The budget rule is perhaps the only working mechanism that has proven itself in international experience to reduce the dependence of the federal budget and internal economic conditions on energy prices for commodity-producing countries.
Since 2018, a new law has come into force in the Russian Federation budget rule. According to it, all oil and gas revenues from oil prices above the base value set in the budget are used to purchase foreign currency by the Ministry of Finance and place it in the National Welfare Fund (NWF).
The 2018 budget includes prices for Urals oil of $40 per barrel. In the future, this level is subject to annual indexation by 2%. The difference between high prices and this value directly affects the formation of reserves, but this money does not enter the economy.
In the first 4 months of 2018, currency purchases by the Ministry of Finance amounted to 988 billion rubles. Taking into account May, the total volume of funds allocated to the National Welfare Fund will amount to 1.3 trillion rubles. In total, at the end of the year, the department forecasts revenues to reserves of 3.5 trillion rubles.
Oil prices are holding at high level since the beginning of the year, currently almost 2 times higher than the base price of $40 per barrel. Compared to January forecasts, the estimate of additional oil and gas revenues increased by 1.75 trillion rubles, which corresponds to a budget surplus of 0.4% of GDP instead of the projected deficit of 1.3% of GDP in 2018.
At the same time, budget expenses increase by only 62 billion rubles, since, according to the budget rule, additional oil and gas revenues are placed in reserve and are not spent. This fiscal policy is designed to reduce the economy’s dependence on energy prices and create a reliable reserve for periods of shortage.
Spending of NWF funds is available in two cases: a decrease in oil prices below the base price and the fund reaching 7% of GDP. If reserves grow above 7% of GDP, additional funds are invested in infrastructure projects. At average oil prices of $55-60 per barrel, the NWF could reach 7% of GDP in 2020. Assuming that current high oil prices continue, the NWF size target could be achieved even earlier.
The budget rule reduces the economy's dependence on external factors and allows the formation of a reliable reserve for periods of budget deficit.
The rule has a great influence on the exchange rate national currency. If previously, when oil prices rose, the ruble strengthened due to increased sales of foreign currency earnings by exporters, but now this effect is compensated by purchases of foreign currency by the Ministry of Finance. Likewise, when oil prices fall below base price sales of currency from the National Welfare Fund will support the Russian ruble.
The fiscal rule makes the ruble a more stable currency and reduces its dependence on oil prices.
A stable currency maintains the attractiveness of the fixed income market and reduces the risk premium of Russian debt securities due to the lesser impact of oil price volatility on the economy. It also contributes to the formation of predictable macroeconomic conditions necessary to ensure sustainable economic growth.
The rule has a positive impact on exporters oil and gas industry. Due to the strong correlation between oil prices and the ruble exchange rate in past years, a positive effect on company revenues from high oil prices was offset by the strengthening of the national currency.
Now there is no such dependence, which allows exporters to receive greater financial benefits from expensive oil.
Criticism of the fiscal rule
A number of experts criticize the current fiscal rule for being too rigid. The NWF's high threshold of 7% of GDP reduces the effective investment of additional oil and gas revenues in infrastructure projects.
According to supporters of easing the rule, the existing harsh conditions do not allow the country to achieve economic growth rates above 2-3%. In addition, a number of experts refer to the fact that there is a negative impact on social development countries due to excessive savings.
Supporters of the rule existing form cite as arguments a reduction in the volatility of the national currency, dependence on oil prices and an increase in the predictability of macroeconomic conditions for real sector economy.
Galaktionov Igor
BCS Broker
11:37 — REGNUM The State Duma adopted the government law on the budget rule in the third final reading, the correspondent reports IA REGNUM July 19. According to the plans of the Ministry of Finance, which developed the bill, the adoption of a new budget rule will reduce the dependence of the federal budget on oil prices.
The rule sets a spending limit for the federal budget. Now it will not be able to exceed the amount of oil and gas revenues for the next financial year. The amount of oil and gas revenues is calculated taking into account the base price of raw materials (oil and gas), the predicted exchange rate of the ruble to the dollar, the volume of non-oil and gas revenues and the cost of servicing the government debt.
The base price of a barrel of oil when calculating the budget should be $40. From 2018, the cost of raw materials will be indexed annually by 2%.
"This is the rule in in full will come into effect in 2019, and for 2018 the maximum level of spending is proposed to be determined taking into account the primary deficit of 1% of GDP,” said the State Duma deputy Gleb Khor("United Russia"). He recalled that during the discussion of the draft law in the State Duma, there were proposals to increase the cut-off price used in the new rule from 40 to 50 dollars per barrel. “However, the majority of deputies considered it possible to maintain the $40 level proposed by the Russian government,” the parliamentarian added.
