Russia Revises Its 2016 Budget as Oil Keeps Falling

January 27, 2016 2:00 PM

Now that the collapse in the price of oil has proven anything but transitory, Russia's government is scrambling to adjust a budget that was based on now lofty expectations for crude prices to average $50 a barrel this year.

Russian Prime Minister Dmitry Medvedev has ordered his government to prepare a revised budget by the first week of February. With oil prices around $30 a barrel, the budget deficit is projected at between 6 and 7 percent of GDP, far off the original 3 percent target set last December. Significant cuts are expected in infrastructure spending, particularly in Crimea.

In less than a month, two revisions of the Russian federal budget have been initiated. First, the finance ministry cut 10 percent off the budget of each government entity in mid-January, when it became clear that the price of oil may stay below the $50 a barrel assumed when adopting this year's national accounts. This week, the prime minister has gone further, asking for additional cuts in public expenditure.

What can be cut? Infrastructure projects are targeted first, including first-time projects in Crimea. These have been financed without going through the regular budget procedure and often lack the necessary engineering and accounting documentation. New subsidized housing at the federal and municipal levels will be axed, too.

Industrial subsidies come next. After Western sanctions were imposed on the Russian banking sector in 2014, the government developed a policy of import substitution, providing various direct and indirect subsidies to agriculture, car producers, universities, and other select sectors and companies. Such subsidies vary from access to cheap credit from state-owned banks, to increasing statutory capital through equity infusion, and to outright handouts for developing new technologies.

Third, the government may resort to a communist-era technique used during lean years: delay payments to suppliers and employees. Arrears in the public sector have already been noted, in public transport salaries for example.

Fourth, higher-than-planned inflation increases government revenues while clandestinely eating into the purchasing power of the population. In 2015, average monthly inflation in Russia was nearly 16 percent, significantly higher than the official forecast. This year a similar trend is emerging.

Whatever budget revisions are done now, they may be updated later in the year when economic growth can be properly measured. The 2016 budget is predicated on 0.7 percent annual GDP growth. The ministry of economy has calculated that at $30 a barrel of oil the economy may shrink again, by as much as 3 percent—which would mean further budget cuts down the line.