World Economy

Russia Has Fiscal Space

Russia Has Fiscal SpaceRussia Has Fiscal Space

From a distance, Russian public finances are currently rosy, but with bleak prospects. Russia is not an economy dependent on oil alone. But natural resources can make or break the budget. For the moment, the budget holds, in Moscow; elsewhere, it’s another matter.

Amid tumbling oil prices, the Russian federal government revised its budget in mid-December, expecting a 2.9% deficit for 2015; that comes against a 1.4% surplus in 2014, NewEurope reported.

This is a bad year for Russia, but still under control by any standard. In October, Fitch rated Russia’s long-term foreign and local currency default rating at BBB-, outlook negative, with Russia retaining investment grade rating, unlike their peers Brazil and South Africa of the BRICS group.

Overall, the federal government has considerable fiscal space. In 2014, Russia had a 17.9% debt-to-GDP ratio, which is better than most EU member states. And by November 2015, the ministry of finance boasted $364 billion worth of international currency reserves.

The problem of course is what to do in a world with $33 a barrel of oil. In the long run that is undeniably a problem for all states that have come to depend on oil revenue, perhaps less so for Russia whose economy is more diversified. But, there is a more “political” issue: regional governments in deficit, with elections looming.

Since 2012, Russia’s regions have been under pressure to cut spending. However, only 25 out of 89 Russian regions are net contributors to the federal budget and 25 are more or less breaking even. And the trend is negative as tax base erosion is pushing many regions into fiscally red territory.  

On December 7, 2015, a Standard and Poors’ report was forecasting a surging regional spending deficit that could reach 10% until 2018. That was with higher oil prices than today. Currently, two thirds of Russian regions have a negative outlook, including Moscow, Surgut, and Novosibirsk.

Fiscal consolidation is politically hard, as Russia is heading towards legislative elections in 2016 and presidential in 2018. There is fiscal space. But, with current abysmal growth levels and record-low oil prices, “something’s gotta give” in terms of military, welfare, and regional spending. Any of these choices will have political implications.