Finance Ministry’s actions should be exchange rate neutral

The Russian Ministry of Finance is developing a new version of the budgetary rule which will restrain the ruble strengthening under oil price fluctuations. This was stated by Russian Finance Minister Anton Siluanov.

Generally, the Finance Ministry’s desire to adhere to any rule that can prevent unreasonable inflation of costs threatening to destabilize the budget under falling oil prices can only be

welcomed. However, the use of budgetary rules is associated with two conceptual problems that are difficult to solve.

The first problem is that there is an objective difficulty in determining the cut-off price, the rise above which could be interpreted as the existence of exceptionally favorable conditions. The cut-off price actually determines the level above which oil and gas revenues can be considered excess profit and should therefore be saved. In 2012, the price of $50 per barrel seemed low, but today it seems quite comfortable. This means that the “starting point” of the favorable market conditions can significantly change in a relatively short period of time. There is something unnatural in the fact that the budgetary rule that implicitly should stay unchanged for many years would be based on an indicator hardly foreseeable even in the medium term.

The second problem is the lack of effective mechanisms that would force to adhere to the adopted budgetary rule. There is no guarantee that the budgetary rule will not be changed or ignored if the government chooses to increase spending over a certain limit. A regulation only makes sense when it really disciplines the government, and for that we need the institutional levers that turn it into a working restriction and no formal declaration from which one can easily opt out on occasion.

Both problems described do not have simple solutions, but they should be taken into account when a budgetary rule is being chosen.

Special attention should be paid to the Ministry of Finance’s desire to influence the exchange rate in order to prevent the roble from excessive strengthening. Monetary policy for sure does not belong to the area of responsibility of the Finance Ministry. The Ministry’s attempts to act as monetary authorities will not have any positive effect and will only bring pricing distortions in the foreign exchange market. The pressure on the ruble will cause a response from the Central Bank: to curb inflation, the regulatory authority will raise the rate. To prevent this, the financial agency’s actions should be as exchange rate neutral as possible.

Evgeny Goryunov — research fellow