Building self-control:Russia’s new fiscal rule

Russia is breaking its oil habit. Starting from 2019, it will adopt a new fiscal rule toshield the economy from oil swings. Transition to the rule will start next year.。

    The new fiscal framework has three pillars: expenditure benchmark, the sovereign fund,and public borrowing rules. The expenditure benchmark puts a cap on federal budgetspending, delinking expenditure from volatile oil revenues. The government will target a1% of GDP federal budget primary structural deficit (defined as the fiscal balanceexcluding the cyclical component of oil revenues and debt interest payments) in 2018.We think this is feasible. From 2019, the target will be 0% of GDP.。

    The second pillar defines the mechanism for handling excess oil revenues (or lackthereof). The authorities will replenish the sovereign fund in case they get extra oilrevenue or utilise it if commodity markets disappoint. The sovereign fund rulerepresents a modified version of the current FX purchases mechanism, applied bythe Ministry of Finance (MOF) to curb oil-driven rouble strength in real effectiveterms. The government’s medium-term oil price assumption is USD40/bbl in 2017prices. We estimate total hard currency purchases will reach USD12bn in 2017.This sum will more than double next year, reaching USD25-28bn, assuming anaverage oil price in the mid-50s. Each additional USD1/bbl oil price increase wouldadd USD2bn to the MOF’s hard-currency purchases, according to our estimates.。

    Finally, the public borrowing rule safeguards the sovereign fund from being utilised inthe event of a non-oil budget revenue shortage or a shortage of budget deficitfinancing. The MOF believes the public borrowing rule will keep public debt at astable and low level and minimise the impact of public borrowing on interest rates forprivate sector debt. Under base parameters, annual net public borrowing should notexceed 0.8% of GDP in the coming years.。

    The underlying reason for implementation of the new fiscal rule is desire to create asustainable and balanced model of economic growth. The rule will also complementinflation targeting in promoting macroeconomic stability (please see: The need forspeed: Why Russia must boost its potential growth rate, 11September 2017). We donot think the new fiscal rule will weigh on Russia’s short-term growth outlook, asfiscal multipliers are low and monetary easing continues.。