Russian macro: Combined 2020-21 budget plan reasonable, external balance stable – expect unhurried growth
The Finance Ministry announced that both oil and gas revenues and revenues not associated with this industry continued to rebound in September, with VAT and excise taxes accounting for the bulk of non-oil and gas revenues, pointing to a continued gradual rebound of the economy.
In 9M20, the government spent around three quarters of the “pre-pandemic” annual target, i.e., actual spending was on track to smoothly reach the latter. This rather even allocation of funds from the federal budget in 9M20 may indicate that Russian businesses went through a difficult period in April–September largely on their own, with limited stimulus from the government.
In 9M20 total exports fell by around 24%, and imports decreased by a mere 7%. Previously, during various external shocks, such as in 2015, when the ruble was not backed by FX intervention from the CBR or Minfin, imports would shrink more than exports. Despite a much narrower current account surplus this year Russians continued to import various consumer durables, such as fridges, dishwashers, or flat-screen brainwashers in relatively high volumes. Previously, the weaker ruble helped local producers to find opportunities and fill some niches in various markets as imports were trimmed.
At the same time, Russia’s unhurried economic growth is naturally accompanied by a gradual adjustment of the economy that has already resulted in a lower reliance by the federal budget and the trade balance on the energy sector.
* The pandemic reality prompted the government to promise a massive increase in spending this year. The new draft plan suggests that federal budget spending should rise by around R2.9 trln over the initial pre-pandemic R19.7 trln target. If so, then the government will need to spend R7.7 trln by year-end. The task looks quite challenging, especially if one thinks about efficient spending, not just throwing money here and there. Historically, such large quarterly spending has never occurred. Therefore, the fiscal rule in 2020 was effectively suspended, but only concerning one of its constituents, namely spending. Another “pillar” of the fiscal rule is FX interventions, which are still in place and produce distortions.
* On top of that, the Minfin’s FX interventions helped foreign and quasi-foreign investors get more foreign cash than would have been possible without those interventions and take it out of the country, keeping the investment income balance strongly negative. As these arrangements do not look ideal and they are not going to change any time soon, the Russian economy is set to continue muddling through, presenting GDP growth below the global average.
* The balance of payments statistics show that the services balance became less negative than in 9M19 amid the narrowed trade surplus. As foreign trips account for a significant part of Russia’s import of services, it was not the weaker ruble that helped reduce the services balance, but administrative restrictions on travel. The reduced negative investment income balance is another major factor that helped keep the current account in surplus.
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