Russia’s budget: Stress-testing budget sustainability
The reported daily number of contaminated in Russia has continued to grow in the past ten days at a rate of around 15%, posting no clear acceleration. It is becoming increasingly likely that the total number of contaminated may start peaking in a month or so as the spread of the disease has intensified in the regions as well (even though the bulk of reported cases originated in the Moscow area).
It cannot be ruled out that economic activity in the country will remain suppressed during the entire 2Q20 – currently this is our working scenario. Various sectors of the economy will be impacted differently, but quite a visible GDP contraction, from 3.5% to 7.0% in 2020 as a whole, is what Russia is going to face. This range is quite wide and stems from the highly uncertain situation in Russia and worldwide. In this scenario, the budget deficit may easily exceed 4% of GDP not due to expected amendments on the expenditure side alone, but mostly due to contracting revenues.
* The 1Q20 official statistics are not available, but it looks as though economic activity started picking up early in the year, as amid decelerating inflation non-oil-and-gas revenues of the federal budget increased by 13.4% y-o-y. As the oil-and-gas taxes declined by over 10% over the same period, total revenues were up by 3.1%.
* GDP growth for 2020 as a whole will be largely determined by the 2Q20 results, as traditional seasonality in GDP q-o-q growth in the second half of the year can hardly be broken due to capacity constraints.
* Several segments of the services sector will take a major hit. However, production of some goods will suffer as well. A wide range in the estimates of GDP growth largely stems from the fact that some quite sizeable sectors are true unknowns. According to scattered reports by real estate agents, sales of real estate nearly collapsed during the lockdown since the end of March.
* The initial R13.1 trln target for non-oil-and-gas federal budget revenues will not be reached. The likely 2020 level will be around or even below R12 trln – less than in 2019. Assuming a $25/bbl Urals price in April–December, oil-and-gas taxes will reach R4.4trln.
* Hence if a serious lockdown lasts the entire 2Q20, total federal budget revenues may at best only slightly exceed R16 trln. Financing expenditures of around R20.5 trln looks manageable though the deficit will exceed 4% of GDP (it may be lower if the ruble weakens amid a prolonged period of $25/bbl oil prices or if the oil price rebounds later in the year). Given the size of the government’s cash pile, it can in principle finance an even larger deficit.
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