|5 July 2012|
The Kremlin is taking a gamble. It intends to massively invest into the infrastructure that could transform the country into a modern European power, but at the same time it is trying to hedge against increasing the economy's exposure to oil prices.
Currently the break even price of oil (the price at which the federal budget balances) is about $117, compared with just $23 in 2007. As this weeks chart shows, the reason why is that since inflation fell into single digits at the end of 2007, spending on infrastructure has taken off - although President Vladimir Putin's pre-election social spending hikes have hardly helped.
This is unsustainable. Last week Putin told the Duma in his annual budget speech presenting policy guidelines for 2013-2015: "The non-oil and gas revenue deficit is too large. The problems and challenges that we face are to stimulate economic growth, implement large-scale social programs and at the same time, insulate the budget against sharp energy price fluctuations."
The Kremlin's search for a balance between the need to invest into power, roads, rail and ports, and to keep spending low enough so that the economy isnt vulnerable to a sharp fall in oil prices has come up empty handed recently, and so has returned to an old tool.
It's answer to the conundrum is the reintroduction of the budget rule that keeps the non-oil real deficit to about 4.7% of GDP (it was over 13% in 2010 and is currently about 9%). This means that the visible budget deficit (the money the government has after counting in the oil tax revenues) will be about 1% from 2013, said Putin. Any excess revenue will be channeled into the reserve funds, which currently hold about RUB3.7 trillion ($112bn) in addition to Russias $513bn of gross international reserves as of the end of June.
In the meantime the Kremlin is badly exposed to a collapse in Europe, but the hope is that each year that goes by without another nasty crisis or crumpling oil prices allows all that new infrastructure to make the Russian economy more robust and able to better weather storms.
Even if there is a meltdown however, Putin promised that the government will still continue to invest heavily into infrastrcuture: Russia needs to employ a more flexible system of reserve management against a background of economic instability. Investments from the Reserve Fund and the National Welfare Fund into infrastructural projects could meet these requirements."