Page 15 - RusRPTJune18

Putin’s speech unveiled a very ambitious plan reform plan during his state of the nation speech on March 1. The President wants productivity growth to accelerate to 5% per year (since 2009, the average growth was only 1%) during next decade, the share of SMEs in GDP to go up to 40% (from current level of 20%), the number of people employed in SMEs to go up from 19mn to 25mn people, and to halve the number of people living below the poverty line (currently 13.8% of the population or 20mn people).
However, it remained unclear where the money was going to come from to pay for this largess. The federal budget has been in deficit for about four years and in 2016 the Ministry of Finance nearly got into serious trouble as I couldn't fill a missing RUB2 trillion hole in the budget .
With the steady rise of oil these problems are melting away. The budget assumes an extremely modest $44 per barrel, but average oil prices so far this year have been in the 60s since October last year, starting the year at $66.2 rising to $68.8 in April. With oil over $70 in May and now at $80 the average is only going to rise further. Indeed, oil prices would now have to fall to $33 and stay there for the rest of the year for the average price this year to be less than $44. That is not going to happen.
Russia Inc is back in profit. Thanks to a reorganisation, cost cutting, more discipline and a crack down on corruption the breakeven price of oil for the Russian federal budget is now around $60 or less, according to various estimates, and continuing to fall. Amongst the new sources of revenue are things like grain exports which brought in $20bn last year and are set to double this year , according to the Ministry of Agriculture.
All this is important as if oil stays where it is then it will provide all the money the Kremlin needs to cover Putin’s promises.
“While the amount of money needed for implementing Putin's new May decree looks impressive, the truth is it is a relatively small amount and may not be enough to ensure Russia's progress into the top-5 economic club. But, we still need more details before making any final conclusions over the future of the new agenda,” says BSC Global Markets chief economist Vladimir Tikhomirov. "On a yearly basis, the new program will cost RUB4 trillion or roughly 25-27% of annual federal budget expenditures. The additional funds required for the new policy will total c. RUB1.3 trillion a year or some 7-8% of gross spending."
The magic number is RUB1.3 trillion of new money. The rise in oil this year has already transformed Russia’s budget out look for this year from ending 2018 with a modest 1.3% of GDP deficit to a p rospective 0.45% surplus , or an extra RUB450bn, MinFin recently said. With some re-jiggering of taxes, a hike in the retirement age and a bit of borrowing then the RUB850bn gap that still needed to be close to meet the spending promises looked entirely doable.
However, now it is starting to look like closing the gap will be easy.
MinFin has a rule of thumb that estimates every $1 increase in the price of oil from the level of $40 per barrel brings the budget an additional RUB87bn. And if you also add in the effect that rising oil revenues have on the value of the ruble, sending it up, then the state gets even more money – an extra RUB144bn for every $1 rise in oil prices.
The $60-plus average price of oil over the start of this year should have already generated an extra RUB1.2 trillion of revenues for the budget, according to the rule of thumb, even if the average price of oil now falls back to $40 and stays there for the rest of this year.
15 RUSSIA Country Report June 2018 www.intellinews.com