A gift for the Minister: as the Ministry of Finance wants to restrain the growth of the ruble

As the Finance Ministry wants to curb the growth of the ruble?

“We have prepared a gift in honor of my birthday — a new version of the budget rule, under which we will withdraw all the additional revenue that must obtain if it will be high oil prices, into the Reserve Fund,” — said Tuesday the Minister of Finance Anton Siluanov. According to him, the reserves should provide additional revenues to the budget from oil prices above $50 per barrel. The new rule “will not allow the ruble and the negative impact of changes in oil prices on the growth prospects of the economy, inflation, interest rates, etc.”, said the Minister. But it will work probably only in 2018, said last week Siluanov Deputy Maxim Oreshkin.

The ruble traditionally answered the Central Bank, in which case the government did not interfere. Moreover, since the end of 2014, the Central Bank switched to a policy of floating exchange rate and stressed that now the rate is only determined by supply and demand in the market. But the collapse of oil and gas revenues and the difficulty of reducing the budget for 2016 did the Ministry of Finance by the interested player: the weaker ruble helps the budget to compensate part of the shortfall due to the fall in oil prices and export revenues. In February, the Reuters Agency reported with reference to two senior officials of the financial and economic block of the government discussing the level of the ruble (as an unspoken reference point), which could help to minimize the losses of the budget at lower oil prices. The Ministry of Finance does not allow for the targeted weakening of the ruble, reported the press service of the Ministry. At the same time Reuters with reference to estimates of the Ministry wrote that strengthening of national currency for 1 RUB leads to a reduction of budget revenues by 35-40 billion rubles.

The Finance Ministry fears that the rising oil prices, and after him — and the strengthening of the ruble, the government will be tempted to sharply increase current spending budget, says chief economist for Russia and CIS “Renaissance Capital” Oleg Kuzmin. In addition, the growth of the ruble will lead to the fact that “we will flood wave of all imports and non-oil sector will become uncompetitive,” he adds. Siluanov not talking about artificially lowering the exchange rate of the ruble, says chief economist at FG “BCS” Vladimir Tikhomirov. But if you earn a fiscal rule and all the additional revenues from rising oil prices would be set aside, they will not be using government spending to enter the market, to create pressure on the growth of the money supply and, consequently, the ruble, explains the economist.

With the January lows, the price of Brent oil increased by almost 60%, to $44,8 per barrel (at 21:20 GMT Tuesday), and the ruble has strengthened by 26% (on Tuesday, the dollar on the Moscow exchange was worth RUB 65,45). According to Bloomberg terminals, 120-day correlation between the ruble and the Brent oil is now at 79%, that is, with high probability the fluctuations of the ruble following the volatility in oil prices. “The oil price is a key factor for the volatile budget,” Siluanov said on Tuesday. The rising oil prices, according to him, the Russian economy provides only “a one-horse race”, while she needs high-quality, sustainable growth.

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This kind of fiscal rule and how it will change?

Budget rules were needed since the beginning of 2000-ies, when oil revenues started to grow and there is a problem, how to use them — how and how much to save, how much to spend on financing costs. In the first stage, after the crisis of 1998, the government sent oil and gas revenues on aggressive reduction of an external debt and creation of a system of sovereign funds. The second version of the budget rules, issued in 2007, established a limit to the non-oil deficit to 4.7% of GDP and the size of the oil and gas transfer (part of oil and gas revenues to be allocated to expenditure) — no more than 3.7% of GDP. But this model has effectively destroyed the financial crisis of 2008. Finally, in 2013, introduced a new fiscal rule: it established the maximum amount of costs the level of income in the “base” oil price, plus 1% of GDP. The second key element of the budgetary policy of using oil and gas revenues: the revenues from the excess of actual oil prices over the base headed to the Reserve Fund, and when it reaches the value of 7% of GDP in NWF.

The rule is not as severe, although it was used in the preparation of three year budget for 2014-2016. In addition, as noted in 2013, the chief ideologist of the system of fiscal rules, Alexei Kudrin (by that time he was no longer Minister of Finance), the latest version of the rules was “a loophole that allows you to spend a reserve for repayment of budget deficit”.

Last year after the collapse of the world oil price fiscal rule has actually not worked because the price of oil is established well below the level calculated by the government for previous years ($96 per barrel). The reserve Fund was no longer filled and now can only be spent. As a result of the crisis, the annual budget for 2016 was drawn up without fiscal rules.

In the earlier version of the budget rule, the cut-off price for filling up of sovereign funds was calculated as the average price of Urals oil over the previous few years. The cut-off price in the new rule — $50 — selected on a different principle: this is the most likely “structural” oil price in long term period — the next 10 to 15 years, explained RBC official financial-economic bloc of the government. He found it difficult to answer the question whether this price is reviewed every year, or will it be ongoing for several years.

According to the interlocutor of RBC, the discussion of the configuration of the new fiscal rules is still ongoing, including the issue of the use of the concept of “normative value” of the Reserve Fund (7% of GDP before the suspension of the budget rule), and therefore it is premature to talk about whether the previously accepted norm. “Now a fiscal rule is viewed more than as a guarantee of budgetary stability, and as a guarantee of macroeconomic stability,” he explains the logic of the discussion of the mechanism.

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What will happen to the ruble?

In reserve funds, where will the oil windfall, the funds stored in a currency. To fill them, the Ministry of Finance, which receives taxes in rubles will be to buy currency exporters in the market and thereby curbing the strengthening of the national currency. A similar mechanism functioned under the previous head of the Central Bank Sergey Ignatyev, Kuzmin reminiscent of “Renaissance Capital”. Then the planned intervention of the Bank of Russia was used to fill the reserve funds.

By calculations “the Capital Renaissance”, when the price of oil is $50 a barrel, the ruble will rise to around 62 rubles per dollar. If oil prices will increase further when the new budget rule, the government will replenish the reserve funds. This will keep the ruble, but with the rise in price of a barrel of oil on the next $10 dollar will cost about RUR 58,5, while oil at $70 per barrel — 55 rbl., analysts estimated the investment company.

What will happen to inflation?

The Finance Ministry has demonstrated that it wants to stick to a strict budget policy, says chief economist at Alfa Bank Natalia Orlova. But what will happen to inflation directly depends on, whether the government, despite the fiscal rule, to increase social spending, she agreed.

Direct effect on inflation, fiscal rule will not have, agrees the chief expert of the Center for economic forecasting Gazprombank Yegor Susin. “But the tight budgetary position of the Ministry of Finance, as well as his desire to gradually reduce the budget deficit by 1% of GDP annually will be to reduce inflation, he said. — After all to reduce the budget deficit plan by optimizing costs and more efficient management”. The joint action of the Ministry of Finance and the Central Bank can lead to a significant reduction of inflation in some years, the expert believes.

The fiscal rule has also a reverse side, which has repeatedly criticized Kudrin. If oil prices are lucky, the reserves will be accumulated, but at the same time, the government will confiscate a significant portion of revenue from exports. These funds will not be returned back into the economy, and therefore will not contribute to its growth, reminiscent of the chief economist FG “BCS” Vladimir Tikhomirov.