Kudrin: budget deficit in 2016 when the price of oil at $30 will reach 6% of GDP

Kudrin: budget deficit in 2016 when the price of oil at $30 will reach 6% of GDP

DAVOS, 20 January the deficit of the Russian budget the average annual oil price at $30 per barrel will reach 6% of GDP, said former Finance Minister Alexei Kudrin.

“When the price of oil at $30 per barrel, the budget deficit will be 6% or more,” Kudrin said on the sidelines of the world economic forum in Davos, Switzerland.

According to the Minister of Finance, the GDP in 2016 with an average annual oil price of $30 can reach 2%, and the peak of the crisis are still ahead.

“If the price will remain at $30 per barrel, the decline in GDP could reach 2%,” said Kudrin.

“The peak of the crisis still ahead,” he added, stressing that the expected this year, capital outflow at $40-50 billion will become a serious burden for the economy.

However, Kudrin stressed that the Bank of Russia should not intervene to support the ruble and to depart from the regime of free floating of the national currency.

“I believe that if the Central Bank went in the free swimming, then he should not intervene,” said the ex-Minister of Finance.

Russia must abandon any hope for high oil prices

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Former Finance Minister also said that the Russian government must abandon hopes that oil prices will rise again, and within 2-3 months to determine the long-term reform strategy.

“Russia should understand one thing. We must abandon hope for high oil prices and to do so unconditionally”, – Kudrin said on the sidelines of the world economic forum in Davos, where he plans to hold a series of meetings with leading experts on the oil market.
Kudrin offered to take a $35 or $40 per barrel as a benchmark and calculate the budget based on that price, extracting the surplus in the event of their occurrence.

“The current crisis has shown that in the oil market can be everything. We must understand that the price of oil may reach very low values, and we should not jeopardize social policy, defense and infrastructure”, – said Kudrin.

The former Minister added that, in his opinion, oil prices can return to the levels of 40-50 USD per barrel, but it will happen in the long term. He suggested that the government establish a long-term reform strategy.

“The next two to three months for Russia – this time develop a answer to all these challenges. Russia will have to deal not only this year, but its strategy”, – Kudrin said, stressing that existing problems cannot be solved within one year.

“The task of government is to make the Russian economy stable at all oil prices,” said Kudrin.

About the use of NWF for financing of pensions

The Pension Fund deficit can be financed from the funds of the national welfare Fund (NWF), which can be combined with a Reserve Fund. This opinion was expressed in an interview with the former Minister of Finance Alexey Kudrin.

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Kudrin was the author of the idea of establishing two funds in the Russian budget. In this case the Reserve Fund may be used to cover operating expenses in case of a fall in oil prices, while the national was conceived as a long-term tool to support the pension system.

NWF funds were supposed to invest in instruments with higher yields in the long term, in particular some of the Russian industrial and infrastructure projects were funded from the NWF.

“During pension reform, I believe the use of the NWF to cover the Pension Fund deficit is warranted. Thus, NWF will leave the category of long-term resources and will not be fundamentally different from the Reserve Fund,” Kudrin said.

Russian pension system is in deficit. The Pension Fund deficit is financed by the Federal budget. Kudrin offer means the actual dismantling of the system created by him to save the windfall profits from oil sales.

“The nature of the funds will cease to be different and it makes no sense to keep records of two funds,” he added, proposing to transfer management of the investment from the national wealth Fund in Russia Vnesheconombank.

According to the Finance Ministry, on January 1, 2016 aggregate amount of the Reserve Fund amounted to 3.64 trillion rubles, the volume of Fund of national welfare of $ 5.23 trillion.

The budget deficit of the Pension Fund of the Russian Federation in 2016 will be 175,1 billion roubles, the income of the FIU in 2016 are estimated to total 7.5 trillion rubles, transfers from the Federal budget will amount to 3.2 trillion rubles.

The mitigation of anti-Russian sanctions

Alexei Kudrin also said that Western countries could soften sanctions imposed on Russia over events in Ukraine, at the end of this or early next year.

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According to him, the most sensitive in economic terms is a ban by the European Union and the United States on long-term financing of a number of major Russian companies, including Rosneft, Sberbank and VTB.

“Today, I have a more optimistic view of the easing of sanctions. They will not be cancelled, but this year or early next to begin the movement, that is, any penalties can be mitigated or eliminated,” Kudrin said on the sidelines of the world economic forum in Davos.

He noted that many Western businessmen and politicians in Davos in private, I hope for a speedy lifting of sanctions.

However, the lifting of sanctions will be preceded by a statement of progress in the implementation of the Minsk agreements reached within the framework of the negotiations “channel four”, the group to resolve the conflict in Eastern Ukraine, which includes representatives of Russia, Germany, France and Ukraine.

“If the final decision finds compliance, I think that the easing of sanctions can occur within one and a half months,” Kudrin said.

About raising some taxes

The Russian government is likely to be forced to raise some taxes to cover the budget deficit, said the former Minister of Finance of the Russian Federation.

“It’s very likely, based on the analysis of the actions and statements of the government and key politicians of the “United Russia”. If we don’t touch defence spending and social spending, the probability of tax increase, even small, though large – 99,9%”, – Kudrin said on the sidelines of the world economic forum in Davos.

The politician suggested that instead of raising taxes to cut subsidies to various sectors of the economy except for infrastructure construction and agriculture. He stressed that many of the existing subsidies are ineffective.

“Except for roads and agriculture, I would safely cut subsidies,” – said Kudrin.

On privatization

Large-scale privatization of shares in state companies must commence no earlier than six and a half or two years, when it can resume economic growth, also said former Finance Minister Alexei Kudrin.

President Vladimir Putin in December asked the government to consider privatisation of some state assets, not specifying how soon it should happen. According to officials, the speech first of all goes about the state-owned stakes in Rosneft, Sberbank and VTB.

“I think that this should be done when indicated by economic growth. In the first place, talking about oil companies. To sell the oil company when the oil price is at a low point and at the time of deep recession, to me kind of strange,” said Kudrin.

He suggested during this time to use the government reserves or borrowing to cover the budget deficit, which, according to him, could reach 6 percent of GDP in 2016. Kudrin noted that the volume of borrowing can be doubled.

“I think within two years there’ll be a rebound in oil prices, albeit small, and economic growth. Then these assets will cost significantly higher,” said the former Minister of Finance.