Draft Budget In Denial

The Russian government gave its conditional approval this week for the 2017-2019 draft budget.

But opposition politician Vladimir Milov told Radio Svoboda in an interview yesterday that the government’s new budget is really not so new. In fact, not much in it has changed from previous budgets. The government is banking on the fact that the economic situation that the country finds itself in will be resolved in the next few years.

“This very much reflects the policy that those in power currently hold: the authorities are waiting, [hoping] that they [the West] will partially remove the sanctions, that the inflow of loans from Western financial markets will resume, that the price of oil will increase.”

The budget does not anticipate “any new shocks to the economy”, and has “not prepared for the possible risks”, Milov says. But the government is rather hoping for “some improvement”.

“In my opinion, this is a gross mistake, because the risk of deterioration of the economic situation is manifold.”

And in the meantime, ordinary people are suffering, Milov continues. “A key factor, which is now pulling down the Russian economy, is the decline in purchasing power.”

“People who depend on the budget [pensioners, and the like],” he says, “will not be able to maintain consumption at the current level.”

Besides decreased purchasing power, there are “serious prospects of ruble devaluation.”

Russia is still importing about 50% of consumer goods, despite the embargo on certain foreign goods (mostly from countries within the EU), Milov claims.

“Of course, any devaluation of the ruble leads to the fact that those wages and pensions, which are denominated in rubles, are in fact depreciated.”

If one year ago, 50,000 rubles bought you some amount of goods, that same amount will now get you 10% less.

“It could happen again. A new blow to consumer demand. People will buy less. Accordingly, businesses that operate in the domestic market will be ruined, sales will fall.”

Milov brings up the debt problems that Rosneft faces, which I have written about twice this week [here & here]. Rosneft was able to support the ruble in December 2014, but now it likely could not do so.

Manufacturing is also suffering, and will continue to do so. Companies have been hesitant to stop production because this means layoffs, and layoffs mean protests. So instead they’re continuing to produce durable goods like cars (even though demand has fallen 30-40%). They have cut production a little bit but not to match the decrease in demand. So what will happen? “This will lead to overstocked warehouses.” And eventually the result will be the same, anyway, and layoffs will take place. “…at some point, these plants will have to fire people, to cut production.”

But again, the draft budget does not anticipate this.

The draft budget also foresees a decrease in the budget deficit from 3.15% in 2017 to 1.15% in 2019. But how?

The traditional solution has been for the government to tap into the two reserve funds that are held by the Ministry of Finance: the Stabilization Fund, and the National Welfare Fund. But, as I have mentioned before, both of those accounts are expected to be depleted within the next 6 months or so. After that, the government will likely turn to borrowing from external sources to cover any losses. In addition, the National Welfare Fund should not be used for deficit spending, as it is supposed to cover future pension payments.

Another option would be to increase taxes, but businesses are already overburdened, Milov tells Svoboda, and this would only drive more of them underground or out of business. So the government is hoping that the price of oil will increase so they can cover the deficit with that.

“…I think their expectations are over optimistic on covering the deficit,” Milov concludes.

“…unfortunately, the problems facing our country and the economy are so serious that there is every reason to suspect that such conditional optimism of the government is not justified…” and the budget is “completely unprepared” for any crisis scenario.

One thought on “Draft Budget In Denial

  1. Pingback: Russia’s Economy: A Primer – Nina Jobe

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