Page 53 - RusRPTAug23

6.0 Public Sector 6.1 Budget
The nation’s finances have inevitably been influenced by the war and the upcoming elections. Despite problems at the start of the year, things have improved in recent months. The budget deficit fell from its April peak of 3.4 trillion rubles to 2.6 trillion at the end of June. In addition, economic growth has led to a rise in non-energy taxation revenue and spending fell. Finance Minister Anton Siluanov has promised the annual budget deficit will not exceed 2.5% of GDP, but there is still a high risk that it will increase above its current level.
In 2024, we expect some tweaks to expenditure. But any major cuts seem impossible: not just for political reasons but because state spending – primarily military spending and social handouts — are driving economic growth and rising salaries (you can read more about this here). On a structural level, the war is now an integral part of the country’s economy. Even if the conflict in Ukraine transitions from an active war to a more frozen conflict, Russia’s military spending is extremely unlikely to decline.
Without spending cuts, the government has a range of measures to combat the deficit. First, it can increase taxes. Although this cannot be used right away — the current moratorium on tax rises expires in 2024. It’s unlikely the government will rush to announce tax hikes on the eve of the election, but this could happen immediately after the vote. There is also the possibility of “stealth taxes.” For example, there was a recent proposal to increase duties on alcohol from countries that Russia has deemed “unfriendly.” But the market for wine is not large and demand is elastic, so higher duties would mostly benefit Russian winemakers and importers from Latin America and South Africa.
Borrowing could also plug the deficit. There is liquidity in the market. However, Russian banks, which no longer face foreign competition, are increasingly dictating their own terms. They prefer to shift inflationary risks to the government and buy inflation-linked bonds. In the context of accelerating inflation, this will make servicing debt more expensive.
The Kremlin could also increase withdrawals from the National Welfare Fund. Over the past six months, doing this has helped plug a 507bn ruble hole in the budget, the Finance Ministry reported. A further 300bn rubles went into shares and bonds of state-owned companies. In total, the fund has 6.8 trillion rubles of liquid assets left, specifically gold and yuan. By the end of next year, 2.3 trillion rubles should remain (according to the Finance Ministry). However, the budget deficit could grow much faster than planned and there is likely reluctance to
53 RUSSIA Country Report August 2023 www.intellinews.com