New Russian budget rule frames government spending; sovereign funds to be combined

The Duma this week passed legislation designed to keep budget expenditures within a limit imposed by relatively low oil prices. Under the new rule, federal budget spending (excluding government debt interest payments) cannot exceed estimated budget revenues. The estimate will be based on revenues from oil & gas taxes calculated at a base oil price and a projected ruble-dollar exchange rate, while non-oil & gas revenues will be those estimated in the budget. Thus, the budget's primary balance (i.e. the balance before interest payments) must be zero or positive with the calculated revenues. The base price of Urals crude is defined to average $40 a barrel this year and will be raised by 2 % per year starting in 2018. A transition will take place in 2018, when the primary balance is allowed to show a deficit of 1 % of GDP. The permitted budget deficit overall would be slightly larger, as interest payments from the federal budget in 2016 equalled 0.7 % of GDP.

In its recent annual Article IV consultations with Russia, the IMF considered the new fiscal rule to be generally appropriate. The IMF suggested that a more flexible base price for oil would smooth budget spending responses to changes in oil prices and reduce the need to suspend the rule in the event of large changes in the oil price. The IMF also proposed that the budget rule should seek to produce budget surpluses to generate more government savings.

In the new legislation, the government's two reserve funds will be merged. The Reserve Fund will be terminated by February 1, 2018 and any remaining assets will be moved to the National Welfare Fund. Any oil & gas revenues exceeding this year's budget estimate will also be transferred to the National Welfare Fund before October 1, 2018.

Later, extra oil & gas revenues will be used to increase the National Welfare Fund, while the Fund may be used to cover a budget deficit up to the amount of a shortfall in oil & gas revenues. The extra revenues and the shortfall will be determined as the difference between the oil & gas revenues calculated at the oil price projected for the budget year, or actual oil & gas revenues, and the oil & gas revenues calculated using the base oil price. If the Fund's assets at the central bank (i.e. liquid assets) are less than 5 % of GDP, annual use of the Fund is allowed up to the oil & gas revenue shortfall or an amount equal to 1 % of GDP. Fund assets can be invested elsewhere than the central bank as long as the assets at the central bank do not fall below 7 % of GDP. This will not apply to infrastructure projects or Vneshekonombank projects already financed from the Fund and started before 2018.