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Saturday, January 20, 2018

Concerns over the reserves of Russia is exaggerated

The Ministry of Finance after a two month break again printed a Reserve Fund. And all because the budget deficit is growing, and this in turn may require a greater expenditure of stored in the fat years of reserves. How much is enough Reserve Fund and it is dangerous exhaustion?

After a two month break the Ministry of Finance resumed the spending of the Reserve Fund. To Finance the budget from the reserves was sent to 390 billion rubles. For this purpose from the Reserve Fund was sold 2,92 billion $ 2.46 billion Euro and 310 million pounds. Money reserves are stored in these three currencies.

“The reserve Fund may be completely exhausted by the beginning of 2018, if the price of oil will remain below $ 60 per barrel”

In April and may, the Agency had withdrawn from the Fund to the same budget – 390 billion rubles. But in June and July there was a break, the reserves were not touched.

As a result, over the last month the amount of the Reserve Fund of the Russian Federation declined in rubles by 18% and amounted to 2.1 trillion rubles (32.2 billion dollars), the Ministry said on Tuesday.

The volume of the national welfare Fund (NWF), which allowed spending to cover the deficit of the FIU, declined by 2.1% – to 4.72 trillion rubles. On September 1, in the accounts of the Central Bank of NWF made up 19.56 billion, 20,76 billion euros, 20 million and 3.83 billion pounds. Income of the Fund from the placement in foreign currency from 15 January to 31 August amounted to 240 million dollars, or of 15.41 bn.

Just this year, the Ministry of Finance planned to spend 2.1 trillion roubles from the Reserve Fund to cover the budget deficit. However, now more and more talk about the fact that the costs of the reserves can be increased this year due to the growth of the budget deficit.

In the first seven months of 2016, Russia’s budget deficit amounted to 1.52 trillion rubles, or 3.3% of GDP. Last year the budget deficit for the same period was 1.1 trillion rubles, or 2.8% of GDP.

The increase in the deficit is due to the fact that in the budget at this time, we received oil and gas revenue is only 2.5 trillion rubles. And this is only 42.2% of plan for the year. Although non-oil revenues continue to grow (by almost 3% in seven months) and amounted to 4.4 trillion rubles.

A week ago, the Bank of Russia estimated the budget deficit in 2016 to 3.5% of GDP benchmark at 3%. According to the calculations of the regulator, to cover the deficit in the current year will require the Reserve Fund in the amount of 2.4 trillion rubles, that is only 300 billion rubles more than originally planned.

Previously, the Agency Reuters with reference to the prepared by the office of the proposal, the government reported that the Reserve Fund may be by year end fully expended and you have to use more 783 billion rubles from the NWF to cover the budget deficit.

However, experts do not see anything wrong in spending the Reserve Fund. Since it was created in the fat years especially in order to cover budget expenditures in the period of low oil prices. “Now the Reserve Fund is used for financing the state budget. All right, this is his function,” says the analyst of IFC Markets Dmitry Lukashov. And most of the reserves is the fulfillment of social obligations.

Moreover, while the expenses do not exceed plan, informed the Ministry of Finance have also withdrawn from the reserves of 390 billion per month, says the head of operations on the Russian stock market IR “freedom Finance” George Vashchenko. This year, in his estimation, can be spent from the reserves of 2.1 trillion (the plan), and 3 trillion roubles, that is another 800 billion to the end of the year. This means that will spend more than planned, however, the funds in the Reserve Fund will still remain in the amount of 1.3 trillion rubles.

“If there is no windfall from the sale of oil, as it is now, the Reserve Fund may reset it. If the hydrocarbons go up, it will be replenished,” says Lukashov.

Deputy Chairman of the Board Loko-Bank Andrey lyushin does not exclude that the Reserve Fund may be completely exhausted by the beginning of 2018, if the price of oil will remain below $ 60 per barrel. However, this is still not a disaster. NWF isn’t over. The Fund may be reduced by this time another 1 trillion rubles, and its volume in this case will fall below 3 trillion RUR, indicates the lyushin.

“Questions about how much of reserves in my view, meaningless. Reserve Fund – it is an artificial construct, invented in our country. The IMF does not require its creation, and in most countries it is not. For normal operation of the economy is sufficient to maintain an adequate level of international reserves, and with that in Russia everything is in order,” – said Dmitry Lukashov.

Although there is one negative consequence for the economy of the spending of the Reserve Fund. “The slosh mass of such a volume (2-3 trillion per year) is emissive in nature, that is, contributes to the weakening of the ruble,” says Vashchenko.

In any case, it is too early to talk about the complete exhaustion of the reserves of Russia. Moreover, except for the Reserve Fund, the country has other ways to cover the deficit, in particular through domestic and external borrowing.

“As for borrowing, they may resume in the fourth quarter, assuming that the Central Bank will lower rates and the Finance Ministry will make a small 0.5 to 1 PP., the award to the market,” said Vashchenko.

Now Russia is relatively easy to raise funds in the debt market, although there are political risks due to the sanctions. “Government bonds can be activated, – said Lukashov. – On the background of zero and negative rates in developed countries they will be in demand. The main thing is not to get too far, as in 1998.

So, the Treasury may place additional Eurobonds due to postponement of the privatization of Bashneft, from which the budget was to receive about 300 billion rubles. Russia successfully entered the international market in may this year, placing 10-year Eurobonds, 1.75 billion dollars at 4.75% per annum.

The budget law allows the Ministry of Finance, which is necessary to Finance the deficit due to low oil prices and uncertainty with large privatization deals, to attract this year abroad $ 1.25 billion ($3 billion). Finance Minister said that the government is trying to decide whether to exercise this right until the end of the year or not.

President Vladimir Putin last week said Russia had no need to re-enter foreign borrowing market although not rule out this possibility. “Those wishing to purchase our instruments are financial enough. We simply have no such need today. If any such reserve funds the government at $ 100 billion it’s pointless, keeping in mind the cost of borrowing”, – said Putin.

Budget can also help increase in the ruble price of oil for the remaining four months. This means that if the price of Brent oil will remain within the range of 46-50 dollars per barrel, the Russian budget will benefit from further devaluation of the ruble. A less likely option is a more expensive oil with minor strengthening of the Russian currency. According to estimates by Raiffeisenbank in the remaining four months of the budget needs the ruble price of oil on average 3,700 rubles, whereas today a barrel of Brent is 3008 roubles.

In General, the situation with reserves of Russia are not so sad as it may seem. Because the Reserve Fund is only one of the links. If you look at the amount of the reserves of Russia is not only not over, but even a little rise.

“Lately a lot of talk about the “exhaustion” of the funds of the Ministry of Finance and the alleged influence of this process on the Russian economy. In my opinion, the fears are totally unfounded. Reserve Fund and part from the national welfare Fund are part of the International reserves of the Russian Federation. So foreign exchange reserves in our country has increased over the last 12 months by 10%. On 26 August this year they made 396,9 billion dollars, which is the highest level in almost a year and a half. No reduction, but there is, though not large, but still increasing,” sums up Dmitry Lukashov.


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