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Friday, March 23, 2018

Siluanov’s statement about the windfall from oil can be interpreted in two ways

Finance Minister Anton Siluanov made an interesting statement that can be evaluated in two ways. He suggested to consider the windfall revenue from oil exports at a price above $40 per barrel. That is, the tax revenues paid by our oil exporters raised over this goal will come not in the budget, but directly to the Reserve Fund.

On the one hand it is right, because there is a risk that its funds will be exhausted next year. On the other hand, this suggests that the government does not believe in high prices for “black gold” and is going to cut the budget by living in the future.

photo: Mikhail Kovalev

Anton Siluanov

Formally the budget rule under which oil and gas tax revenues over the so-called the cut-off price did not go to the budget and the Reserve Fund, 2013. In principle, similar to the scheme operated from 2004, but then the Fund was not called Backup, Stabilization.

In 2004, the cut-off price was $20 per barrel (in oil prices from $33 to $52), and in 2006, when commodity prices reached $66-68, it has grown to $27.

Budget revenues once again exceeded expenses. In addition, the dynamics of growth in oil prices significantly outpaced the growth of the cut-off price. As a result, according to experts, the Stabilization Fund received up to 75% of additional income from a favorable external environment.

In February 2008 the stabilization Fund was divided into Reserve Fund and national welfare Fund. The first was to be the mainstay of the budget, and the second expected not to spend and to save for future generations.

But then the circumstances of the Russian economy was forced to change these schemes. After the crisis of 2008-2009, a new cut-off price became the level of $45-50. In fact, it was quite normal, as oil prices were in a corridor of $60-80. In the end, the cut-off price reached $96, but then the oil cost more than $110.

All this remained in the past. Now the Reserve Fund is close to exhaustion. According to Deputy Finance Minister Alexei Lavrov, he can completely end in 2017. There are pessimists who say it will happen in the first months of next year. “In this case, the Finance Ministry will start financing the budget deficit of Fund”, — said Alexey Lavrov.

How true such a grim prospect, only time will tell. As of September 1, the Reserve Fund was left of 2.09 trillion rubles, NWF — of 4.72 trillion.

Assessing these statistics, it is possible to assume that the Reserve Fund is, indeed, barely enough until the end of this year, and NWF, which feeds the money transfers to the Pension Fund and infrastructure projects, will not last long.

What to do in this situation? The Finance Ministry is looking for the exits. The Agency Siluanov thinks it’s necessary to freeze the spending budget for 2017-2019 at the level of 2016. In addition, the Minister of Finance, the need to replenish reserves windfall from oil exports, if that would cost over $40 per barrel.

The question arises: whether it is the way out? In the 2016 budget, the government laid the price of “black gold” the average for the year of $50. Now a barrel costs $47. In February dropped to $30. And above $52 was raised, and it it lasted no more than a week. So, the required “fifty dollars” is unlikely to be obtained.

So the reason why the President needs to appoint a “cut-off price windfall” of $40, is quite obvious.

First, the Ministry of economic development has laid the basis for the budget the bar to 3 years ahead. Second, even if prices are higher, the government will be able to find an additional way of repayment of the budget deficit, and will be able to replenish the sinking Fund Reserve, which protects Russia from year to year.

However, this scheme has many flaws. For the growth of oil prices requires the agreement of the major world producers of raw materials. If they agree, we’ll know in a week when will there be a meeting in Algeria. Its prospects are quite vague. Meanwhile, former Finance Minister Alexei Kudrin predicted a fall in oil prices below $30. However, he says it will happen in the next 20 years and many of us, such a tragedy will not be affected.


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