Additional revenues from higher oil prices will be redirected to the Fund national welfare(NWF). Initially, the Ministry of Finance proposed to fill with additional income Reserve fund, whose main task is to reduce the budget deficit. For the same purposes, the department proposed to actually reorganize the National Welfare Fund and merge it with the Reserve Fund. However, the relevant State Duma Committee on Budget and Taxes noted that the main task of the NWF is to ensure co-financing of voluntary pension savings Russians and ensuring budget balance Pension Fund. Therefore, it is impossible to redirect all the funds of the National Welfare Fund to the Reserve Fund.
By the second reading, the Ministry of Finance and the relevant committee changed the document, stipulating that the Reserve Fund would be liquidated by February 1, 2018 and merged into the National Welfare Fund.The new United Fund will take on the tasks ofbalancing the insurance pension system, financing the federal budget deficit, as well as co-financing voluntary pension savings.
Funds from the National Welfare Fund can be used, among other things, to co-finance voluntary pension savings and finance the federal budget deficit, depending on the balance of the fund at the end of the year, the State Duma deputy noted Leonid Simanovsky("United Russia"). “If the volume of NWF funds placed on deposits and bank accounts with the Bank of Russia exceeds 5% of GDP at the end of the next year, then the use of the fund’s funds to cover the deficit of the federal budget and the budget of the Pension Fund of the Russian Federation will be limited to the volume of lost oil and gas revenues, and if it does not exceed 5% “That’s 1% of GDP,” the parliamentarian noted, commenting on the law.
Russia's additional oil and gas revenues in the first six months of this year have already amounted to 1.7 trillion rubles, the head of the Treasury, Roman Artyukhin, told Izvestia. This is more than half the projected amount for the entire 2018. Experts support the Ministry of Finance’s desire to create savings at an accelerated pace: these funds should become a “safety cushion” in case of a new crisis.
Starting this year, a new budget rule has been in effect in Russia. For all revenues from the sale of oil at a price of over $40 per barrel, the Ministry of Finance buys foreign currency and sends it to the National Welfare Fund. It is intended to become a new “safety cushion” to replace the Reserve Fund spent during the crisis.
This year, the Ministry of Finance expects to replenish the National Welfare Fund with additional oil and gas revenues in the amount of 2.74 trillion rubles. However, already in the first half of the year, revenues from the sale of oil at prices above $40 per barrel amounted to 1.7 trillion rubles. These funds are accumulated on separate foreign currency accounts, Roman Artyukhin told Izvestia after a joint round table of the Moscow Exchange and the Treasury.
The Ministry of Finance calls the key result of the implementation of the new budget rule, in particular, a decrease in the sensitivity of exchange rate fluctuations to oil price dynamics.
As a result, with an increased level of volatility in oil prices in 2017–2018 - from $43 to $80 per barrel - fluctuations in the ruble exchange rate against the dollar remained in a relatively narrow range: from 56 to 64 rubles, as noted in the “Main Directions of Budgetary, Tax and Customs -tariff policy for 2019 and the planning period of 2020 and 2021” prepared by the Ministry of Finance.
Moreover, if there were no budget rule, the dollar exchange rate would now be 50 rubles, First Deputy Prime Minister and Minister of Finance Anton Siluanov said in June. Current course American currency stays around 62 rubles/$. At the end of May, the minister made a similar statement economic development Maxim Oreshkin. According to him, over the past three years, the government and the Bank of Russia have been able to build such a fiscal and monetary policy that “whether the price of oil rises or the price of oil falls, this did not interfere with exports and conditions were stable.”
However, the head of the Accounts Chamber, Alexei Kudrin, said that the budget rule can and should be softened by $5 - making the cut-off price not $40, but $45. This, in his opinion, could make it possible not to increase VAT from 18 to 20% from next year. And the volume of additional budget revenues would be comparable to those that the treasury would receive from increasing the value added tax - 600 billion rubles per year.
Russia managed to receive more than half of the additional oil and gas revenues planned for this year thanks to a fairly high oil price, noted Alexander Deryugin, director of the Center for Research on Regional Reforms of the Russian Presidential Academy of National Economy and Public Administration. According to him, the predicted figure of 2.74 trillion rubles will most likely be achieved, and perhaps even exceeded. At the same time, the expert is confident that there is no need to soften the budget rule, since the cost of “black gold” is difficult to predict.
