More loans, less reserves: told the Ministry of Finance on the financial forum

Taxes are not touched

The debut of the Moscow financial forum — new private site of the Ministry of Finance of Russia — took place on Friday, on the one hand, after the elections to the state Duma, who alerted the record low turnout, on the other — immediately after successful placement of the Ministry of Finance of Eurobonds for $1.25 billion — as said on the forum happy with Anton Siluanov, foreigners have bought up like “hotcakes”. Before the forum there were rumors that the Minister of Finance can use this platform to announce the need to increase taxes — at the beginning of autumn the Ministry of Finance came to the government with various proposals to increase the tax burden, reported by “Vedomosti”. However, according to them, the day before the forum, President Vladimir Putin at the meeting, the fact that the publication was denied by his press Secretary, Dmitry Peskov, decided not to touch taxes until 2019. As a result, the forum Siluanov announced that the Finance Ministry had no proposals for the next three years to increase taxes — the question is, apparently, closed.

The Ministry of Finance did not consider just the increase in the tax burden, it was about redistribution between different taxes, then said Siluanov told reporters. The Agency believes that the country is too much load on the wage Fund more than it would be rational to reduce direct taxes (and insurance premiums — in fact a direct tax and increasing indirect taxation (VAT), says a Federal official familiar with the ideas of the Ministry of Finance. This is the principle of “fiscal devaluation” such a maneuver would be an interesting business and could enhance the competitiveness of the economy, says the source .

“Right now, taxes are the funding sources of our large spending commitments,” says the Federal official. In nominal terms the budget expenditures in the next three years will remain at the same level. “The combination of relatively low taxes and high public spending is no longer sustainable,” warns the chief economist of Renaissance Capital Charles Robertson. Will have to either raise taxes or cut spending but both are fraught with protests, he wrote in Friday’s review about the prospects for a “new perestroika”. That popular support for the government is not as high, according to Robertson, said the low turnout in the elections to the state Duma (48%). Earlier on low turnout as a symptom of voter apathy and disillusionment of the population in a policy of austerity drew the attention of the rating agencies Moody’s and Fitch.

Gone beyond the limit

Siluanov said at the forum that in 2017 will remain “fairly large deficit (about 3% of GDP), but “we can afford it”. Reserves in sovereign wealth funds accumulated during the “fat years” will last for another three years, but spending will need more careful — have to borrow.

In 2016, the Finance Ministry plans to borrow on the domestic market of 100 billion rubles over the limit to 300 billion rubles, specified in the law on the budget, said Siluanov. According to him, the Finance Ministry has already fulfilled the annual programme of internal borrowing over 300 billion rubles net borrowing (placement of new securities minus repayment of old). By the end of July the Ministry of Finance has already exceeded the annual quota of 300 billion rubles, the net placement of OFZs, according to data of the Federal Treasury, at the end of August the net placing amounted to 226 billion rubles (placed 686 billion rubles repaid 460 billion roubles).

The law on the 2016 budget assumes a gross placement of OFZ bonds on 800 billion rubles and a maturity in the amount of 500 billion rubles, the Finance Ministry also already reached my quota on foreign loans this year for $3 billion, dorazmestit yesterday Eurobonds for $1.25 billion after the may sale of securities of $1.75 billion, which was the first since September 2013.

Next year the Ministry of Finance may need to increase both internal and external borrowing, said Siluanov. According to him, net domestic borrowing will amount to 1 trillion and foreign loans, the Finance Ministry may return to the limit of $7 billion, to usual 2014. But Siluanov warned that mindlessly increase borrowing dangerous. The Ministry of Finance releases OFZs with maturities of up to 30 years. But large borrowings “not all banks will be willing to invest in 10-year and 15-year bonds of the state”, says Minister in the June interview. “I will say: given our capital-risk-based is preferable for us short of paper.” And the risk that we may be headed to t-bills, as it was some time ago, is one of the key risks,” he warned. Now the Ministry of Finance occupied the domestic market with a yield of 8.7–8.8 per cent. In 2016, the budget will have to pay around RUB 470 bln in interest expenses for servicing domestic debt, and that’s not counting the 500 billion rubles for repayment of the securities, follows from materials of Department.

The new rule in 2020

After five years of spending in foreign currency savings and reserve funds can begin to re-grow after 2020, when the new “fiscal rule”. The Minister of Finance on Friday revealed details of how it will look. It 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. 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 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 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.

The fiscal rule

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 ten 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 to introduce a fiscal rule in 2020.

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”.