Temporary budget rule from February 1. The State Duma introduced a new budget rule and merged the reserve fund and the National Welfare Fund
MOSCOW, July 14 – RIA Novosti. At a plenary session on Friday, the State Duma adopted in the second reading a government bill on a new design of the budget rule and on the merger of the Fund national welfare(NWF) and the Reserve Fund based on the NWF.
Budget rule
The cut-off price for Urals oil in the updated budget rule is set at $40 per barrel. Oil and gas revenues received at a price above this level will be directed to reserves.
The bill defines the spending limit federal budget, which cannot exceed the amount of oil and gas revenues calculated based on the base price of oil, the base export price of natural gas and projected exchange rate, non-oil and gas revenues, as well as expenses for servicing public debt. The base price for Urals oil is set at $40 per barrel in 2017 prices and is subject to annual indexation by 2% starting in 2018.
National Welfare Fund + Reserve Fund
In the second reading, amendments were made to the bill on the unification of the sovereign funds of the Russian Federation on the basis of the National Welfare Fund. Deputy Head of the Ministry of Finance of the Russian Federation Vladimir Kolychev explained that such a merger is proposed in conditions where the depletion of the Reserve Fund is predicted against the backdrop of oil prices that have dropped significantly over the past two to three years.
At the same time, the target component of this fund remains the same as the goals of the previous two funds: financing aimed at balancing the insurance pension system, financing the federal budget deficit and co-financing voluntary pension savings. It is planned to form a consolidated fund from additional oil and gas revenues.
If the total volume of funds in the combined fund exceeds 5% of GDP, it is proposed to limit its use to shortfall in oil and gas revenues; if the total volume of funds is less than 5%, then limit this volume to 1% of GDP.
The amendments provide that the funds of the Reserve Fund are credited to the National Welfare Fund (unified fund) no later than February 1, 2018. The Ministry of Finance will publish monthly information on the value of the National Welfare Fund's assets at the beginning of the reporting month, the transfer of funds to the specified fund, their placement and use in the reporting month.
According to the approved amendments, until the volume of NWF funds placed with the Bank of Russia is reached at the end of the next financial year and (or) the first and (or) second year of the planning period 7% of the projected volume of GDP, placement of NWF funds in other financial assets is not allowed, with the exception of financing self-sustaining infrastructure projects started before January 1, 2018.
The Ministry of Finance’s calculations on the main parameters have been published budget system and the ruble exchange rate when implementing the “temporary budget rule” from February. With an oil price of $55 per barrel, the calculated equilibrium exchange rate of the ruble will be 58.05 rubles/$ without converting excess revenues; if this policy is implemented, it will be 64.9 rubles/$. The budget, according to these calculations, is balanced at an oil price of about $58 per barrel and an exchange rate of about 64 rubles/$. Actually finance ministry assumes a devaluation of the ruble in the current situation by approximately 10%.
Reuters, the main information channel for foreign exchange market operators, published official calculations by the Ministry of Finance on the main parameters of the budget, depending on the application of the “fiscal rule”. Let us remind you that the rule as such may be introduced into the Budget Code and involves, in various options, the conversion of part of the oil and gas revenues of the federal budget into sovereign funds, depending on the price of oil. After a meeting with President Vladimir Putin on January 18, a temporary law was put into effect from mid-February, until amendments to the Book Code are adopted. budget rule in the hard version (see Kommersant, January 21). The budget for 2017, calculated based on an oil price of $40 per barrel, is not correct. The Ministry of Finance, through the operations of the Central Bank, stores excess revenues from oil exports in Treasury foreign currency accounts with the Bank of Russia and is ready to spend them (in accumulated volumes) regardless of the expenditure of the Reserve Fund and the National Welfare Fund (NWF) if oil falls below $40.