Revenue receipts to the treasury are uneven, so if in the first half of the year Russia earned more additional oil and gas revenues than planned, this does not mean that the dynamics will continue in the second half of the year, noted the head of the “ Fiscal policy» Economic expert group of Alexander Suslin. She emphasized that when drawing up income forecasts, they proceed from average price for oil and the average dollar exchange rate, which may change throughout the year. According to her, optimal size"airbags" - approximately 7% of Country's GDP. When this level is reached, the fiscal rule can be relaxed.
7% of Russia's GDP is about 7 trillion rubles. Thus, it turns out that Russia will need to save at an accelerated pace for another three years. The previous crisis showed that a “safety cushion” is necessary. It guarantees the ability to fulfill social obligations to the population in the event of a new economic shock.
The State Duma today approved in the second reading a bill introducing a new budget rule and providing for the merger of the Reserve Fund with the National Welfare Fund (NWF). The bill sets the cut-off price for oil at $40 per barrel in 2017 prices - oil and gas revenues received above this level will be directed to a single fund.
Changes to the Budget Code, providing for a new design of the budget rule, were approved by deputies in the second reading. According to the bill, budget expenditures will be calculated based on Urals oil prices at $40 per barrel. annual indexation by 2% since 2018. Only oil and gas revenues calculated from such a base price will be distributed to finance expenses - everything received at a price above the level will be sent to reserves. The new rule will begin to apply when preparing the 2019 budget.
Another change is the merger of the funds of the National Welfare Fund and the Reserve Fund. As of July 1, the volume of the National Welfare Fund was $74.2 billion, the Reserve Fund - $16.7 billion. In the context of the predicted exhaustion of the last funds of the National Welfare Fund by the end of 2018, they are planned to be used both to finance the budget deficit and to balance the pension system. As Deputy Head of the Ministry of Finance Vladimir Kolychev previously explained, if the total amount of funds in the consolidated fund exceeds 5% of GDP, it is proposed to limit its use to shortfall in oil and gas revenues. “If it is less, this volume is expected to be limited to 1% of GDP in order to maintain the minimum permissible amount of funds in sovereign funds,” the official clarified.
The funds from the Reserve Fund will be credited to the consolidated fund no later than February 1, 2018. Until the volume of NWF funds placed in the Central Bank reaches 7% of the projected volume of GDP (at the end of the next financial year or the first or second year of the planning period), placement of fund funds in other financial assets not allowed. The only exception will be self-sustaining infrastructure projects, financing of which began before January 1, 2018.
Evgenia Kryuchkova
How did the idea of merging extra-budgetary funds come about?
The government generally supported the idea of combining the resources of the Reserve Fund and the National Wealth Fund (NWF), proposed at the end of June by the Ministry of Finance. We are talking about the possibility of directing funds from the National Welfare Fund that were not used to finance infrastructure projects to cover the budget deficit, after the funds of the Reserve Fund currently used for these purposes are exhausted. The Ministry of Finance will have to present a mechanism for consolidating funds.
The Russian Ministry of Finance announced yesterday that it was launching a budget rule, according to which it would begin to buy and sell currency on the domestic market. Thus, the ruble will become less dependent on fluctuations in oil prices. However, due to exchange rate changes monetary unit RF, caused by future currency interventions, will be closely monitored by the Bank of Russia. He does not want to return the ruble from free floating to regulated soil.
Ministry of Finance: in the interests of exporters and overall stability
The budget rule provides that if oil prices exceed $40 per barrel, the Ministry of Finance will buy foreign currency on the market for the entire volume of additional oil and gas revenues received. Purchased dollars and euros will be sent to reserves. If the price of a barrel of Urals oil falls below 40, the agency will begin to sell foreign currency in an amount corresponding to the shortfall in budget revenues.
“At the same time, the accumulated volume of sales transactions foreign currency cannot exceed the volume of foreign currency purchases accumulated since the beginning of operations,” explains the Ministry of Finance. – This solution will also ensure the equivalence of the volume of transactions between foreign exchange market the deviation of the actual volume of use (replenishment) of sovereign funds (Reserve Fund and National Welfare Fund) from provided by law about the budget in 2017. Thus, conducting operations in the foreign exchange market will have a generally neutral impact on the state of the money market.”
Initially, it was assumed that the budget rule would be launched after the next three-year period (2017-19), for which the budget had already been drawn up. However, the situation has changed - the ruble strengthened significantly at the beginning of the year against the backdrop of rising oil prices. And this, according to the Russian authorities, does not meet the interests of domestic exporters (oil and gas).
