* Budget faces $46 billion shortfall at $50 oil price
* Finance minister says defence spending won't be cut
* Ex-finance chief says Kremlin not grasping challenges
By Jason Bush
MOSCOW, Jan 15 President Vladimir Putin's
insistence on huge defence spending makes it hard to see how a
government plan to make deep budget cuts will see Russia through
a deepening economic crisis.
Finance Minister Anton Siluanov called on Wednesday for a 10
percent cut in planned expenditures, warning that if oil were to
average $50 a barrel this year, the budget would face a
shortfall of 3 trillion roubles ($46 billion).
But defence spending will not be affected because of a Putin
directive that dramatically limits room for manoeuvre: military
and security costs swallow up more than a third of the budget
and are set to rise by about 30 percent this year.
(Graphic on Russian defence spending:
Siluanov had signalled opposition to the huge outlay on the
military. "One needs to redistribute and restructure
expenditures in favour of infrastructure, education and so on.
Such military expenditures are heavy to carry," he said.
However, that was on Dec. 26 and on Wednesday he performed
his about-face, acknowledging that defence was off-limits.
Despite the crisis gripping the economy, Putin is
preoccupied with boosting Russia's international might, being
tested in the standoff the West over Ukraine.
He has also shown he will not put his popularity at risk by
cutting social expenditures such as pensions, which rely on
federal subsidies that consume another quarter of the budget.
Last month he said pensions must be indexed to inflation,
which is now running at more than double the annual rate of 5.5
percent projected in the 2015 budget.
"For Putin the priority is the army, the secret service and
the bureaucracy. And also financing pensioners, the main
supporters of the regime," Boris Nemtsov, an opposition leader
and former deputy prime minister, wrote on his Facebook page.
"All the same... a reduction in people's real incomes and a
rise in poverty is unavoidable."
OIL PRICE AND ROUBLE PLUNGE
Both Siluanov and Prime Minister Dmitry Medvedev have now
acknowledged the budget agreed late last year, based on the oil
price averaging $100 per barrel over the next three years, is
not fit for purpose.
Since it was agreed the price of oil, Russia's main export
earner, has fallen below $50 and the rouble's parallel dive has
continued. The currency lost more than 40 percent against the
dollar last year and Russia's problems have been
aggravated by Western sanctions over the Ukraine crisis.
Before the plunge, oil and gas produced around half of
federal tax revenues, and the World Bank now expects the economy
to contract 2.9 percent this year..
Economy Minister Alexei Ulyukayev sees a "pretty high"
chance Russia's credit rating will be downgraded to junk
and a deputy, Alexei Vedev, expects inflation to
peak at 15-17 percent in March/April.
Russia plans to spend more than 20 trillion roubles by 2020
on modernising its armed forces, but the dilemma is not new.
Long before the collapse in oil prices, Siluanov's predecessor
Alexei Kudrin warned that plans to spend hundreds of billions of
dollars on rearmament were unaffordable.
Kudrin was sacked in 2011 for speaking out against the
military build-up and now doubts the Kremlin has woken up to the
new realities. "I have the impression that at all levels of
power, including the first person (Putin), there isn't an
objective assessment of the challenges before Russia," he said
in an interview with Russian agency RBC on Jan. 12.
Kudrin again singled out the military programme, saying: "It
was obvious that it was impossible to fulfill it even before,
and all the more so now that oil prices are lower."
COMPLACENCY OVER RESERVES?
The root of the Kremlin's complacency, Kudrin and other
analysts say, is the fact that Russia's reserves still look
impressive. The budget's Reserve Fund, accumulated during the
years of oil-price plenty, is worth about $90 billion, or around
6 percent of gross domestic product. Another sovereign fund, the
$80 billion National Welfare Fund, could also be tapped.
However, 60 percent of the latter fund has already been
earmarked for off-budget projects. Moreover, the whole fund is
meant to provide long-term support to the overstretched pension
system, which faces a growing hole.
In December, Kommersant newspaper published what it said
were leaked Finance Ministry projections, based on an average of
$60 per barrel in 2015, under which 70 percent of the Reserve
Fund would need to be spent this year.
Siluanov has said he expects a fiscal deficit of up to 3
percent of GDP this year, which suggests the fund could run out
in about two years if there is no oil price rebound.
That raises the question of how Russia would fund the
shortfall if oil prices remained low for several years, or how
it would cope with further budgetary shocks.
German Gref, head of the state's biggest bank, Sberbank, has
called for a "radical turn" in policy and set out a plan for
doing so. Some others appear to have given up hope on the
government's ability to come up with a coherent crisis plan.
"In these conditions what can the government do?" asked
Nemtsov. "They will start printing money right away and do it
regularly, so as to economise on the reserves."
"The Kremlin has nothing left except to pray that oil prices
($1 = 64.8890 roubles)
(Editing by Timothy Heritage and David Stamp)