Russian economy: More sanctions, more resilience
It appears almost certain that, after the US administration sanctioned the OFZ market, more sanctions will be imposed later this year, and in the years to come, as both sides, i. e., the West and Russia, will be keen to continue playing the same game for years, and even longer. Therefore, mounting sanctions will continue to shape Russia’s economic policy accordingly. Russia does not need additional spending to stimulate the economy as doing so mostly inflates prices rather than stimulates growth in real terms. The country’s budgetary policy will remain conservative, enabling the government to run the budget without major deficits in the years to come.
The ruble price of oil (Urals) increased considerably in recent months, and not due to higher USD prices alone, but also due to a weaker ruble as the Russian currency fell amid expectations of new sanctions. The weaker ruble, though, helps the Russian budget. If oil prices and the USD/RUB rate stay at current levels, then the federal budget may be able to collect around R1 trln of oil-and-gas revenues above the budget plan. The weaker ruble also helps the non-energy sector to grow, while the government can collect additional taxes as well. All in all, if sticking to the current version of the official budget, then it may be nearly balanced this year, implying no need to rely on borrowing.
* The Russian budget has become more resilient to external shocks because since 2014 the emphasis of taxation has shifted from taxation of energy exports toward the broadening of the tax base, while the total level of taxation has remained moderate. Increased mineral resource taxes amid lower export duties on energy exports is just one example.
* The role of the VAT has increased in recent years as well, and this tax is easy to administer. The share of oil-and-gas taxes in total revenues of the federal budget fell to around 30% in 2020 and 1Q21.
* Sanctioning OFZs and discouraging foreign investors from buying Russian debt will in turn discourage the Russian government from borrowing excessively, as happened in the past and was stipulated by the fiscal rule. The government over-borrowed last year, and it borrowed even when the budget was in surplus, thus crowding out other borrowers and keeping domestic interest rates elevated.
* The government is likely to significantly reconsider its borrowing plans in 2021 and beyond, so that borrowing in excess will not distort local money markets as much as previously. Hence a better macroeconomic environment can be expected going forward.
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