Therefore, the budget rule was launched, as the Ministry of Finance emphasizes, “in order to increase the stability and predictability of domestic economic conditions.” Currency purchase and sale operations will begin in February. Moreover, as Finance Minister Anton Siluanov promised a little earlier, in 2017 all additional revenues from energy exports will be directed to the budget, and funds from the Reserve Fund and the National Welfare Fund will begin to be saved.
Let us recall that the 2017 budget provides for the expenditure of sovereign funds on total amount 1.8 trillion rubles. The Ministry of Finance previously planned that the Reserve Fund would be completely exhausted this year. But rising oil prices and the subsequent strengthening of the ruble exchange rate forced officials to improve their forecast and reconsider their plans.
Every month the Ministry of Finance will assess the oil and gas revenues that will flow into federal budget. Actual oil and gas prices, export duty rates and the average ruble exchange rate for the reporting month. An assessment of the volume of additional or lost oil and gas revenues, as well as the monthly volume of foreign currency purchase and sale transactions on the Russian market will be published on the official website of the Ministry of Finance monthly before noon Moscow time on the third working day of the current month.
Bloomberg journalists spoke on condition of anonymity with some federal officials and reported that the volume of monthly foreign exchange interventions The Ministry of Finance may reach $1 billion.
Central Bank: first we need to extinguish inflation!
All this may mean a departure from the “floating ruble” policy, which the Bank of Russia tried not to do even in the difficult year of 2015. However, the Central Bank of the Russian Federation believes currency operations in the amount of 50 million dollars per day are insignificant for Russian market. In general, the regulator approves of the intervention policy and intends to “conclude appropriate transactions on the market in the volume and within the time frame calculated by the Ministry of Finance.”
“According to the Bank of Russia, the introduction of “fiscal rules” in the future and their application on an ongoing basis will ensure more stable and predictable internal conditions for development and will contribute to changing the structure of the economy towards reducing its dependence on raw materials. “Fiscal rules” in combination with the application of the inflation targeting regime by the Bank of Russia will stabilize the real exchange rate of the ruble, which will limit its impact on the competitiveness of Russian producers,” the Central Bank said in a commentary.
Nevertheless, the Bank of Russia considered it necessary to emphasize the immutability of its approaches to monetary policy. The regulator, as before, will take into account measures budget policy when preparing forecasts and making decisions on key rate. At the same time, the Central Bank is confident that the Ministry of Finance’s foreign exchange operations will not interfere with achieving the target 4 percent inflation by the end of 2017.
The fact that reducing inflation is one of the most important tasks monetary policy financial regulator, emphasized the first deputy chairman of the Central Bank, Ksenia Yudaeva, in an interview published today with the Izvestia newspaper. She noted that only after achieving the desired 4% per year will the Bank of Russia return to another important problem - replenishing gold and foreign exchange reserves to $500 billion.
“For us, the inflation target is an absolute priority. This is more important than achieving the level of international reserves,” Yudaeva said.
The Central Bank set itself the goal of increasing state reserves to a confident $500 billion back in 2015. On this moment their size is 380 billion dollars. The last time the Central Bank bought foreign currency to replenish reserves was in May-July 2015, when it purchased more than $10 billion. In response, the American currency rose in price from 49 to 62 rubles, and oil then fluctuated in price from 45 to 52.5 dollars per barrel.
Yudaeva recalled that the December baseline scenario does not provide for replenishment of reserves. However, she did not rule out that the Central Bank would make some currency purchases in this year in case of changes in budget policy.
As for the strengthening of the ruble in recent months, then the deputy chairman of the Bank of Russia considers it “fundamentally justified”, since it is caused by rising world oil prices.
“Another thing is that fiscal policy measures, which are also a fundamental factor, can smooth out fluctuations in the real exchange rate even in the face of fluctuations in oil prices,” Yudaeva emphasized.
The ruble trembled
In general, the Central Bank of the Russian Federation does not expect speculative pressure on the ruble from the Ministry of Finance’s operations in the foreign exchange market. A commentary released today by the Bank of Russia press service says that there are no prerequisites for this. Firstly, the interventions will be uniform, and secondly, they will be insignificant, based on the assessment of the volume of additional oil and gas revenues in 2017. In short, there is no reason to panic.
The foreign exchange market, however, became nervous yesterday evening after the Ministry of Finance announced the launch of the fiscal rule. The dollar exchange rate on the Moscow Exchange exceeded the level of 59.5 rubles despite the weakening of the American currency on the world market. The euro exchange rate came close to the 64 ruble mark.