Russia is running out of options to plug a yawning hole in its budget – and steps unthinkable before oil prices began to plunge 20 months ago are now being considered.
Two senior financial officials told Reuters that authorities were discussing the possibility of calculating rouble rate levels against the dollar that could compensate for some budget losses caused by tumbling oil export revenues by preventing the rouble from strengthening too much.
They did not say authorities would attempt to publicly set such a rate, and the central bank - which is independent of government – said the rouble rate was determined by foreign exchange supply-and-demand on the domestic market.
But to influence the currency in a way favourable to the budget, the central bank would not have to return to the policy of publicly targeting a rate, one of the sources said. The pace and volumes in which it carries out foreign exchange transactions can affect the strength of the rouble.
The discussions are a measure of the plight facing the Russian budget. It could face an additional shortfall of up to 2.5tn roubles ($31.7bn) this year if crude prices stay at around $30 per barrel, putting at risk the target of keeping the deficit at 3% of gross domestic product.
The steps now being considered by officials to fill the gap are unorthodox – illustrating how Moscow has run out of easy fixes after crude’s plunge from a peak of around $115 in June 2014, and is scraping the barrel to keep the budget on track.
President Vladimir Putin’s government has already suggested it may tap the sovereign wealth Reserve Fund, raise oil taxes, sell off some of the state’s biggest firms or hike dividend payouts from them, among potential measures.
The rouble rate level discussions reflect the fact that a weaker domestic currency would shore up the country’s finances as every dollar Russia earns from exporting oil buys more roubles that can go on state spending - even though in the longer term it could damage the economy.
A spokeswoman for the finance ministry did not return calls seeking comment. But a source at the ministry estimated that a movement of the rouble rate by 1 rouble against the dollar under the current oil price would add or wipe away around 35-40bn roubles from the budget.
There is no suggestion a rate will be publicly set, which is the province of the central bank. In a written reply to Reuters questions, the bank said it was sticking to its floating foreign exchange rate.
Nevertheless, to influence the rouble’s strength, the central bank would not have to reintroduce the practice of publicly targeting a rate, which was withdrawn in late 2014 to maintain gold and forex reserves.
It would be enough for it to speed the pace at which it rebuilds those reserves; building up its reserves involves selling roubles on the market, which could weaken the currency.
Last year, the central bank said it intended to keep accumulating its gold and foreign exchange reserves until they reach a “comfortable” level of $500bn, from $371.3bn now.
The central bank is not currently active in adding to its reserves but can take action when the time is right, said another financial official. “No one has cancelled the target of $500bn,” the source added.
A weaker rouble could offer badly needed support to the budget by bringing in some additional revenues, but it could come at a cost further down the road to the economy, which shrunk by 3.7% last year and is expected to contract by another 1% this year.
Dmitry Polevoy, head economist at ING in Moscow, said a weaker currency could drive up inflation and in the end lead to an increased burden on the budget, as some spending would need to be adjusted for price increases. “I believe the currency rate should not be seriously viewed as a tool helping to solve all the problems. It may be viewed as some kind of balancing factor only,” he said.
Some other measures for plugging the budget shortfall could be less risky.
Privatisation this year, focusing on some big firms, is expected to bring in up to 800bn roubles if successful. Meanwhile, an increase in dividends to the government from state firms, if approved, should bring in another 110bn roubles, the economy ministry said last week.
There are downsides, of course. Privatisation in the current market conditions means selling assets at relatively low prices, and the dividend hike means state firms will have less money for investment, which could hit the wider economy.
Those two measures together would anyway still leave a potential additional budget shortfall in excess of 1tn roubles this year.
Squeezing out money from elsewhere would encounter stiff resistance and, like the other measures, could have long-term consequences for the Russian economy.
According to Sberbank CIB estimates, under an oil price of $30 per barrel the proposal to change the way mineral extraction tax is calculated, announced by Finance Minister Anton Siluanov last week, could beef up the budget by another $12bn.
It would, however, risk a backlash from the politically influential oil industry which argues that higher taxes would mean less investment and a drop in output. Last year, the finance ministry proposed to delay a promised cut in oil export duty, hoping to secure around 200bn roubles. Yet, at an oil price of $30, the extra cash accrued from that delay could be three-quarters less than originally envisaged, according to three financial sources.
The finance ministry has also recently suggested taking back funds from ministries’ budgets that had been approved but not spent as of October 1 of the previous year.