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 Officials fear that without limiting the defense budget, the
government will have to raise taxes, increase the pension age or
print money to prevent the state deficit from running out of
control.
Despite a crisis brought on by diving oil markets and Western
sanctions, they believe Russia can muddle through next year provided
the price of crude, its dominant export earner, holds near current
levels.
But even at $60 per barrel, the present oil price is little more
than half what the Kremlin needs to balance the budget, and it is
quickly running out of money.
Without radical action, the officials are much less confident about
2016-17 - and even sooner, should global oil prices continue their
slide towards $40.
One senior government source expressed concern about the effects of
an unchecked deficit on one of Russia's two funds built up from past
oil income.
"If no spending is cut and revenue risks persist, we will have a
deficit of 4 trillion rubles. The Reserve Fund will be spent within
18 months," he said. "In 2016 we will have no resources to meet our
budget obligations. Not to mention 2017."
At current exchange rates, 4 trillion rubles equates to $71 billion,
not far from the $89 billion that the Reserve Fund now holds.
Sanctions imposed by the European Union and United States over
Moscow's role in the Ukraine crisis have deepened the problems:
foreign investment is down sharply, more than $100 billion has fled
abroad this year, Russian firms and banks have lost access to
international capital markets and privatization plans are on hold.
The central bank has had to spend heavily from its reserves, which
have dropped to just below $400 billion from $510 billion at the
start of 2014, to arrest a steep slide in the rouble.
DEFENSE DRAIN
Spending will be cut 10 percent next year but Finance Minister Anton
Siluanov said last week that this was not enough to balance the
budget. Expenditure is dominated by social and defense commitments,
and Putin had set military investment as a priority even before the
stand-off with the West began when Russia annexed Crimea from
Ukraine in March.
Out of total spending of 13.96 trillion rubles ($248 billion) in
2014, social benefits account for over 33 percent, and defense and
security 32.5 percent.
Next year, military spending will rise to 35 percent of the 15.51
trillion rouble budget. That means about $100 billion for defense
and security at today's exchange rates.
At the same time, the weaker rouble will lead to higher inflation
next year by pushing up import costs, threatening Putin's reputation
for safeguarding Russians' living standards.
The lion's share of social spending goes on pensions, and this will
rise sharply due a rapidly aging population unless the government
takes radical action by raising the retirement age from 55 years for
women and 60 for men.
"Without cutting military spending and raising the pension age, we
won't muddle through. What options do we have? Raise taxes and print
money, which triggers a downward spiral of inflation and higher
interest rates," the government source said.
[to top of second column] |
"DRAMATIC DEVELOPMENT"
In the shorter term, the biggest economic risk would be a further
plunge in oil prices, even if they bounced back rapidly. A drop to
$40 for just a few days could inflict great psychological damage.
Earlier this month, the rouble fell as much as 20 percent against
the dollar in one day after oil plunged and the central bank raised
its main interest rate sharply. The authorities were forced to
impose informal capital controls to cool the panic and slow the
flood of money out of the country.
Putin has said formal capital controls are not on the agenda.
Officials are anxious to avoid such drastic action as this would
inflict long-term damage on Russia's international financial
reputation: investors will put money into a country only if they
believe they can take the profits back out later.
"We won't introduce capital controls unless there is a dramatic
development," said a top-level government source. "I don't know if
$40 per barrel will trigger it. For our country it is very bad, it
is a tragedy. But whether it will trigger capital controls or not, I
just don't know," the source said.
In December 2008, oil fell during the global financial crisis to
around $36 but even then Russia did not reinstate capital controls.
"This crisis is more psychological, more emotional than those we
have seen in the past. But in principle, the situation is not very
different from 2008. We can always switch to measures we used in
2009," the source said, naming state guarantees and direct funding
of troubled companies among possible measures.
However, former finance minister Alexei Kudrin said the current
crisis was different because of the sanctions. "To come out of the
crisis, the government and the president should settle the conflict
with leading powers, mainly Europe and the United States," he said
last week.
However, the top-level government source held out little hope for an
easing of tensions with Washington. "Relations with the United
States are frozen," he said.
($1 = 56.2950 rubles)
(Additional reporting by Alexander Winning; Writing by Dmitry
Zhdannikov; editing by David Stamp)
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