Is the State Budget Ready for the New Wave of the Financial Crisis?

The ongoing decrease in global prices on hydrocarbons and depreciation of the national currency against the US dollar raised concerns again about the new wave of the crisis and ability of the financial system to respond to such threats adequately.

Last week, Sergei Ignatiev1, Chairman of the Central Bank of the Russian Federation presented quite an optimistic scenario of developments for Russia. According to Sergei Ignatiev who is directly responsible for development and strengthening of the country’s banking system: “We are better prepared for a possible crisis than in autumn 2008. Since that time we have amassed experience, while banks have lowered their dependence on foreign assets”. Many experts agree in general with Sergei Ignatiev that the financial and economic situation in the European Union can trigger another wave of the crisis in Russia, however, their evaluations as regards the ability of the financial and budgetary system to withstand the crisis differ.   

The problems of financial and fiscal stability are justified not only by an inevitable drop in prices on hydrocarbons with the crisis breaking out. It is important to take into account as well a high risk of a slowdown of economic growth rates, worsening of the situation with funding of banks and liquidity shortages in the economy.  Such a scenario of development of the crisis in the euro area was mentioned in the Report of the International Monetary Fund late in 20112. As a preventive measure, the IMF advised governments to work out a plan of actions in case of emergency.  Experts of the European Commission and the European Central Bank have announced that development of plans meant for mitigation of repercussions of Greece exiting the euro area began3.

In Russia, due to a number of factors the government anti-crisis program has not been developed yet. One can hardly expect that in new realities of the financial crisis in Europe the problems of the financial and budgetary system can be solved by means of the same anti-crisis measures as were used in 2008; the situation in the economy and the budget sphere is different fr om that which prevailed three years ago. Without taking into account oil revenues, since the beginning of the crisis Russia’s budget deficit has increased by 50%4, while the stabilization fund has failed to be replenished to the level of the year 20085; the above factors lim it the government’s abilities to fund new anti-crisis measures.  Thus, availability of experience in carrying out of the anti-crisis policy cannot be regarded as a case for government’s readiness to respond to new threats. In a situation of growing uncertainty which is experienced not only by Europe, but the entire global economy it is primarily important to assess the potential of both revenues growth and reduction of expenditures in the mid-term prospect.

As regards the state of things in the budget sphere, Arkady Dvorkovich said straight out: “The Russian authorities have no concerns as regards the federal budget balance for the year 2012 as long as oil prices are higher than those provided for in budget adjustments”.  However, it is to be noted that a drop in prices on primary products in May 2012 was unexpected to the Government of the Russian Federation which had already determined the fate of additional oil and gas revenues of the federal budget and submitted to the State Duma amendments to the 2012 budget specifying budget parameters with the forecast of the average annual price on oil revised upward from $100 per barrel to $115 per barrel taken into account.  A drop in prices on hydrocarbons may require adjustment of the prepared draft amendments and the expected volume of federal budget revenues.

It could be agreed that a possible decrease in oil prices to $100 per barrel will have no significant impact on stability of the budgetary system provided that related adverse factors are not taken into account. The above factors include, primarily, a risk of a drop in volumes of production output and investments in 2012. Late in April 2012, the Government of the Russian Federation approved the forecast of the main parameters of the social and economic development in 2012 and the 2013-2015 period prepared by the Ministry of Economic Development of the Russian Federation. The baseline scenario proceeds from the fact that growth rates of the main indices of the Russian economy will be lower than expected late in 2011: the forecast of the GDP growth has been revised downward from 3.7% to 3.4%, while that of investments in capital assets, from 7.8% to 6.6%6.  

Secondly, in the mid-term prospect the federal budget will be subjected to additional pressure due to growth in expenditures related to “a large-scale program of modernization of the armed forces, obligations to raise money allowances and pensions of military servicemen and employees of law-enforcement agencies, financing of overhaul of the road network and other”. According to the World Bank7, federal budget expenditures can be increased by 0.5% to 1.5% of the GDP annually within the next six years.

Also, a scenario of further drop in prices is not ruled out. According to the World Bank8, risks related to such developments arise due to a possible slowdown of growth rates of the global economy in future and a drop both in demand and the extent of oil consumption in the global market. It is to be noted that risks related to slowdown of the global economy are justified by the fact that the crisis situation in the euro area may expand, growth rates of the US economic recovery are slower than expected and the US credit rating has been downgraded. According to the Bloomberg Agency, a drop in prices on oil is also justified by the fact that in April oil reserves in the USA reached their maximum level in the past 21 years. Thus, a further drop in global oil prices on hydrocarbons is quite likely.

According to the data of the Accounting Chamber9, a drop in prices on Urals oil by $1 may result in a decrease of Rb 55bn to Rb 58bn in federal budget revenues (in conditions of the year 2011). According to the estimates of the Accounting Chamber of the Russian Federation, with global oil prices falling from $100 per barrel to $90 per barrel the federal budget will lose up to 1% of the GDP, while according to the Standard & Poor's, an international rating agency a drop in oil prices by $10 will directly and indirectly result in a decrease of 1.4% of the GDP in public revenues10.

A decrease in the revenues base of the federal budget and growth in expenditures may result in a rapid accumulation of the public debt on unfavorable terms. Though A. Dvorkovich believes that Russia’s public debt will not exceed 20% of the GDP, that is, the annual volume of budget revenues such a forecast causes concern. With such developments, the leadership declares that it is necessary to return to budget rules as regards utilization of the budget’s oil revenues; the above rules were temporarily cancelled in the 2009–2011 period. According to A. Dvorkovich, “there is a principal decision of the President and the Chairman of the Government that we should return to the budget rule which is being formulated and to be approved.”  However, it is unlikely that such system problems can be solved by means of toughening of the management of oil revenues through stabilization funds. Due to the above, there are serious reasons for which the optimism and calm of the top management of the Central Bank of the Russian Federation and A. Dvorkovich as regards readiness of Russia’s budgetary system to a new wave of the crisis cannot be shared.   

Т.V. Tischenko, PhD (Economics), Senior Researcher of the Budget Policy Department

1 On May 16 at the meeting of the State Duma.
2 The IMF Report, November-December 2011.
4 The oil-and-gas deficit in 2008 amounted to 6.4% of the GDP, while in 2011, to 9.4% of the GDP.
5 As of January 1, 2012, balances of the Reserve Fund amounted to Rb  811.5bn or  1.5% of the GDP, while those of the National Welfare Fund, to Rb 2,794.4bn or  5.1% of the GDP.
7 Report of the World Bank on the Russian Economy, April 2012.
8 Gazeta.Ru.
9 Conclusion of the Accounting Chamber of the Russian Federation as regards the draft federal budget in 2012–2014.
10 Quotation of RIA Novosti.