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Cracks in the Wall

A Shortfall in Oil Revenues Raises the Specter of a Budget Deficit in Russia Federation Council meeting on December 1, 2010 By Tai Adelaja Russia Profile 03/15/2012

When the combative former Finance Minister Alexei Kudrin publicly scolded the Kremlin for overspending in September, he was swiftly shown the door. Yet the warnings of the long-term finance minister may come to haunt the Russian government, which this week reported that Russia's budget deficit grew more than expected. Russia's projected state budget deficit has more than doubled to 245.34 billion rubles ($8.3 billion) or three percent of gross national product, signaling a tough ride ahead for the Kremlin. The figure, released by the Finance Ministry on Tuesday, is a far cry from the 27 billion ruble ($912.6 million) budget deficit reported over the same period last year.

Deputy Finance Minister Tatyana Nesterenko told journalists last month that the federal budget deficit should not exceed 1.5 percent of GDP between January and February. The government, she said, hopes to end the year with a balanced budget or even a surplus, despite extra spending on campaign promises. The current budget gap, the ministry now says, resulted from slightly lower revenues from oil and gas, sales as well as additional expenditures on healthcare and defense.

Former Finance Minister Alexei Kudrin lost his job in September after publicly criticizing the 2.1 trillion rubles ($66 billion) in additional defense spending through 2014. Both President Dmitry Medvedev and Prime Minster Vladimir Putin have defended the high military spending, saying it was in sync with the country’s super power status. Putin added that the country's aging military infrastructure and weaponry needs to be replaced.

In the run-up to the March 4 presidential elections, President-elect Vladimir Putin made large spending commitments in addition to planned increases in public sector wages, pensions, and subsidies. Putin has also pledged to increase spending on the military, health provision, and wages increases. Analysts say the campaign promises, if delivered, could cost $160 billion or eight percent of the projected gross domestic product (GDP) over his six-year term.

According to revised figures published on the Finance Ministry’s Web site on Tuesday, revenues stood at 1.866 trillion rubles ($63 billion) in January to February, while expenditures amounted to 2.111 trillion rubles ($71.3 billion) in this period. The ministry had expected end of February revenue to be 1.897 trillion rubles ($64.1 billion), while spending was expected at 2.021 trillion rubles ($68.3 billion). Despite the new figures, Nesterenko remained optimistic on Tuesday, saying the country may still post a budget surplus this year due to higher-than-expected oil prices. "We can pull this off if only we are as prudent as we were in the past and will not spend additional oil revenues collected this year," Nesterenko was quoted by the Kommersant daily as saying.

The Finance Ministry had expected a budget gap of 1.5 percent of the GDP by the end of 2012 based on the oil price of $100 per barrel. The ministry's figures show that crude was selling at $123.2 from February 15 to March 11. It estimates the country needs an oil price of $117 a barrel to balance its books. Currently oil prices are running between $105 and $110 a barrel for light sweet crude oil, according to Dow Jones Newswires.

Analysts have said that the new figures do not reflect a trend. "Month to month variations in the budget are not very significant," said Yulia Tseplyaeva, chief economist at BNP Paribas. She attributed the wider deficit to expenses carried over from last year. She also said pay increases for military and police personnel, some of which were distributed in February, were a possible factor. “Lower non-oil and gas revenue partly reflects a usual seasonal pattern, but could be also related to weak industrial sector performance,” ING Bank's Russia Chief Economist Dmitry Polevoi wrote in a note to investors on Wednesday. "Falling energy revenue reflects the ‘scissors’ effect of higher ruble flexibility, which despite rising oil prices negatively affects the ruble-denominated flow of revenues.” Polevoi expects the 2012 budget surplus to be at 0.6 percent of the GDP based on current spending plans and oil prices. Spending may be higher "if some or all of Putin's pre-election promises are incorporated into the actual budget plan," he said.

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