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MinFin argues for conservatism in budget revenue projections – fight for budget rule rumbles on – final decision is yet to be taken


Vedomosti ran a front page article today saying that no consensus was reached yesterday at the government meeting with Prime Minister Dmitry Medvedev on the 2014-17 economic outlook. MinFin questioned MinEconomy’s estimates for oil and gas prices, RUB weakness and GDP growth, suggesting they all work to inflate budget revenue projections.

To recap, MinEconomy revised their 2014-17 forecast recently and delivered it to the government for debates. The key message is that to sustain Russian GDP growth at near 1% YoY this year and maintain the recovery track further, MinFin has to relax the ‘budget rule’ – i.e. spend around RUB 900bn of additional oil and gas revenues and expand the budget deficit by 0.5% of GDP starting 2015.

Conversely, yesterday MinFin argued that the ‘budget rule’ has to be tightened to adjust for i) overstated non oil and gas revenues (dividends and profit tax on oil and gas companies have to be accounted as oil and gas budget revenues) and ii) tighter access to the market to finance the deficit.

MinFin is usually at odds with MinEconomy, as trying to maintain sustainable fiscal policy over the mid-/long-run, whilst MinEconomy, which is responsible for growth per se, urges for more stimuli. The jury is still out as to who will have the upper hand, but we would rather expect more quasi-fiscal spending from NWF and VEB, rather than adjustments to the budget rule.

All in all, there is no fast-win recipe other than structural reform for the Russian economy to build up a growth pace that could be healthy and persistent over the medium-term perspective. As for the counter-cyclical measure we would rather favour monetary policy easing (once inflation subsides) as it is less likely to distort capital allocation, coupled with re-prioritisation of budget spending towards more infrastructure spending.

Vladimir Kolychev, Daria Isakova
VTB Capital analyst

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