Tough Russian budget rhetoric masks laxer reality

MOSCOW (Reuters) - A Russian plan to cut 10 percent from this year’s budget is at best misleading. Once the government has protected President Vladimir Putin’s favored spending areas such as welfare and defense, it will struggle to make savings worth a third of that.

Russian President Vladimir Putin delivers a speech at a meeting with members of the All-Russia People's Front in Stavropol, southern Russia, January 25, 2016. REUTERS/Alexei Druzhinin/Sputnik/Kremlin

The plan has grabbed much attention, reassuring investors looking for signs that Moscow is taking prudent steps to respond to the oil price plunge, while also deepening concerns about the further pain inflicted on the slumping economy.

But large areas of the budget are excluded from the cuts and Russia has a poor record of meeting its own targets. Last year the government also promised sweeping cuts and ended up raising state spending substantially.

Despite this, Russia is still squeezing expenditure as global prices of its main revenue earner, oil, remain well below levels needed to balance the budget. With inflation likely to overshoot an official forecast of 6.4 percent, even a spending freeze, for example, would mean sizeable cuts in real terms.

Nevertheless, the talk of sweeping cutbacks hardly squares with the facts.

“The wording of the government’s budget policy is very, very tough, but we don’t see this confirmed by the actual figures,” said Natalia Orlova, economist at Alfa Bank.

For a start, the 10 percent cut is from the 2016 budget which parliament approved in December, not from actual 2015 levels. Often also overlooked is the fact that most spending, around two thirds of the federal budget, will not be subject to the planned savings.

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Putin appears reluctant to jeopardize his popularity by cutting the social benefits, mainly pensions, that account for over a quarter of the federal budget. He has also declared defense and national security, another third of the budget, off limits.

In reality the cuts now being touted, about 500 billion rubles ($6.4 billion) according to Finance Minister Anton Siluanov, would amount to only around 3 percent of this year’s budget. Meanwhile, the government is already talking about increases elsewhere that would partly negate these reductions, such as new “anti-crisis” measures.

“There’s a history of announcing spending cuts in Russia, and actually what happens is that the cuts never quite materialize as planned, and they can get offset by rises in the areas that are ring-fenced,” said Neil Shearing, chief emerging markets economist at Capital Economics.

The anti-crisis spending - supposed to counter the economic effects of plunging oil prices, the weak rouble and Western sanctions imposed over Ukraine - remains vague. However, similar measures last year included subsidies for industries and recapitalizing banks. Some of these were financed from a sovereign wealth fund rather than the federal budget.

Russia also said it would cut budgeted expenditure - outside the protected areas - by 10 percent in 2015. Yet total federal government spending not only rose around 8 percent compared with a year earlier, it also exceeded the level planned before the cuts were announced.

This shows the political and economic obstacles that may also make the latest promises hard to deliver this year, when Russians will vote in September.

“New parliamentary elections will put enormous pressure on the government,” said Vladimir Tikhomirov, economist at BCS, a financial services group. “Normally the government would try to help the pro-government parties by increasing wages and salaries.”

Even cutting the unprotected areas - such as infrastructure, health and education - will be difficult and damaging as these have already been pared to the bone.

“Because so much of the budget has been effectively ring-fenced it’s just as important to think about the distributional consequences,” said Shearing. “Public investment is already very low by the standards of other emerging markets.”


Despite the gap between rhetoric and reality, some analysts believe Russia deserves credit for lowering spending in real terms by keeping nominal increases below inflation.

Even without the promised cuts, this year’s budget would represent an increase of only around 3 percent from last year, well short of the rise in consumer prices.

This compares with inflation-beating surges during the years of plenty, when oil prices rose ever higher. Thanks to a decade of lavish spending, Russia now needs oil prices of around $70-80 per barrel to balance the budget, up from just $21 in 2006.

Although a weaker rouble has pushed this break-even point down from above $100 in 2010-14, it is still well above the $50 used to plan this year’s budget - let alone the $30 or so where oil is trading now.

Nevertheless, some analysts argue the dangers of a sudden fiscal crunch are exaggerated, as Russia could fund deficits by borrowing even after its savings run out.

But a long, slow squeeze to balance the books is also a cheerless prospect. “The flip-side of the fact that it’s not as dramatic as the headlines suggest, is that the squeeze will go on for longer,” said Shearing. “It’s going to be pretty grim for several years to come.”

editing by David Stamp