Russia Decries ‘Castles in the Sky’ as Plans Converge on $40 Oil
by BusinessMirror – September 24, 2016
OIL has traded above $40 for five months, but Russia’s future economic plans increasingly revolve around crude prices at that level.
The price of Russia’s main export blend Urals at $40 a barrel will be used to calculate the country’s budget in 2017 to 2019, and a fiscal mechanism that will go into effect from 2020 should be set at the same level—or $10 less than previously suggested, Finance Minister Anton Siluanov said at a conference in Moscow on Friday. The so-called budget rule, which would prevent the government from spending surplus revenue above a pre-set oil price, aims to insulate the economy from the ups and downs in crude and shield the exchange rate by withdrawing all additional income into reserves.
“Plans can’t be made under the assumption that prices will grow and demand for our products will rise,” Siluanov said. The Finance Ministry “always advocates a position against building exuberant plans, castles in the sky.”
Its budget still squeezed after the collapse in oil, Russia has been revisiting a policy suspended this year that capped spending based on a backward-looking average for oil. While a rebound on commodity markets has lifted the ruble and helped the economy endure its longest recession in two decades, oil has fluctuated since August’s rally on speculation the Organization of Petroleum Exporting Countries (Opec) and Russia will agree on ways to stabilize the market when they meet on September 28.
Already running its widest deficit since 2010 this year after oil’s collapse, Russia is preparing its budget for the next three years. The Finance Ministry has proposed a fiscal gap of 3.2 percent of GDP in 2017, compared with about 3 percent in 2016. It then plans to reduce the shortfall by one percentage point each year to balance the budget by 2020.
Brent crude, which is used to price Urals, is up 3.7 percent this week, trading at $47.50 in London on Friday. The price of oil in rubles is at 3,041, compared with the level of 3,165, which Russia used as a basis for this year’s budget.
The global oil oversupply will persist into 2017 as Opec members, such as Saudi Arabia, pump near-record levels, others, such as Iran and Iraq, bolster capacity and production outside the group weathers the price slump, according to the International Energy Agency. Prices may struggle to Opec acts, Citigroup Inc. predicts.
The head of Russia’s budget watchdog Audit Chamber, Tatyana Golikova, in an interview last week urged authorities to resume discussing the budget rule, which she said should use crude’s current level. Any additional income at a higher price would be saved away, according to Golikova.
“Thanks to a safety cushion, we were able to pass through three years, and we’ll have enough reserves to last us another three years,” Siluanov said. “The entire windfall income needs to be channeled into reserves.”
Speaking at the same event on Friday, Bank of Russia Governor Elvira Nabiullina reiterated that the budget still presents a threat for price growth.
“If it’s unbalanced and a medium-term strategy for consolidating it isn’t clear, the budget by itself presents pro-inflationary risks,” she said. “The budget’s structure is very important to us. Even with a small deficit, spending decisions may be made that are very pro-inflationary.”
(Source: BusinessMirror.com.ph)