Russia’s Upcoming Fiscal Crisis

Source: Wikimedia Commons

The numbers are not on the right side for Kremlin. Russian treasury’s coffers may well be enough for just another year. Some estimates suggest, by the end of 2017 the Russian Government, the biggest employer in the country, may not have enough money to cover salaries of government employees. In a country where 46% or 33.6 million out of the total 72.3 million working age population are dependent on the government for a living this upcoming crisis should be a big deal!

The First Deputy of Russia’s Finance Minister Tatiana Nesterenko recently alluded that the Russian economy is right in the middle of a “perfect storm” where everything appears to be calm and normal only at the surface. If not for the financial reserves accumulated during the years of higher oil and gas prices, this apparent sense of calm would not be there.

Some estimates suggest that Russia’s oil reserves will be depleted by the next year, if the current rate of revenue and expense trends continue for the Russian exchequer and the economy is not structurally reformed.

Troubling Fiscal Math

Russia had a reserve fund of $59 billion as of December 2015. Of that about $33-$40 billion will be spent throughout 2016 to cover budget deficits, which ran at over $30 billion during Q1-Q2 2016, leaving behind a meager $15 billion, to be easily spent in 2017.

The news about dwindling resources comes at a time when Moscow is maintaining military presence in multiple fronts, including in Syria and Ukraine.

From 2014 to 2015 Moscow’s military expenditures skyrocketed almost 48% to reach $45 billion. Military expenditure further grew in 2016 due to escalation of conflicts in various hotspots around the world. Combined with other paramilitary costs Russia’s National Defense expenditures reached a prohibitive 5.3% of GDP in 2015.

Constantly increasing military expenditure is coinciding with depleted treasury reserves. Russia is adding new tanks, missiles, combat planes and ships to its arsenal as extensive military exercises are added to Ukraine and Syria. However, how much of these extra spending will bring tangible returns either in terms of Russian influence abroad or protecting economic interests is questionable.

Point to note here is that even with this additional Russian spending on its military, Russia hardly can get on par with the US, let alone NATO whose combined military budget stands at $918 billion, which dwarfs Russia’s estimated $50 billion military budget today.

Impacts of Sanction makes solutions tricky

The question now is how Kremlin is going to cover budget deficit after Reserve Funds are depleted? A easy way out under normal circumstances would have been increased borrowing from local and international markets. But sanctions have closed outside markets for Moscow making obtaining such loans effectively impossible.

Absent ability to raise money via loans, the Russian Central Bank will probably have no choice but to print currencies, which in turn may fuel inflation. Russia is already experiencing double digit inflation given that inflation in 2015 was already 12,9%.

Amid the growing financial pinch, conflicting narratives are now common among various sides of the Putin administration as to what to do with the current situation or what is the real fiscal state to begin with.

President Putin and Prime Minister Medvediev are regularly giving assurances to the Russian people that the economy had already passed its lowest point and is about to turn a corner, whereas, for many it appears as though the reality drags the Russian economy from one low point to the other.

So what to do next?

Restructuring the economy has been the buzz word in Moscow after oil prices started spiraling down in the mid-2014. Russian officials were putting on a brave face in attempts to convince public opinion that Western sanctions and cheap oil will only make economy stronger bringing about vital structural changes. However, since the sanctions started, Russian exports had fallen by almost half, dragging down Ruble’s strength against the USD by almost 50%.

To find a way out, President Putin has charged two opposing teams of economists to prepare policy proposals detailing how to fix the current fiscal stress by early next year. One of the teams is headed by former liberal Finance Minister Alexei Kudrin, who wants, among other things, to raise pension age, reduce budget spending and stimulate private investments. He initially linked successful economic reform to political changes, but now appears to have abandoned such hopes.

The other group of economists reflect staunch anti-liberal values, and proposes to pump additional 1.5 trillion rubles into the economy to finance unspecified “breakthrough” projects which, as they believe, will quickly ignite economic growth and push Russia into the forefront among other developed economies. These economists also bet on a stronger Eurasian Union with Belarus and Kazakhstan integrating along the European Union pattern.

Within a year, President Putin will have to start making decisions as to which reform plan to choose, as he will start preparing for re-election in March 2018. Despite Putin’s high popularity ratings at 82%, he will have to convince the electorate that he is still their man at the top. Putin has to show some economic brightness in the midst of a fiscal storm which may not remain manageable much longer.

About Sergey Denisov 7 Articles
Sergey Denisov covers Russia and Eurasian geopolitics for The GeoStrategists. He writes from Moscow, Russia.

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