Publication: Monitor Volume: 7 Issue: 155

Deputy Prime Minister and Finance Minister Aleksei Kudrin announced on August 21 that the government has approved the draft budget for 2002 (Interfax, August 21). The ministry will now proceed to present the budget to the Duma. It anticipates no difficulty in obtaining the Duma’s approval. According to Kudrin, the government’s proposed budget addresses all the major priorities that have been expressed by the deputies. The government’s fiscal policy is currently in excellent shape, and despite ambitious plans to improve the lot of state employees (hiking wages by 70-80 percent at an additional cost of 60 billion rubles), increase spending on defense and education, and reduce the burden of taxation, the proposed budget for 2002 provides for a surplus of 1.2 percent of projected GDP. The budget forecasts economic growth of 4.3 percent and inflation at 12-14 percent. The growth target is probably a safe assumption, but the projection of inflation in 2002 is optimistic in light of considerable upward adjustments that must be made in administered prices to help trim budgetary subsidies to consumers. A critical further assumption in the budget is an average world market price of oil of US$22 per barrel in 2002.

Kudrin will promise the Duma that even if the world market price of oil falls substantially below the US$22 assumption, there will be no need to reduce expenditures below the budget targets. Shortfalls in revenues would be made up, according to Kudrin, from financial reserves to be set aside from privatization receipts, sales of state reserves and contributions to the budget from the profits of state-owned enterprises. Nevertheless, the government will ask that the ceiling on foreign borrowing for next year be lifted by US$1.5-2.0 billion. With Russia’s fiscal situation looking strong, the government would like to test the waters of the international capital markets with an eye to building a multiyear state reserve for priority expenditures. The government suspects that conditions may now be right to tap the Eurobond market to reduce the probability of facing painful choices between politically sensitive domestic spending programs and the need to meet foreign obligations over the next few years.