Page 50 - BNE_magazine_03_2020 wellness

50 Opinion
Fiscal consolidation has been significant
bne March 2020
level of external debt has been reduced dramatically. When the sanctions were first imposed in 2014 Russia had more than $250bn of external liabilities, which could have eaten up most of its reserves. Today the total non-resident holdings of
External vulnerabilities are extremely low
Source: Central Bank of Russia, Ministry of Finance, IIF
with the faux privatisation of a stake in Rosneft, that later turned out to be a loan.
The budget has been transformed over the last six years. Spending has been cut, tax collections have soared, VAT and retirement ages were hiked, and the budget went back into surplus in 2018 for the first time since 2011. This budget surplus has immunised Russia from new harsh sanctions.
The banking sector is also now lean after dealing with the effects of sanctions for several years. Domestic banks’ holdings of general government debt securities as a share of total assets are less than 3% – low by historical standards – and they have almost entirely deleveraged. Where once the banks funded their business with wholesale borrowing on the international Eurobond market, now they are almost entirely dependent on their domestic deposits.
“If necessary, domestic banks appear to have enough
liquidity to keep rolling over sovereign debt and could buy out approximately 90% of foreign investors’ debt ($60bn in liquidity surplus vs. $68bn in debt held by foreigners), even at par,” says the IIF.
But the biggest change was the decision to allow the ruble to become a freely floating currency in 2014, which has allowed the economy to sustain significant shocks, like the collapse of oil prices that year, without burning through its hard currency reserves.
“The free-floating ruble functions as the first line of defence to balance-of-payments shocks, and the [Central Bank of Russia] CBR has kept real rates elevated at the upper end of its own neutral rate estimate range of 2-3% in real terms,” says the IIF. Moreover the gross international reserves (GIR) have been built up to beyond $500bn, which was the CBR’s “comfort” level, and acts as a second line of defence.
Indeed, it is unlikely that the CBR will have to dip deeply into these reserves if there is another shock as at the same time the
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Source: IMF, IIF
OFZs are about $46bn. Instead of using reserves to cover this, just temporarily suspending the fiscal rule that siphons off
all oil and gas revenue over $42 per barrel of oil prices would probably be enough to cover much of this liability before it was necessary to tap the reserves.
The price of security and unintended consequences
The Kremlin has made it very hard to attack the economy using economic sanctions, but the construction of this fiscal fortress as come at a price – low growth. Last year it was clear that the Kremlin considers the construction work to be complete and has turned its attention back towards boosting growth using the 12 national projects as a mechanism.
“Sanctions on sovereign debt are unlikely to hinder spending on national projects since most of the spending will be budget neutral, financed by a redistribution of funds within the budget and the 2019 VAT increase. In the long run, however, budgetary restrictions as a result of higher cost of funding will impact fiscal policies, requiring either spending cuts or higher taxes. Furthermore, any sanctions could continue to weigh on confidence and productivity, and therefore reduce potential growth,” says the IIF.
As the sanctions on Deripaska and the affect on the international metal markets so clearly showed, placing sanctions on a country that is large and well integrated into the global economy can backfire thanks to the unintended consequences.
“Russia is fundamentally different from previous targets of comprehensive sanctions regimes – including Iran, North Korea, and Cuba – so these cases provide little guidance. Spillovers from sanctions may be felt well beyond the borders of Russia or the sanctioning country,” says the IIF, adding that rivalries between the various agencies in the US government