The center of the storm: why the Finance Ministry does not see the bottom of the crisis

Suddenly sounded the statement of the first Deputy Finance Minister Tatyana Nesterenko about the fact that the Russian economy is in the middle of a storm, must be taken absolutely seriously. At least because Tatiana is one of the veterans of the Ministry of Finance, which works in his leadership since 1998, and before that it was four years the Deputy of the state Duma, the one that was still a place for discussion where many members considered it their duty to deeply understand the problems faced. The Deputy Nesterenko worked in the budget Committee, which gradually became one of the most important “players”. The Ministry of Finance Nesterenko is the fact that in many Western countries called a professional first Deputy that pulls all the work, while the Minister deals with political issues. It is clear that in Russia the Finance Minister is not a politician, but a large part of his time is spent at various meetings and conferences, dealing with the press, while Nesterenko more sitting at your workplace.

I say all this in order for the reader to understand what is heard are the words of skilled and informed officials. Unlike the Minister of economy, unsuccessfully for the second year trying to get ahead of ourselves with the Creek bottom has been passed!”, sees very well what is happening in the economy really is. Yes, this look is inevitably distorted “minfinovskih points and, quite likely, he does not see all the shades of the emerging pattern, but to throw it aside would be wrong.

Six quarters of decline

Vision Nesterenko radically contrasts with what we hear from the President, Prime Minister, Minister of economy and the list goes on. She said that temporary tranquillity, which many perceive as reached the bottom, is misleading, that the economy developed serious negative processes.

It is clear that the statement made in the midst of the budget process, should be considered in conjunction with what is happening with revenues and expenses. And most importantly, said Nesterenko, is that budget revenues are plummeting and the Ministry of Finance have no ideas how to stop this process, no hopes that it will stop by itself. The results of the first half for the Russian economy were not disastrous. The President and the Prime Minister is constantly stressing it, saying that could be worse. Just think, only a small percentage of the fall (! ), say government analysts; the rate of fall is slowing, and it is proclaimed a success. But you must understand that as long as economic dynamics preserves the sign “minus”, the economy continues to shrink and economic activity to fade.

The downturn in the Russian economy continues for six consecutive quarters, and, obviously, this recession is no ordinary balancing of the economy, adapting it to low oil prices. To new prices, Russia’s economy has adapted quickly: the ruble lost two times, respectively, reduced the import of goods and services. Moreover, the oil industry, which seemingly had the most to suffer from falling prices and feels almost better than anyone: oil production slowly, but growing, decline in domestic demand and refining capacities allow to increase exports, quickly switching from crude oil to gasoline and diesel fuel.

Not for the consumer

You have to be honest: in the Russian economy there are sectors that feel good. This commodity sector, in General, expanding production and exports; it is agriculture, which is growing steadily since 1999; that the defense industry, which last year grew 12% and which continues to Deplete the Federal budget, producing products, which, in essence, is a pure deduction from the national economy. But that part of the economy, which works on domestic consumers, feels bad: construction production and retail trade for a year and a half of the crisis fell by 15%, continuing the slide down. And if retail “optimists” can talk about the slowdown of the decline (3% YTD), in terms of construction there is a real collapse — almost 10% YTD. It is clear that the fall of the construction is not that other, as continuation of the investment decline, without overcoming which is of no economic recovery to speak of. The growth of wages recorded in the beginning of the year resulted in the growth of imports (thanks to a stronger ruble! ) — obviously, the income increased for higher-skilled workers, whose consumption basket is biased in favor of higher quality goods.

The result was the lack of growth of tax revenues of regions (tax and income), which at first glance is not a problem of the Federal budget. Assigned to regions of the may decrees of Putin’s program to increase salaries doctors and teachers struck in the regional budgets noticeable gaps, plug that on their own, without seeking help in the regions of Moscow, I can’t. That is the endless queue of walkers in the Cabinet Tatiana Nesterenko and her colleagues!

