ALEXANDER DERYUGIN: “THE BUDGET DEFICIT WILL NOT BE COMPARABLE TO THE EXPECTED RATE OF THE ECONOMY DECLINE MENTIONED BY THE ACCOUNTS CHAMBER”
Alexander Deryugin, Researcher, Budget Policy Department of the Gaidar Institute, commented to ”Davydov.Index”on the Ministry of Finance forecast regarding the Russia’s budget deficit in 2022.
“When it comes to forecasts for this year's budget execution, we face several uncertainties at the same time. The first one is the extent to which the economy will fall. Here, much will depend on how much the world (primarily Western countries) will abandon our energy resources and what will be the overall pressure force for foreign businesses to demand their withdrawal from the Russian market.
Many different foreign companies were operating in the country, and some of them announced their withdrawal, others are still thinking, while some of them announced and withdrew, others announced and stayed and can continue working as if nothing had happened. We cannot predict what the decision these companies will take in the future.
When it comes to the rejection of Russian oil and gas, the rejection of oil is likely to happen fairly quickly. However, rejection of gas is more complicated because there are no alternatives to Russian gas supply, and the Europeans have not yet reached an agreement on this issue. Though, it is just a matter of time before the European countries will be able to abandon Russian gas altogether in the very near future.
This process is going on right now, but for the time being gas will be supplied to the West as well. Indeed, China and a number of other countries will continue to buy it, although there will be pressure on them as well, and if they do buy Russian energy, it will be at a big discount.
The second factor of uncertainty is inflation. It acts to the advantage of revenues and against spending. That is, expenditures will of course rise but slowly, because budgets have been approved. Social expenditures, will definitely be indexed, but slower than inflation. In this sense, higher inflation will have an impact on reducing the budget deficit, as revenues will outpace expenditures.
With all this in mind, it is difficult to predict the specific situation that we might face by the end of the year. Moreover, there could be new developments, including negative ones. There is no point in predicting anything in these conditions. The Minister of Finance voiced just a moderate option based on the current situation. However, we understand that what we face now, will change.
The only thing that will not change is the sanctions. Regardless of how the situation develops, they will gradually toughen. Anyway, they are already approaching saturation on the part of European countries. Next, they will see that Russia has not collapsed, although they were probably counting on it. They will begin to putting pressure on other countries (China, first of all), so that these countries would also freeze economic cooperation with Russia. It is hard to say how things will develop, because China has its own agenda and plays its own games. China does not care about American interests. Thus, it is very difficult to make predictions at this point as well.
In addition, we do not know what the situation is in the territory of Ukraine that is now under the control of Russian troops. Life has to be getting on there, and it is not known yet how much it will cost. I do not think the information is public, but obviously there will be a need to spend money, that is, there will be additional costs.
Thus, one can be guided by the forecast of the Ministry of Finance in a zero proximity. However, we have to bear in mind that inflation will be higher than the forecasted levels resulting in a budget deficit in 2022. It will not be very large, amounting to the announced 1% of GDP or a little more. It will not be comparable to the expected rate of economic decline that the Accounts Chamber mentioned. Indeed, it is too early to talk about 2023.
Many different foreign companies were operating in the country, and some of them announced their withdrawal, others are still thinking, while some of them announced and withdrew, others announced and stayed and can continue working as if nothing had happened. We cannot predict what the decision these companies will take in the future.
When it comes to the rejection of Russian oil and gas, the rejection of oil is likely to happen fairly quickly. However, rejection of gas is more complicated because there are no alternatives to Russian gas supply, and the Europeans have not yet reached an agreement on this issue. Though, it is just a matter of time before the European countries will be able to abandon Russian gas altogether in the very near future.
This process is going on right now, but for the time being gas will be supplied to the West as well. Indeed, China and a number of other countries will continue to buy it, although there will be pressure on them as well, and if they do buy Russian energy, it will be at a big discount.
The second factor of uncertainty is inflation. It acts to the advantage of revenues and against spending. That is, expenditures will of course rise but slowly, because budgets have been approved. Social expenditures, will definitely be indexed, but slower than inflation. In this sense, higher inflation will have an impact on reducing the budget deficit, as revenues will outpace expenditures.
With all this in mind, it is difficult to predict the specific situation that we might face by the end of the year. Moreover, there could be new developments, including negative ones. There is no point in predicting anything in these conditions. The Minister of Finance voiced just a moderate option based on the current situation. However, we understand that what we face now, will change.
The only thing that will not change is the sanctions. Regardless of how the situation develops, they will gradually toughen. Anyway, they are already approaching saturation on the part of European countries. Next, they will see that Russia has not collapsed, although they were probably counting on it. They will begin to putting pressure on other countries (China, first of all), so that these countries would also freeze economic cooperation with Russia. It is hard to say how things will develop, because China has its own agenda and plays its own games. China does not care about American interests. Thus, it is very difficult to make predictions at this point as well.
In addition, we do not know what the situation is in the territory of Ukraine that is now under the control of Russian troops. Life has to be getting on there, and it is not known yet how much it will cost. I do not think the information is public, but obviously there will be a need to spend money, that is, there will be additional costs.
Thus, one can be guided by the forecast of the Ministry of Finance in a zero proximity. However, we have to bear in mind that inflation will be higher than the forecasted levels resulting in a budget deficit in 2022. It will not be very large, amounting to the announced 1% of GDP or a little more. It will not be comparable to the expected rate of economic decline that the Accounts Chamber mentioned. Indeed, it is too early to talk about 2023.