Central Bank of Russia: One possible way to preserve current fiscal rule is adjustment to oil and gas sector taxation

MOSCOW. Aug 14 (Interfax) - The stability of the fiscal rule with the current risk that long-term oil and gas revenues will remain below the baseline it has set will be one of the most important factors in shaping budget policy for the coming years, the Central Bank of Russia of Russia said.

"One of the most important factors in budget policy planning in the medium term will be the risks of exhausting the liquid part of the NWF funds and the stability of the current budget rule (validity is based on 8-8.3 trillion rubles in 2023-2026 in basic oil and gas revenues). Under conditions of sanctions pressure on Russia and a gradual cyclical decline in world prices for raw materials, there is a possibility that oil and gas revenues will remain below the baseline for a long time even with a moderate weakening of the ruble," the draft Guidelines for the Unified State Monetary Policy for 2024 and the period 2025 and 2026, published by the Bank of Russia say.

A possible way to maintain the budget rule in the current structure and move toward gradual accumulation of the National Wealth Fund (NWF) is a possible adjustment in the taxation parameters of the oil and gas sector, the Central Bank said.

Making its estimates, the Bank of Russia takes into account the budget consolidation strategy with a gradual return to fiscal rule-based expenditure budgeting in 2025-2026. The rule's transitional provisions provide for additional financing of expenses in of up to 2.9 trillion rubles in 2023 and up to 1.3 trillion rubles in 2024. Earlier, the Finance Ministry said the government, taking into account the assessment of the situation in the economy and the financial system, might consider scaling back the use of NWF funds to finance additional expenses.

In the event of looser budget policy due to longer normalization or a more significant structural primary deficit in the transition period, pro-inflationary risks could increase and the government's debt sustainability deteriorate. "This might occur due to growth in borrowing, higher yields on government securities and higher costs of servicing OFZ-PK and OFZ-IN bonds," the draft says. This would lead to higher risk premiums and domestic interest rates, and squeeze private demand for credit. "Maintaining a sustainably loose fiscal policy in the long term raises the neutral interest rate and requires a sustainably tighter monetary policy," the Central Bank said.

Some of the stimulus from high budget spending in 2022-2023, according to the Central Bank, will be felt over a certain subsequent period of time due to the gradual introduction of significant advance transfers to the economy. A significant role is being played by the approved indexation of the minimum wage by 18.5% from January 1, 2024, and adjustments to the indexation of pensions, social benefits, maternity capital and wages in the public sector.

The full impact of fiscal policy on aggregate demand and inflation in 2023-2026 will depend on possible changes in the structure of budget expenditures by type and purpose, including in the share of public procurement, capital investment, social transfers and wages in total assignations.

Additional support for the economy during the post-crisis recovery period will be provided by investments from the NWF in projects within the country. Their limit in 2022-2030 is set at 5.1 trillion rubles, including up to 3.5 trillion rubles in 2022-2025. Net investment of NWF funds amounted to 900 billion rubles in 2022 and to 300 billion rubles on H1 2023. Since August, in addition to regular fiscal rule-based transactions, the Central Bank returned to the practice of mirroring operations for investing NWF funds in rubles when selling foreign currency. This year, sales will amount to 250 billion rubles, and in 2024-2026 they might reach 600 billion rubles annually. These operations will have an additional impact on the balance of payments and banking sector the liquidity, the document says.

The Russian Finance Ministry for the first time since February last year switched to buying foreign currency/gold under the budget rule. So, from August 7 to September 6, the daily volume of purchases was determined to be equivalent to 1.8 billion rubles. The Central Bank later said it would not mirror those transactions on the domestic market from August 10 so as to reduce market volatility.

Russia's federal budget deficit was 2.817 trillion rubles or 1.8% of GDP in January-July 2023. Over the past month, the size of the deficit increased by 222 billion rubles.

Overall, a deficit of about 2.9 trillion rubles, or 2% of GDP, is expected for 2023. However, according to Finance Minister Anton Siluanov, it may amount to 2%-2.5% of GDP for the year as a whole.