PRESS: Russia’s GDP may fall by 5% in 2020 – finance minister

MOSCOW, May 6 (PRIME) -- The Finance Ministry expects Russia’s gross domestic product (GDP) to contract by 5% in 2020 under the baseline scenario, Minister Anton Siluanov said in an interview to Vedomosti business daily published on Wednesday.

“There are several scenarios, and all of them are not too optimistic. We used a 5% GDP contraction this year as the baseline scenario, and meets the estimates of the central bank (which expects the economy to shrink by 4–6% this year),” he said as quoted by Vedomosti.

Budget deficit should amount to about 4% of GDP this year, while budget revenue may contract by about 4 trillion rubles as compared with the plan. Oil and gas revenue will fall by 1.5 trillion rubles and non-oil and gas revenue by about 2 trillion rubles.

But the government will not cut spending, it will even increase it. “We will use the money of the National Wealth Fund and borrowing to finance current obligations and the anti-crisis programs,” Siluanov said.

Budget spending will be raised by 1.07 trillion rubles in 2020, as the government will use the income from the purchase of the controlling stake in Sberbank from the central bank. “And we should stay at this increase of the spending. We also have carryovers from the previous year of 1.1 trillion rubles, and will spend a part of them,” he said, adding that the coronavirus force majeure should not result in a nonfulfillment of the budget this year.

He also said that spending on national projects in 2020 may be adjusted, but all social obligations would be fulfilled.

Average support of the economy from the budget will exceed 6.5% of GDP this year. “So far, we made decisions on 2.8% of GDP, but it does not include spending from the National Wealth Fund’s money and additional borrowing that we are doing to support the planned spending. This is a counter-cycling budget policy: we finance spending in full in spite of losses in revenue. Taking into account this money, support of the economy may be estimated as more than 6.5% of GDP,” he said.

The government will spend 200 billion rubles on support of the healthcare and epidemiologic sector, more than 250 billion rubles on social support, 800 billion rubles on support of the economy, about 200 billion rubles on support of regions, and more than 400 billion rubles to balance non-budgetary funds, he said.

He said that there is no underfinancing of the medical industry from the budget. In other countries, private money goes into the healthcare sector, as people pay for medical insurance on their own, while in Russia the state has a part in it.

“What does underfinancing mean? Insurance principles should work in medicine. They should spend as much money from the fund for obligatory medical insurance as they collected. But specific tasks and projects like upgrade of primary healthcare are a completely different story. In this case, budget resources that exceed insurance payments are spent,” he said.

The government already approved two anti-crisis packages and is working on a third that should help companies relaunch operations after the mandatory downtime, he said.

He said that the ministry wanted to raise Russia’s sovereign debt by 1.5–2% of GDP to compensate non-energy revenue shortfalls to 4–4.5 trillion rubles this year.

At the same time, the cost of debt for Russia is high. “We borrow at 5.5–6.3% now, while the developed countries borrow at less than 1%. We spend more than 800 billion rubles each year on interest, and we will pay about 1.5% of GDP per year if we double borrowing, which is more than 6% of the budget, so we would have to cut other spending,” he said.

There is no economic sense in using the entire 5 trillion ruble growth of lending by banks to finance budget deficit, thus eliminating the interest of banks in lending to the economy. Banks eagerly buy Russian state bonds, but the government has to know where to stop and not to offer too high yields, he said.

BUDGET RULE

Abandoning the budget rule is dangerous for the budget and macroeconomic stability, Siluanov said.

“Judging by the experience of previous debt and budget crises, we came to an optimal budget formula, or the budget rule, when the budget balance is reached at a baseline oil price, which now stands at U.S. $42.4 per barrel. We added 0.5% of GDP to spending to raise financing of infrastructure temporarily until the national projects are finished. This method creates stability for the budget, it helps us forecast maximum state spending, it creates no risks for fulfillment of obligations,” the business daily quoted him as saying.

“That is why the suggestions to forget the budget rule and spend regardless of our abilities are dangerous to the budget and for macro stability,” he said, adding that the rule creates enough flexibility for the budget as it allows the government to raise debt to compensate lost non-oil and gas revenues.

Nevertheless, the cutoff oil price under the rule is too high today and should be revised. “We want the cutoff price to work. We should stop it today as it is growing by 2% each year, and it will grow to $44 per barrel in 2022. It is too high of a threshold in the current situation,” he said.

OIL PRICE

Russia has created necessary financial cushions and will weather the oil price of even $10 per barrel, Siluanov said.

“If the Urals price had been below $15 five years ago so the budget does not receive a kopeck of oil and gas revenues, it would have been a crisis. But now we don’t even pay that close attention to oil because we have created necessary financial buffers and we will survive even at a price of $10. This is a war of the past, and we are ready for it, we are now facing a challenge of a completely different scale,” he said.

The ministry sees the average oil price of about $30 in 2020, he said.

Participation of the U.S. in the OPEC+ deal is a key factor for success. Even if Russia and the OPEC states had made a deal in March, the countries still would have to revise it as demand for oil and oil products plummeted due to the coronavirus pandemic, he said.

TAXES, PREFERENCES

A damping mechanism, or a reverse oil excise compensating growth of prices for raw materials for the oil refining sector has paid off, oil companies are not asking for any changes, Siluanov said.

“We introduced the mechanism during high prices, and we couldn’t spare money from the National Wealth Fund for them. But the situation has reversed now, and everything is fair. We had to think about the future and prepare for different times during high oil prices. Oil companies have not asked us to revise the damping mechanism,” he said.

He also said that new oil tax preferences are irrelevant now due to the OPEC+ oil output reduction deal.

“Speaking of preferences, Russia decided to reduce oil production together with OPEC+ and new preferences that would be necessary to raise it have become irrelevant. It would be strange to speak about additional preferences now,” he said, adding that all tax preferences should be based on investment obligations.

“If you get 100 rubles of preferences, please send it to investment instead of dividends,” he said.

The government is not discussing any proposals to raise or cut taxes safe introduction of the tax on income from large deposits with banks. He said that a write-off of debts is not the best way to create incentives for businesses during the pandemic.

“We can restructure debts, including tax arrears. We are discussing measures to help businessmen minimize the burden of circumstances that they will have accumulated by the date they end the downtime. We are not discussing a decrease of taxes, we are discussing a tax stimulus that would allow them to improve activity. We plan no serious  changes in taxes,” he said.

He also said that the state-controlled companies should pay at least 50% of their net profit calculated under International Financial Reporting Standards (IFRS) in dividends. The companies are allowed to delay dividends, but the government’s position on the dividend amount did not change, he said.

The government also does not think that direct distribution of money to the Russians during the coronavirus pandemic is a good thing. Russia would have done it if the ruble were a global reserve currency, but now it has to support those who need it most. It has to support businesses and help them keep their employees, it has to help people to cover priority spending, or their spending on food, housing, and credits, he added.

(72.7263 rubles – U.S. $1)

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