Tags: russia | oil | economy | budget | deficit

Russia Braces for Widening Deficit as Oil Plunge Starves Budget

Monday, 19 Jan 2015 04:30 PM

Russia’s government is bracing for the impact of a widening budget deficit as the decline in the price of oil and gas, the source of about the half of state revenue, forces the Kremlin to redraw its priorities.

The gap may have been 0.7 percent of gross domestic product last year, Finance Minister Anton Siluanov said Dec. 26, revising his forecast from a 0.7 percent surplus. Last week, he called for a “more conservative” spending plan to safeguard reserves and account for the impact of lower energy prices. The ministry may publish the 2014 data as early as Tuesday.

Russia is facing its first recession since 2009 as oil, its biggest export earner, trades at the lowest in more than five years, compounding the effect of sanctions imposed by the U.S. and the European Union over the conflict in Ukraine. The shortfall is set to reach 2 percent this year, putting pressure on the government to finance it at a time when its debt may be downgraded to junk, according to Vladimir Miklashevsky, a Helsinki-based strategist at Danske Bank A/S.

“It is not clear how they will cover the deficit if the western capital market is practically closed off and it is expected that Standard & Poor’s will cut rating to junk,” Miklashevsky said by phone. “They may reach further into the rainy day funds.”

The ruble has weakened 48 percent against the dollar in the past 12 months, the worst performance among more than 170 world currencies tracked by Bloomberg. It strengthened 0.3 percent to 64.02 a dollar as of 10:45 p.m. in Moscow on Monday. S&P on Jan. 16 said it will decide by the end of the month whether to lower its rating for the country, currently at the lowest investment grade.

Reserves Shrink

International reserves, which include two sovereign wealth funds, shrank by about one-fifth in 2014 to $386 billion as of Jan. 2 as the Bank of Russia sought to defend the ruble. Policy makers rolled out measures to ease foreign-currency refinancing debt to ease the payment in 2015 after the U.S. and EU limited Russia’s access to international capital markets.

Even so, government reserves of $170 billion would cover more than three years of budget deficits if oil prices stayed at $45 as the ruble’s weakness helps offset lost revenue, Economy Minister Alexei Ulyukayev told Bloomberg TV in a Jan. 14 interview in Moscow.

Oil Drop

Oil fell 48 percent in London in 2014, the steepest decline since the 2008 financial crisis, as the Organization of Petroleum Exporting Countries refused to limit output in response to the highest U.S. oil production in three decades.

With oil prices at $60 a barrel, Russia may contract about 4 percent and the deficit would swell to more than 3 percent, Siluanov said last month. The 2014 budget was pushed into a deficit by a 1 trillion-ruble ($15 billion) plan to recapitalize banks, he said.

“The ball is now in the Finance Ministry’s court,” Vladimir Kolychev, chief economist for Russia at VTB Capital in Moscow, said by e-mail. “Not only from a ratings standpoint, but also from a wider macroeconomic perspective, as uncertainty over the composition of fiscal consolidation needs to be lifted.”

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Russia's government is bracing for the impact of a widening budget deficit as the decline in the price of oil and gas, the source of about the half of state revenue, forces the Kremlin to redraw its priorities.
russia, oil, economy, budget, deficit
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2015-30-19
Monday, 19 Jan 2015 04:30 PM
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