Experts believe that, barring a sudden collapse in oil prices, the 2016 budget will be tough but balanced.

The growing budget hole at the start of the year prompted the authorities to reduce budget spending in real terms by 10 percent. Photo: RIA Novosti

With the Russian government having approved the draft federal budget for 2016 on Oct. 8, this financial document is expected to be submitted to the State Duma no later than Oct. 25, a change from the previous deadline of Oct. 1. Moreover, for the first time since 2008, there will be no three-year plan: the document covers 12 months, period.

Three for the price of one

“There’s no behind-the-scenes intrigue. It makes sense to adopt a one-year budget for 2016 given the high economic uncertainty, taking into account the parameters for the following 24 months on a purely indicative basis,” commented presidential aide Andrei Belousov.

In a climate of high uncertainty, volatility and limited reserves to soften the blow, the government wants to keep its hands untied, says Economic Expert Group head Yevsey Gurvich, adding that decisions will be taken step by step as the situation develops. As an example he cites the crisis in 2009, when the budget reality deviated from the forecast by a third, although in normal “quiet” years the forecast error does not exceed 2-3 percent.

The economic crisis in Russia is clearly to thank for the tightening of budgetary procedures. Having had their fingers burnt by last year’s dip in oil prices, the collapse of the ruble and the manual reformatting of the budget in spring, number-crunching officials have become less bold in their predictions.

After all, if the reality turns out much worse than the forecast, the specter of sequestration will arise and painful cuts to public services could ensure. The advantage of this approach is the far greater rigidity and (hopefully) accuracy of budget structures.

Making ends meet

The parameters for the 2016 budget are not yet known, but the motto is already clear. It was formulated at a recent government meeting by Prime Minister Dmitry Medvedev, who called on his subordinates to “economize on all fronts.” That rings in unison with the task set by President Vladimir Putin to keep the budget deficit to within 3 percent of GDP.

Recall that the growing budget hole at the start of the year prompted the authorities to reduce budget spending in real terms by 10 percent. Since then, Russia’s economic woes have not diminished: oil prices have not risen, GDP continues to fall, and sanctions have not been lifted, which means that the policy of austerity is set to continue.

Nonetheless, despite the continuing economic downturn and the drop in real wages, coupled with the acute weakening of the ruble, the Russian authorities’ main priority is budget stability.

The cuts will not be evenly spread, and the only question is which of the “fronts” will suffer the greatest losses. Most of the polled experts believe that investment projects and programs will take the brunt, while social spending in nominal terms can probably be maintained at the current level or perhaps slightly index-adjusted, but in real terms they will still decline due to high inflation.

“I think there will be some increase in spending in 2016 against this year. A level of 4-5 percent is probably a realistic scenario. Anything higher would signify that the government is somehow trying to stimulate the situation; a lower figure would mean tight budget policy and austerity,” says Alfa Bank chief economist Natalia Orlova.

She notes that despite the talk of spending cuts in previous years, outlays continue to grow. “The growth that we observe more or less corresponds to the economic reality, i.e. it indicates that the government is indeed trying to preserve budget stability in the first instance, not increase spending,” adds Orlova.

As for budget expenditures, they can be kept to a minimum in 2016, keeping the deficit at the required 3 percent level. This opinion was expressed by Russian Minister of Economic Development Alexei Ulyukayev. He believes that Russia can afford a deficit of 3 percent, as this is a “lesser evil” than budget sequestration. However, compared to what was planned in the three-year budget for 2015-2017, costs still need to be cut.

With regard to investment costs, the matter relates to reducing outlays on building new infrastructure and procurements of equipment, and on switching from expensive foreign equipment to more affordable domestic substitutes.

In addition, the government may change its priorities regarding permanent facilities, and simply cut costs or raise the limit on the participation of private business in construction projects at the federal level.

 Recommended: "Why Russia is having flashbacks to its nightmare 1998 default"

The key variable: global oil prices

Meanwhile, the Russian Ministry of Finance proposes to cut fiscal expenditure in the next year to 650 billion rubles (approximately $10.45 billion at today’s ruble-dollar exchange rate). The resulting budget deficit, which to date exceeds 1 trillion rubles ($16 billion), will be covered by the government’s so-called “rainy day fund” – the Reserve Fund.

But on top of the budget planning issues, the main uncertainty remains the price of oil over the coming year. As the experience of the past few years shows, predicting the dynamics is a fool’s game; the figure can only be guessed at. But a great deal depends on this hypothetical number, since oil revenue accounts for around half the Russian budget. Therefore, the price of a wrong forecast is very high.

In any event, to hedge its bets, the Ministry of Economic Development has already included an “apocalyptic” scenario in its new macroeconomic forecast, which provides for an oil price even lower than today’s $55 per barrel. If that were to happen, cheap oil could deprive next year’s budget of about 2 trillion rubles ($32 billion), the dollar exchange rate could remain above 75 rubles, and the recession would probably last until 2017. Of course, this scenario is best avoided. But it is important for the government to consider all angles and not be caught off-guard.

Tighter belts all round

Most of the surveyed experts believe that, barring a sudden collapse in oil prices, the 2016 budget will be tough, but balanced.

“This budget will be much tighter than the current one. Social programs that were inflated by high oil prices will be slashed,” said FBK Institute of Strategic Analysis head Igor Nikolaev. He says that a feature of the new budget will be that, unlike 2015, the cost cutting will hit the defense industry too, which was previously considered a “sacred cow.”

As for the most problematic areas of the new draft budget, Nikolaev highlights the fact that the protracted fall in oil prices has seriously hit treasury revenue. As a result, pensions will not be index-linked to inflation, which last year was about 12 percent and is sure to be even higher this year. Most likely pensions will be indexed at 4-7 percent, which means a further decline in living standards.

The growing budget hole will have to be closed by the Reserve Fund, which can last for a maximum of one more year due to sanctions and restrictions on access to foreign financial markets. Overall, the budget is balanced, but the main risks stretch beyond 2016, believes Nikolaev.

The 2016 budget reflects the economic difficulties facing Russia,” says Higher School of Economics academic director Yevgeny Yasin. In his opinion, the period of economic recovery based on high oil prices is over.

“The state used to be able to offer significant social guarantees, but now that’s impossible. There is no way that the state can provide the same level of social protection as before. Sanctions and the growing budget deficit mean there will be lots of tighter belts in 2016,” posits Yasin.

At the same time, he notes that the one-year budget, though tough, is probably realistic. This means that new shocks to the system  and mainly the wallets of the less well off  will probably be avoided.