Russian macro: how Minfin’s actions hamper the effectiveness of CBR policy

RUSSIA ECONOMICS - Report 15 Nov 2021 by Evgeny Gavrilenkov and Alexander Kudrin

Russian federal budget revenues soared this year and exceeded the initial annual plan by 8.9% in 10M21. Oil-and-gas revenues were 21.8% higher than expected, while the rest of the revenues were 2.1% above the planned annual amount. In 10M21, the government spent 85% of budgeted expenditure, which means even allocation by month of the initial budgeted amount. Revenues soared due to an unforeseen surge in inflation and higher-than-expected oil prices. The federal budget is just one part of the Russia’s consolidated budget, which also incorporates regional budgets, federal and regional extra-budgetary funds, while the regional governments are closely linked to municipal budgets.

In 2021 so far, not only the federal budget but also the rest of the enlarged government was in surplus. The situation will somehow change by year-end as budgetary financing will increase; the government had spare cash and offered it to the banking system via REPO deals, deposits and some smaller transactions. As a result, injections of liquidity from the government remained an important factor that affected the money market.

Minfin’s liquidity injections have grown in importance ever since the fiscal rule was re-introduced in 2017 and have effectively become an integral part of monetary policy. Some forms of such transactions can be considered a Russian version of QE. Several trillion rubles of the public money deposited by the Minfin and the Federal Treasury with banks requires no collateral and can be considered a form of QE orchestrated amid rising inflation and key rates. A peculiar mix of quantitative measures and high policy rates appears inflationary and distortive and may not be sustainable in the long run. This mix also reduces the effectiveness of the CBR's interest policy. Inflation will start coming down after the Ministry of Finance and the Federal Treasury reduce the scale of their operations on the money market.

* The 10M21 federal budget posted a surplus over R2.1 trln. As revenues exceeded the plan by a high margin, the government decided to raise 2021 expenditures to around R24 trln from the planned R21.5 trln.

* Despite the expected rise in expenditure over the rest of the year, the federal budget is likely to remain in surplus in 2021 as a whole.

* The federal budget represents around one half of this consolidated budget but is the major source of funding for the rest of the system (the regional budgets and various extra-budgetary funds, such as the State Pension Fund, the Medical Insurance Fund, and some others).

* The federal budget is the main beneficiary of high oil prices as it collects most oil-and-gas revenues, such as export duties, MET, etc. At the same time, it also takes a major hit if the oil price falls. Hence, a rather cautious approach to federal budgetary planning.

* However, a too-cautious policy and excessive absorption of liquidity by the budget forces the government to return this liquidity back into the system, which often appears distortive.

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