Putin Loosens Purse Strings a Bit After Years of Austerity

(Bloomberg) --

After several years of squeezing the budget to build up its reserves in the face of Western sanctions and falling oil prices, Russia is planning to ease off the austerity slightly in a bid to revive a stalled economy.

The government Thursday approved a three-year budget plan that calls for cutting the surplus to 0.8% of GDP next year and near balance in 2022. Last year’s surplus totaled 2.7% of GDP, one of the biggest among major economies.

“Just like this year, the budget in the coming three years will not just be balanced, it will be in surplus,” Prime Minister Dmitry Medvedev said at the opening of the Cabinet session.

Russia’s economic team is now under pressure to revive the sluggish economy as public discontent with stagnant living standards has bubbled up into protests around the country. The Organization for Economic Cooperation and Development Thursday cut its forecast for Russian growth this year to 0.9%. The threat of new U.S. sanctions has also diminished as attention in Washington turns to elections and a trade war with China.

“They’ve raised spending a bit compared to the previous plan in order to address the criticism from experts and government agencies that it was harsh,” said Dmitry Dolgin, chief economist at ING Bank in Moscow. “It would be a real easing if they raised the cutoff price” or invested more of the government’s rainy-day fund domestically, he said. “That’s probably still to come.”

Fiscal Rule

For the moment, Medvedev said the government is sticking to its tight fiscal rule, under which revenue from oil prices above the cutoff price are saved in the rainy-day fund.

“All kinds of events can happen,” he said. “Despite rather high prices for energy resources, we’ve set the cutoff price at the level of $42.40 a barrel of Urals crude in 2020.” Brent crude traded about $64 a barrel Thursday.

Plans for budget loosening have triggered calls for even more government spending to speed up growth, even leading to some rare disputes among Russia’s technocrats. Finance Minister Anton Siluanov warned last week that Russia will have to find additional sources of funding if it plans to open up the coffers even further.

“By 2022 the surplus will only be 0.2%,” Siluanov said last week. “If we start talking about increasing spending, we’ll move into negative territory and we’ll have a deficit. That means we’ll have go to the market for funding.”

New sanctions introduced by the U.S. in August bar American banks from buying new issuance of any Russian sovereign debt that isn’t in rubles. Siluanov said Russia has no plans to sell Eurobonds before the end of the year, but may consider issuance in euros or yuan in 2020.

To contact the reporters on this story: Anya Andrianova in Moscow at aandrianova@bloomberg.net;Natasha Doff in Moscow at ndoff@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Torrey Clark

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