Poor ruble

For the Ministry of Finance is the greatest challenge of the current year are oil prices, which fell to a long-unseen levels: the average price of export of Russian oil in the first half amounted to $37/barrel. despite the fact that years ago it was $57/barrel. but in severe crisis of 2009 m — $50.5 per barrel. It is clear that export prices for oil are set in dollars, and budget revenues in rubles, that is, any weakening of the ruble should lead to increased revenues. That is correct, but with two caveats. First, after the transition to a floating exchange rate, the Central Bank can not weaken the ruble: the only tool for this is the massive purchases of foreign currency by the Bank of Russia. But, I confess, the situation in which the Bank of Russia will weaken the national currency will look like, to put it mildly, strange, and not only for us but also for the Investigative Committee. Second, the weakening of the ruble leads to an increase of budget revenues only in the case if oil prices are not reduced; and the practice shows the opposite: the ruble generally follows oil prices, but the devaluation of the ruble in the case of oil price reduction is smaller in scale. In practice it turns out that cheap oil (the quotes around $30-35/bbl.) with the exchange rate, which at this point is formed on the market gives less rouble budget revenues, than expensive oil ($45-50/bbl.), although these points in time the ruble strengthened to levels that cause concern to President Putin and his associates.

The contraction of the economy and falling oil revenues led in the first half to increase the budget deficit to 4% of GDP vs 3% of GDP stipulated in the budget law and submitted to the Finance Ministry a safe level only in the short term. The rising budget deficit leads to the fact that the Finance Ministry forced harder to get into the reserve funds. Today, the scenario in which the Reserve Fund drop to zero this year, it is very likely, and the NWF in the next two years, as dreamed by the Ministry of Finance six months ago, clearly not enough. All this Nesterenko sees quite clearly. And also clearly, she understands that the hopes for the improvement of the economic situation quite a bit. Even the termination of the economic downturn and yield a zero growth rate for the year that the Minister Ulyukayev sees as superoptimist option, will not lead to an increase of budget revenues, which will significantly reduce the budget deficit.

But beyond that, Nesterenko understands that the implementation of the provisions of the law on mandatory indexation of wages and pensions by the rate of inflation will cause a reduction in all other expenses (except for the untouchable military) should be more than 10%, which today plans to the Ministry of Finance. And reduction of budgetary expenses will inevitably lead to a reduction in aggregate domestic demand because of falling incomes of the Federal budget is not the result of the tax cuts, leaving more resources to the private sector. And all this just so the budget deficit did not grow! But the Finance Minister has declared another goal is to consistently reduce the deficit in subsequent years by 1% of GDP. And because the Federal budget is planned for the next three years, all restrictions should be clearly communicated to the recipients today, they have formed a stable negative expectations with no gap in the budget arithmetic is not in sight.

And that’s when all these arguments in the Ministry of Finance are supported by concrete figures, it becomes clear that the economic tranquility you are seeing the Russian government is unstable and temporary, that those gales and storms, which are now clearly visible to those people standing on the bridge of the Finance Ministry tomorrow will fall on the economy.

Sequester or machine

A year ago, I believed that President Putin does not see the real power of the economic crisis, because at the time, he has the money, that is, with the budget, everything was good: the budget revenues exceeded the plan, and the Minister of Finance could at any moment get from nowhere a couple of hundred billion unaccounted rubles. This year the trick the Minister Siluanov does not pass, and his optimism is limited by the fact that the planned budget expenditures will be fully funded not only this year but next, and most importantly, in 2018, in a presidential election year.

After Nesterenko, it seems that President Putin will have to give the economy much greater attention: the geopolitical strengthening of Russia — a thing pleasant, but the revenue it adds. Moreover, the growing military and political confrontation with the West will inevitably lead to the depletion of the Treasury and, consequently, increasing social tension in the country. If Nesterenko rights and the likelihood of full full exhaustion of reserve funds by the end of 2017 high before the beginning of a new presidential cycle, Vladimir Putin faces a difficult choice: or to enter the budget sequestration in daily practice, or to move to a new macroeconomic paradigm that even today nobody has suggested (nor Sergei Glazyev, nor Kudrin, nor Andrei Belousov and Igor Shuvalov), you should begin to use the power of the printing press to Finance not development programs, and current budget expenditures.

I don’t know which of these alternatives seemed more damaging to Tatyana Nesterenko, but it is obvious: both quite fit into her understanding of the storm that she already sees, while others have not.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.