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54 Opinion
bne August 2023
officials started to talk more frequently about the need for budget consolidation including a review of current and planned expenditures. That was accompanied by discussion of the need for new or a revision of existing taxes – the “windfall tax”, a hike in the oil price used for taxation purposes (via cutting the set gap between the Brent and Urals blends), re-introduction of personal tax on interest paid
on bank deposits, and a new wave of discussion of a higher progressive personal tax rate, etc.
Spending cuts back on the Cabinet agenda. Attempts to boost the government’s revenue flows are also accompanied by a stronger push toward slashing some, less critical, fiscal expenditures. The efficiency of the way the Cabinet spends its money on many budget items has been recently questioned by a number of officials from Cabinet ministers to auditors
of the Audit Chamber and a range of Duma deputies. The
last such move came from Finance Minister Anton Siluanov who, according to media reports, on June 29 at a government meeting on the new budget draft suggested that all ministries should cut spending on their “non-protected” items by 10% y/y. While he did not specify what such items include, most probably the larger of these items could be expenditures
on investment, road construction, economy, public administration and ecology. At the same time, “protected” items clearly will include social programmes, defence, education, healthcare, regional transfers and debt payments. We believe that this year’s budget process will be a difficult one, as the government is facing the major task to balance its finances in a situation where it no longer can rely on large inflows of oil and gas revenues or easy and almost unlimited access to the credit markets. Under these circumstances, fiscal tightening will come as unwelcome news for the economy, which in 2022-23 grossly benefited from a huge expansion in budget spending: MinFin data shows that in 5M23 nominal federal budget expenditures were 25% higher than in 5M22 and 49% above the levels seen in 5M21.
Ruble on a losing streak since December 2022. All these changes in attitudes coincided with some notable shifts in the dynamic of the ruble exchange rate. The ruble has been steadily losing ground since early December 2022, when Western oil price caps were put in place. There were two instances when this weakening trend was interrupted. The first occurred in late December 2022-early January 2023, which came as a timely act
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of support to Russian tourists who traditionally travel abroad en masse during the Christmas holiday season. The second period when the ruble’s weakness was briefly reversed during early May – again, that coincided with another traditional period of mass holiday travel from Russia.
Belousov announces a new RUB80-90/$ corridor for
the ruble. Since mid-May the ruble’s weakening trend
has continued without interruption. On June 15, during
the St. Petersburg Economic Forum (SPIEF), First Deputy Prime Minister Andrei Belousov announced new trading parameters for the ruble – he said that in his view a trading range that is comfortable “for the Russian economy” lies in the RUB80-90/$ corridor. That confirmed what was already seen as a new reality by the market. However, still some
hope remained that by late June, once the bulk of monthly and quarterly tax payments to the budget was complete,
the ruble might bounce back to the levels around RUB80/$
or below. However, that did not happen once the main tax payments were completed on June 29; instead, the weakening of the Russian currency accelerated, and the ruble hit lows of RUB91/$ and RUB99/€ not seen since the end of March 2022.
Russian currency lost 50% of its value to a bi-currency basket in seven months. The best way to analyse the dynamics of the ruble exchange rate is by looking at its
value to the $-€ basket. Such an approach helps to neutralise fluctuations in the $-€ currency pair. Our analysis shows that
since early December 2022, the Russian currency has lost 50% of its nominal value to the bi-currency basket: if in late November-early December 2022, the ruble rate to the basket was in a RUB60-61/basket range, by early July 2023 the rate had dropped to RUB90-91/basket. The last attempt to reverse this trend took place in late April-early May 2023, when the basket value moved from RUB85/basket to RUB80/basket, but this happened only for a brief period.
Weak ruble benefits exporters and the budget ... It is quite obvious that a lower ruble rate is quite beneficial for Russian exporters and the budget (the latter receives payments of export duties in nominal rubles, although such duties are
set in dollars). A weaker currency helps the government to compensate for losses to the budget that are caused by lower prices and shrinking volumes of exports and trade earnings.