The Finance Minister revealed details of the new budget rule

Without a primary deficit

A new “budget rule” — a system of rules for the use of oil and gas revenues — will start working in 2020, will determine the base oil price of $40 a barrel and will limit budget expenditures so that they should be equal to the base income less interest expenses on debt service, said at a Moscow financial forum on Friday, the Minister of Finance Anton Siluanov. “Preparation of budget rules, which, we believe, possible to be implemented from 2020, would be that the price of $40 a barrel we should have zero primary deficit. That is, all those in debt servicing costs that we will be spending budget will be the deficit that we can afford,” said Siluanov, quoted him as saying to the reporter .

In other words, the new fiscal rule, the Ministry of Finance will consider oil and gas revenues at a price of $40, add on to it forecast non-oil and gas revenues (this amount will be considered as a basic income) and to plan expenditures so that they were not above the base income, not counting interest payments on the debt.

The new version of the budget rules will be the fourth since the introduction of this practice of public Finance management in 2004.

The old fiscal rule, which operated in 2013-2015, meant that the marginal cost budget is equal to the base revenue plus 1% of GDP. The new rule will replace the 1% interest costs, which now is within 1% of GDP. According to the law on budget for 2016, interest expenses this year are planned at level 646 billion rubles, or 0.8% of GDP. The primary budget deficit (deficit excluding debt servicing costs) is planned at the level of 2.2% of GDP, while the Finance Ministry wants to 2020 was not the primary deficit.

Why $40?

Under the old rule, the base price of oil for calculating oil and gas revenues that can be directed for financing budget expenditures, was determined as the average annual price of Urals oil over the five-year period with annual compounding this period of one year up to 10 years (averaging a ten-year period was supposed to start with the budget in 2018). Windfall oil and gas revenues from the excess of actual costs over base) transferred to sovereign wealth funds. The rule worked in the growing oil prices, but in 2015, the estimated oil price for the budget rule was $96, whereas the actual price fell to $50. Therefore, the 2016 budget rule was suspended, and in return was introduced, temporary rules (effective until February 1, 2017), allowing you to spend oil and gas revenues and savings reserve funds to Finance Federal budget expenditures.

Now it is proposed to use the budget rule is the average price of oil over the previous years conservative price of $40 per barrel. This price is taken because it corresponds to the threshold of profitability of shale oil in the world ($40-50), a high-ranking Federal official familiar with the plans of the Ministry of Finance. According to him, in a short time the Agency wants to make the legislative initiative of the new Duma in order to introduce a fiscal rule in 2020. The representative of the Ministry of economic development reported that the document the Ministry has not been received.

The average price of Urals in January—August 2016 $39,36 per barrel, and in August topped $40 per barrel (us$43.9). If a new fiscal rule has acted now, in August, the Reserve Fund could be replenished.

Question about cut-off price of $40 or closer to $50 — still to be discussed in the government, says the Federal official. The Finance Ministry proposes to annually index it to dollar inflation (in 2014 it was 1.6% but in 2015 — just 0.1%), said earlier a source close to the Ministry of Finance. In General, the drop in oil prices and volatility in the currency market has forced the Finance Ministry to take another look at the purpose of the budget rules. Its meaning must be broader than simply the ability to stabilize state finances, aims to insulate the economy from volatility in oil prices,” says a source in the financial-economic bloc of the government. We are talking about “real effective exchange rate of the ruble is not so much fluctuated along with oil prices, and not so much fluctuated relative prices in the economy, inflation, exchange rate and affect the profitability of companies in different sectors”.

“We orientirueshsya that we have the budget deficit should be gradually reduced by one percentage point annually. If we choose $40 as the price cut, we come to a balanced budget by 2020, if we select $50 — we come to 2019. Depending on what the cut-off price, will be determined the moment when the fiscal rule will work fully,” says the official financial-economic bloc.