Budget deficit throws cloud over government outlays

This week will see the Russian government finalising the budget for the year ahead, with another budget deficit in store, as plans for longer term budgeting are put on hold.

The budget deficit may hit $96 billion in 2010. Federal spending will remain at the 2009 level – around $300 billion – whilst revenues are forecast to fall to $210 billion.

The shortfall will see Government call on reserves to cover the gap, with $80 billion left in the reserve fund and some of the national welfare fund also likely to be brought into play. But Danila Levchenko, Chief Economist at Otkritie, says the government will also be tapping the markets

“The government plans to borrow – on the domestic and foreign markets. I think borrowing should be postponed, taking in consideration the unfavourable conditions on the financial markets. Domestic borrowing could hurt private borrowers, and foreign borrowing will be a burden for the budgets in future years.”

One of the government's main sources of revenue remains oil – with the budget predicated on crude averaging $55/bbl. This week sees it in the high $60 range and if the price remains above $55/bbl, there will be additional budget cash and reduced pressure on the government to borrow.

But Evgeny Gavrilenkov, Chief Economist at Troika Dialog, says cutting expenditure will be a more effective longer term option, and adds that a budget deficit carries significant implications for the Russian currency.

“The only way to finance the deficit is to devalue the currency – it will mean revenues will go up because they come from the oil and gas sector – export duties. But it's not the easy way, because the Rouble is also in short supply. The only way to tackle the problem is not to have deficit at all.”

Cuts to outlays are almost certain in the short to medium term. It is unlikely crude prices will go high enough to solve all the Governments budgetary difficulties, even if they do remain high enough to provide a little more cushion than appeared to be the case in February. And with the mood still fragile on global and domestic debts markets, any borrowing will need to be done with caution.