Page 13 - RusRPTAug23

Budget Consolidation Takes Priority.
Currency stability was on top of the government’s economic agenda ... In previous reports, we wrote that the Russian monetary authorities will probably make efforts aimed at stabilising the ruble exchange rate in the RUB70-80/$range. We, therefore, chose to retain our FX rate forecast at a level of an average of RUB75.7/$in 2023. We reasoned that for the Kremlin, the government, and the CBR, the top priority of their monetary and FX policies will be to protect stability – that should include the economy as well as the financial market, inflation, and the currency rate. Since any significant weakness in the currency always triggers – usually after a 1-2-month delay – a spike in retail prices for imported goods and services, we thought that the authorities would be hesitant to see a weaker ruble as this could ultimately undermine their efforts aimed at controlling inflation and at ensuring continued macro and financial stability in the country.
... but that is not the case any longer. The events of recent weeks have shown clearly that the top priority of the Kremlin and the government has now changed. While it is still about stability, the notion of stability seems to be now centered around maintaining a fiscal balance and protecting the government’s FX reserves. According to data from MinFin, in June the government’s National Welfare Fund saw a monthly drop of $9.2bn while the fund’s liquid assets fell by $4.1bn. From this perspective, any fluctuations in the FX exchange rate and even the inflation trend become secondary. But it would be incorrect to say that control over inflation has been completely taken off the policy agenda. That is not the case, but in the new reality, such a goal is now left sole at the Central Bank’s discretion. At the same time, the government for its part seems to be prioritizing the budget execution.
Budget consolidation has now become the main policy priority. The task of budget consolidation has been voiced recently by many government officials. Over the past 6-8 months their views have significantly evolved. Back in October-November 2022, government speakers were shrugging off any possible negative implications that the Western oil embargo and export oil price caps might have on state finances. Their view was supported by budget statistics which showed that in October-November the Russian federal budget was still running a hefty monthly surplus. Then, in December 2022, Russia suddenly recorded a massive deficit of almost RUB4 tln, which was again
13 RUSSIA Country Report August 2023 www.intellinews.com