule and put off purchase of foreign exchange for 30 day to boost the supply of dollars on the market.
The cost of oil crashed after the OPEC+ production cut deal collapsed on March 6 and Russia and Saudi Arabia started a price war, which is partly aimed at reducing US shale production. That has lead to the value of the ruble to tumble and raised questions over the Kremlin’s ability to fund its ambitious 12 national projects and other obligations. Russia’s NWF reserve fund has grown rapidly in the last year and totalled $150.1bn as of March 1.
The fund is sufficient to cover budget deficits for 6-10 years if the price of oil falls to $25-$30 per barrel and stays there. That estimate is longer than the 4-6 years the ministry mentioned a week earlier. However, the ruble exchange rate plays a large role as the fund is made up of dollars and spending is in rubles. The Ministry didn't comment on what its long-term exchange rate outlook is but it is clearly assuming a deep devaluation of the ruble to accompany a long- term and steep fall in oil prices.
The fund was initially designed to meet future pension payments, but following the last oil price shock in 2014 has been re-tasked as a general reserve fund that can be used to supplement the budget if the state is running a deficit.
"If oil prices remain sustainably low the sufficient amount of liquid assets in the National Wealth Fund guarantees fulfilment of all state obligations and preserved macroeconomic and financial stability,” Ministry of Finance said in a statement. “As of March 1, 2020 the NWF’s liquid funds and funds on the extra oil and gas revenues account exceeded RUB10.1 trillion ($150.1bn), or 9.2% of GDP. Those funds are sufficient for covering the revenue shortfall due to the oil price plunge to $25-30 per barrel within 6-10 years (considering damping mechanism revenues).”
To preserve the fund there are limits on how it can be used. If the NWF liquid funds dive below 5% of GDP, the annual amount of its funds used to cover the deficit of the federal budget and the budget of the Pension Fund cannot exceed the amount equivalent to 1% of GDP.
The NWF is funded by sterilising all oil tax revenue above the price of $42 per barrel. This mechanism is known as the budget rule but the CBR decided to temporarily suspend this mechanism for 30 days, during the worst of the oil price shock, and refrain from buying foreign currency on the exchange markets, which will boost the supply of dollars.
The purchases are actually made on behalf of the Finance Ministry, which supervises the budget rule mechanism. The Central Bank acts as the Finance Ministry’s agent for currency purchases on the open market.
"The Bank of Russia has decided not to purchase foreign currency on the domestic market within implementation of the fiscal rule mechanism for 30 days. The decision is aimed at making the actions of monetary authorities more predictable and reducing volatility on the financial markets amid major changes on the global oil market. It covers both regular foreign exchange purchases and purchases postponed in 2018," a CBR press release said.
6 RUSSIA Country Report April 2020 www.intellinews.com