Based on the calculations of the Ministry of Finance, with oil at $40 per barrel, the estimated average annual ruble exchange rate should be 69.42 rubles/$ (federal budget deficit - 3.1% of GDP, spending of reserve funds - 1.8 trillion rubles). At the current oil price of $55 per barrel, the budget deficit will be 1.5% of GDP without applying the budget rule, and the waste of reserve funds will be 464 billion rubles. (which assumes non-use of the National Welfare Fund in 2017). If the declared regime of constant purchase of reserves for treasury accounts is applied, the deficit will be 0.7% of GDP, the reserve fund will be replenished by 241 billion rubles, the ruble exchange rate should weaken by about 10% and amount to 64.9 rubles/$.
The logic of the Ministry of Finance’s calculations suggests that without applying the budget rule and without devaluing the ruble, balancing the federal budget is possible only with an oil price of $76 or more (the figure was obtained by linear approximation of calculations by Anton Siluanov’s department). With a controlled devaluation of the ruble, which formally does not affect the free floating regime, the budget is completely balanced (zero deficit) at an oil price of about $61 per barrel; a refusal to use sovereign funds is possible in 2017 at an oil price of about $61 per barrel. Without the fiscal rule, sovereign funds will be replenished when the oil price is above about $62 per barrel; with the rule applied, when the price is above $53. The difference in calculations is apparently determined by estimated changes in borrowings on the domestic market. In the latter case, with an oil price above $53, oil additional income in the “buffer fund” at an exchange rate of about 64 rubles/$ will exceed the estimated expenses of sovereign funds in 2017 of 1.8 trillion rubles.
According to calculations by the Ministry of Finance, the current exchange rate level, about 60 rubles/$, is considered impossible. If the “budget rule” is implemented, it will reach this level with oil at about $75-80, with a budget surplus of about 2% of GDP and an increase in the Reserve Fund in 2017 by more than 2.3 trillion rubles. Thus, the statements of the Ministry of Finance and the Central Bank that the budget rule “in general” will not have an impact on the ruble exchange rate are convincingly refuted by the financial department’s own calculations.
The budget rule is perhaps the only one that has proven itself in international experience a working mechanism for reducing the dependence of the federal budget and internal economic conditions on energy prices for commodity-producing countries.
Since 2018, a new budget rule has come into force in the Russian Federation. According to it, all oil and gas revenues from oil prices above the base value set in the budget are used to purchase foreign currency by the Ministry of Finance and place it in the National Welfare Fund (NWF).
The 2018 budget includes prices for Urals oil of $40 per barrel. In the future, this level is subject to annual indexation by 2%. The difference between high prices and this value directly affects the formation of reserves, but this money does not enter the economy.
In the first 4 months of 2018, currency purchases by the Ministry of Finance amounted to 988 billion rubles. Taking into account May, the total volume of funds allocated to the National Welfare Fund will amount to 1.3 trillion rubles. In total, at the end of the year, the department forecasts revenues to reserves of 3.5 trillion rubles.
Oil prices have remained at high levels since the beginning of the year, currently almost 2 times higher than the base price of $40 per barrel. Compared to January forecasts, the estimate of additional oil and gas revenues increased by 1.75 trillion rubles, which corresponds to a budget surplus of 0.4% of GDP instead of the projected deficit of 1.3% of GDP in 2018.
At the same time, budget expenses increase by only 62 billion rubles, since, according to the budget rule, additional oil and gas revenues are placed in reserve and are not spent. Such fiscal policy designed to reduce the economy's dependence on energy prices and create a reliable reserve for periods of shortage.
Spending of NWF funds is available in two cases: a decrease in oil prices below the base price and the fund reaching 7% of GDP. If reserves grow above 7% of GDP, additional funds are invested in infrastructure projects. At average oil prices of $55-60 per barrel, the NWF could reach 7% of GDP in 2020. Assuming that current high oil prices continue, the NWF size target could be achieved even earlier.
The budget rule reduces the economy's dependence on external factors and allows the formation of a reliable reserve for periods of budget deficit.
