Budget Deficit to Devour Russia’s Reserve Fund in 2010

by Alexander Melikishvili

On Monday, July 27, the Director of the Department of Budgetary Assessments of the Russian Ministry of Finances Alexei Lavrov held a press briefing in which he provided at least partial empirical confirmation of U.S. Vice President Joe Biden’s remarks to the Wall Street Journal regarding the pitiful state of Russian economy. At the press briefing, which was organized on the eve of submission of the draft federal budget for 2010 for the approval of the Russian federal government scheduled for today, Mr. Lavrov presented the overview of the draft budget, which contained the following highlights:

– The Reserve Fund, one of the two Russian sovereign funds, is expected to be depleted by the end of 2010 because the government will use it to cover the growing budget deficit. It should be noted that as of July 1, 2009, the Reserve Fund amounted to 2.96 trillion rubles ($95.1 billion), but Prime Minister Vladimir Putin’s decree issued on July 22 will decrease it by 1.36 trillion ($43.7 billion) to finance the state budget in the third quarter, and in 2010 the remaining 1.6 trillion rubles ($51.4 billion) will be spent for the same purpose. The Economist already called this measure “an astonishingly rapid depletion of a huge fiscal reserve.”

– Russia’s other sovereign wealth fund, the National Welfare Fund, which amounted to 2.8 trillion rubles ($90 billion) as of July 1, 2009, is expected to decrease to 2.3 trillion ($74 billion) by the end of 2010, and it will be further reduced to 1.6 trillion ($51.4 billion) in 2011, and to 940 billion ($30 billion) in 2012, according to the projections released by the Russian Finance Ministry.

– The state budget deficit this year will be equal to 9.4 percent of the gross domestic product, while in 2010 and 2011 it is expected to account for 7.5 and 4.3 respectively. As this exhaustive compilation of the Russian news reports of Lavrov’s briefing indicates, the Russian Finance Ministry bases the aforementioned projections on a rather conservative estimate of oil prices, which are pegged at $55 per barrel in 2010, $56 in 2011 and $57 in 2012 (for comparison, on Wednesday the price was registered at $63.04 per barrel).

– Finally, for the first time since 1998, the Russian Finance Ministry will sell abroad 613.6 billion rubles ($20 billion) worth of Eurobonds in 2010 to finance the state budget shortfall. As Reuters reports, over the next three years the Russian government plans to borrow abroad $58.6 billion. As a result, by 2012 Russia’s foreign debt will amount to 16.4 percent of the GDP.

Such a drastic reversal in the financial fortunes will invariably have an impact on Russia’s foreign and, possibly, domestic policy over time. Undoubtedly much depends on the price of oil, but if the current trend continues, then the Kremlin may suddenly become more malleable and certainly more cooperative on the issues of importance to the United States and its Western allies, including strategic arms control, North Korea and Iran. While this does not necessarily mean the repeat of the 1990s, the more the Russian economy is dependent on Western financial infusions the more it is likely that the Kremlin will start to behave less as a spoiler on the international arena. In this regard, President Medvedev’s surprisingly candid admission of Russia’s inferiority in the strategically important area of supercomputers in his speech delivered at the National Security Council meeting on Tuesday, provides a rare glimpse at Kremlin’s new found humility. However, as to whether this will force the Kremlin to abandon its idée fixe of the “sphere of privileged interests” (which the Russian officials repeatedly fail to define) in the post-Soviet space remains to be seen.