After months of dodging inflation shocks from trade wars, geopolitics and a crash in oil, Russia is zeroing in on a risk closer to home.
No longer content to take the sole blame for inflation, Bank of Russia Governor Elvira Nabiullina on Thursday drew “special attention” to inflation threats linked to the budget. Speaking at the same conference moments later, Finance Minister Anton Siluanov couldn’t agree more, Bloomberg reported.
“The lack of balance in the budget is to a great extent decisive in determining the future trend in the movement of the key rate,” Siluanov said. “Failure to lower the budget deficit largely acts as a constraint for cuts in the key rate.”
Looking to enlist support before a tussle over the budget in the run-up to a parliamentary election this year, Nabiullina and Siluanov are making the case for coordination between fiscal and monetary authorities and elevating the fight against inflation as a priority for both. The central bank overshot its target for price growth in 2015 for a fourth consecutive year and has conceded it’s at risk of missing its 4% goal in late 2017 after turmoil in the oil market and the ruble.
A closer alignment of policies would mark a dramatic shift in Russia, where the finance ministry has historically had the upper hand. Until 1995, the central bank directly extended loans to fund the federal budget deficit and parts of the economy. As pressure mounts on the government to stabilize public finances after the widest shortfall since 2010 last year, the finance ministry and the Bank of Russia are increasingly speaking in one voice.
“We think there is an acute need to work out a program that will allow to balance the budget system in the medium term,” Nabiullina said. “Without that, the budget will be a source of risks both for the economy and monetary policy.”
Russia, which relies on oil and gas for about 40% of its budget revenue, is struggling to keep the deficit within the government’s target of 3% of economic output in 2016. The government is reviewing this year’s fiscal plan, which was based on an average oil price of $50 a barrel. The nation’s main export blend Urals averaged $31.99 in the first three months of the year, according to the finance ministry.
A rebound in oil prices in recent weeks has boosted the ruble, which is up more than 11% against the dollar in the past three months. It traded 1.1% stronger at 67.29 versus the US currency in Moscow.
The longest recession in two decades is forcing the world’s largest energy exporter into difficult choices.
