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The CBR said that it is also prepared to use “additional instruments” to support the market. During the previous ruble meltdown in 2014 the central bank hiked rates to 17% to calm the markets. This time round analysts are only expecting the CBR to reverse its easing policy, but not to hike rates, unless the situation starts spinning out of control.
After falling to RUB75 to the dollar on March 9 from RUB67 three days earlier, the ruble recovered a little ground over the course of the day and opened at RUB72 on March 10. During the worst of the crash in 2014 the ruble dollar rate rose to over RUB80.
2.2 Crunching the budget numbers in the time of oil shock crisis
Markets are in shock following yet another oil shock to the Russian economy. But Russia has made enormous progress since the last time oil prices collapsed in 2014 and the Ministry of Finance is sanguine about the outlook for growth and spending this year. bne IntelliNews crunched the numbers to see just how bad a $10 fall or more in oil prices are.
Russia plans to keep the federal budget in surplus and the economy growing over the next three years, despite the recent fall in oil prices.
Oil revenues are expected to fall significantly, but the corresponding fall in the value of the ruble will mitigate that fall to some extent. As the Russian budget calculates spending on the basis of oil revenues denominated in dollars in the budget, but spends in rubles the government is actually one of the biggest winners from the devaluation that comes with falling oil prices. Although there are less dollars coming into the budget from oil exports, they buy a lot more rubles and the spending allocations don't change even if those rubles are worth less.
Russia’s decision to free the ruble in 2014 has created a mechanism to cushion the economy from a really nasty oil shock and analysts are almost unanimous that the CBR has learnt its lesson from 2014: it will not burn through its hard currency reserves to defend the ruble in this crisis. In 2014 the ruble fell from circa RUB35 to dollar to a low of RUB80. This time round the ruble immediately dropped like a stone following Russia’s decision to withdraw from the OPEC+ deal on March 6, falling from circa RUB68 to the dollar to RUB75 as the market opened again the following Monday. But since then it has already clawed back some of its losses and was trading at RUB71.4 at the time of writing on the morning of March 12.
Russia has been making a big effort to diversify its revenue base away from oil but in 2019 budget oil revenues still account for 40% of the total tax take. According to the three-year budget plan now in place that is supposed to fall to 35% by 2022.
However, the reduction in oil and gas revenues – despite boost from the FX effect – will not be complete covered by the ongoing rise in non-oil revenues, largely driving by growing agricultural exports. Russia remains vulnerable to the fall in oil prices, but it has been careful to buy some protection in the form of reserve funds.
As part of the budgets make over since a near-miss financial crisis in 2016 when it was unable to fill a RUB2 trillion ($27bn) hole in the budget has been the hunt for new revenue sources. Deep reforms have been made to the tax service and new sources of income found, chief among them being an increase of 2pp to the VAT rate and an increase in the retirement age.
As a result of fiscal consolidation federal budget spending in 2018 reached a 10-year low of 16.1% of GDP, while the tax take has increased by 20%,
7 RUSSIA Country Report April 2020 www.intellinews.com