The rule has a great influence on the exchange rate national currency. If previously, when oil prices rose, the ruble strengthened due to increased sales of foreign currency earnings by exporters, but now this effect is compensated by purchases of foreign currency by the Ministry of Finance. Likewise, if oil prices fall below the base price, sales of currencies from the National Welfare Fund will support the Russian ruble.
The fiscal rule makes the ruble a more stable currency and reduces its dependence on oil prices.
A stable currency maintains the attractiveness of the fixed income market and reduces the risk premium of Russian debt securities due to the lesser impact of oil price volatility on the economy. It also contributes to the formation of predictable macroeconomic conditions necessary to ensure sustainable economic growth.
The rule has a positive impact on exporters oil and gas industry. Due to the strong correlation between oil prices and the ruble exchange rate in past years, the positive effect on company revenue from high oil prices was offset by the strengthening of the national currency.
Now there is no such dependence, which allows exporters to receive greater financial benefits from expensive oil.
Criticism of the fiscal rule
A number of experts criticize the current fiscal rule for being too rigid. The NWF's high threshold of 7% of GDP reduces the effective investment of additional oil and gas revenues in infrastructure projects.
According to supporters of easing the rule, the existing harsh conditions do not allow the country to achieve economic growth rates above 2-3%. In addition, a number of experts refer to the fact that there is a negative impact on social development countries due to excessive savings.
Supporters of the rule existing form They cite as arguments a reduction in the volatility of the national currency, dependence on oil prices and an increase in the predictability of macroeconomic conditions for the real sector of the economy.
Galaktionov Igor
BCS Broker
The State Duma today approved in the second reading a bill introducing a new budget rule and providing for the merger of the Reserve Fund with the National Welfare Fund (NWF). The bill sets the cut-off price for oil at $40 per barrel in 2017 prices - oil and gas revenues received above this level will be directed to a single fund.
Changes to the Budget Code providing for new design budget rule, approved by deputies in the second reading. According to the bill, budget expenses will be calculated based on Urals oil prices at $40 per barrel with annual indexation by 2% from 2018. Only oil and gas revenues calculated from such a base price will be distributed to finance expenses - everything received at a price above the level will be sent to reserves. The new rule will begin to apply when preparing the 2019 budget.
Another change is the merger of the funds of the National Welfare Fund and the Reserve Fund. As of July 1, the volume of the National Welfare Fund was $74.2 billion, the Reserve Fund - $16.7 billion. In the context of the predicted exhaustion of the last funds of the National Welfare Fund by the end of 2018, they are planned to be used both to finance the budget deficit and to balance the pension system. As Deputy Head of the Ministry of Finance Vladimir Kolychev previously explained, if the total amount of funds in the consolidated fund exceeds 5% of GDP, it is proposed to limit its use to shortfall in oil and gas revenues. “If it is less, this volume is expected to be limited to 1% of GDP in order to maintain the minimum permissible amount of funds in sovereign funds,” the official clarified.
The funds from the Reserve Fund will be credited to the consolidated fund no later than February 1, 2018. Until the volume of NWF funds placed with the Central Bank reaches 7% of the projected volume of GDP (at the end of the next financial year or the first or second year of the planning period), placement of fund funds in other financial assets is not allowed. The only exception will be self-sustaining infrastructure projects, financing of which began before January 1, 2018.
Evgenia Kryuchkova
How did the idea of merging extra-budgetary funds come about?
The government generally supported the idea of combining the resources of the Reserve Fund and the National Wealth Fund (NWF), proposed at the end of June by the Ministry of Finance. It's about about the possibility of directing funds from the National Welfare Fund that were not used to finance infrastructure projects to cover the budget deficit, after the funds of the Reserve Fund currently used for these purposes are exhausted. The Ministry of Finance will have to present a mechanism for consolidating funds.
The new budget rule, which should restore strict approaches to the use of oil and gas revenues from 2020, will take as a basis the oil price of $40 per barrel and will take into account the cost of servicing the public debt
Russian Finance Minister Anton Siluanov (Photo: TASS/Alexander Astafiev)
No primary deficiency
The new budget rule - a system of rules for the use of oil and gas revenues - will come into effect in 2020, set the base price of oil at $40 per barrel and will limit budget expenditures so that they must be equal to base revenues minus interest costs for debt servicing, according to the Moscow Financial forum on Friday, Finance Minister Anton Siluanov. “The preparation of the fiscal rule, which we believe can be implemented from 2020, will be that at a price of $40 per barrel we must have a zero primary deficit. That is, all those debt servicing expenses that we will include in budget expenses will precisely constitute the deficit that we can afford,” Siluanov said, as quoted by an RBC correspondent.
In other words, according to the new budget rule, the Ministry of Finance will count oil and gas revenues at a price of $40, add projected non-oil and gas revenues to them (this amount will be considered basic income) and plan budget expenses so that they are no higher than basic income, not counting interest payments on debt .
The new version of the budget rule will be the fourth since the introduction of this practice of public finance management in 2004.
The old budget rule, which was in force in 2013-2015, implied that the budget expenditure limit was equal to basic income plus 1% of GDP. The new rule will replace this 1% with the amount of interest costs, which is currently within 1% of GDP. According to the budget law for 2016, interest expenses this year are planned at 646 billion rubles, or 0.8% of GDP. The primary budget deficit (the deficit excluding debt servicing costs) is planned at 2.2% of GDP, and the Ministry of Finance wants there to be no primary deficit from 2020.
Why $40?
According to the old rule base price oil to calculate oil and gas revenues that can be used for financing budget expenditures, was defined as the average annual price of Urals oil over a five-year period with an annual increase in this period by one year up to ten years (averaging over a ten-year period was supposed to begin with the 2018 budget). Surplus revenues (oil and gas revenues from the excess of real prices over the base price) were transferred to sovereign funds. The rule worked with rising oil prices, but in 2015 the estimated price of oil under the fiscal rule was $96, while the actual price fell to $50. Therefore, for 2016, the budget rule was suspended, and in its place temporary rules were introduced (valid until February 1, 2017), allowing oil and gas revenues and savings from reserve funds to be spent to finance federal budget expenditures.
It is now proposed to use the conservative price of $40 per barrel in the budget rule instead of the average oil price for previous years. This price was taken because it corresponds to the profitability threshold for shale oil production in the world ($40-50), explains a high-ranking federal official familiar with the plans of the Ministry of Finance. According to him, the department soon wants to submit a legislative initiative to the new Duma in order to introduce a budget rule from 2020. A representative of the Ministry of Economic Development told RBC that the document had not been received by the ministry.
The average price of Urals in January-August 2016 was $39.36 per barrel, and in August it exceeded $40 per barrel ($43.9). If the new budget rule were in effect now, the reserve fund would be replenished in August.
The question of the cut-off price - $40 or closer to $50 - is still to be discussed in the government, a federal official tells RBC. The Ministry of Finance proposes to index it annually to dollar inflation (in 2014 it was 1.6%, but in 2015 - only 0.1%), a source close to the Ministry of Finance previously told RBC. Overall, the fall in oil prices and volatility foreign exchange market forced the Ministry of Finance to take a different look at the purpose of the budget rule. Its meaning should be broader than just an opportunity to stabilize state finances, the task is to “isolate the economy from the volatility of oil prices,” says an interlocutor in the government’s financial and economic bloc. We are talking about “so that the real effective exchange rate of the ruble does not fluctuate so much with oil prices and that relative prices in the economy, inflation, exchange rate conditions and everything that affects the profitability of companies in different sectors.”
“We are guided by the fact that our budget deficit should gradually decrease by one percentage point annually. If we choose $40 as the cutoff price, then we arrive at balanced budget by 2020, if we choose $50, we come to 2019. Depending on what the cut-off price is, the moment will be determined when the budget rule will work fully,” says an official from the financial and economic block.
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