BofA linked the demand for reform in Russia with the price of oil and the budget

The balance instead of growth

The recovery in oil prices to $60 per barrel, which is expected to BofAML analysts, may reduce the motivation of the Russian authorities to implement reforms, said Bank chief economist for Russia and CIS Vladimir Osakovsky on the presentation of the report “the global economy-2017” in Moscow on December 13. In historical perspective, Russia is mainly conducted changes at low oil prices. The rise in oil prices may weaken the tendency towards fiscal consolidation, which, in fact, is a key driver of the reforms, says the economist. “Until we have a shortage [of the budget] remains and reserves continue to be spent, the demand for reform is still there and will be,” he said.

The Russian government next year plans to cut spending for the first time since the beginning of 2000-x years and intends to reduce them until 2019. However, the fiscal costs of a possible swelling which previously warned experts can “surprise” and exceed plan, the report BofAML. This can happen for two reasons, says the report osakovskiy: or in the case of a steady recovery in oil prices and revenues additional oil and gas revenues, or in reducing political support for President Vladimir Putin ahead of elections in 2018.

The price of a barrel of oil, envisaged in the budget-2017, very conservative — only $40 with the Bank’s expectations of $55-60, indicates osakovskiy. Higher prices in the market “will bring significant additional revenues, potentially opening the way to increased costs” at a constant target for budget deficit of 3% of GDP, the report says. Last week Finance Minister Anton Siluanov said that the surplus of the budget at an oil price of $50 per barrel will be about 1 trillion rubles, half of which would go to maintaining reserves, and the other half for expenses.

Chief economist of Alfa Bank Natalia Orlova previously admitted spending to increase 5% oil at $50. But BofAML takes for the baseline scenario is that additional income will go to reducing the budget deficit and the maintenance of sovereign reserves in the optimistic scenario this could lead to a decrease in the deficit to 1.4% of GDP in 2017. Osakovskiy see the political will in Russia for fiscal consolidation, therefore, the probability of growth of the budget deficit is much lower than the probability of the promised reduction, the economist said at the presentation of the report in Moscow on December 13.

In addition, the presidential elections in 2018 could affect the implementation of reforms in Russia, the report said. Major structural changes, most likely, will be delayed until at least 2018, and in the near future the authorities will focus on the privatization and optimization of the public sector and elements of the pension reform. To speed up the reforms could early presidential elections in 2017 — the likelihood of this scenario is, says BofAML. However, the Kremlin previously said that no such issue on the agenda, and the head of the CEC, Ella Pamfilova said that to vote early “is not possible technically for different reasons”.

USA as a threat

The main risk to the global economy comes from the United States: announced elected President of the country Donald trump’s ambitious programme of fiscal stimulus could trigger overheating of the economy, warns Bank of America Merrill Lynch. Employment is already at a natural high and support can result in significant speed up rate hike by the fed. The analysts note that the new leader will have to conduct the announced reforms through Congress, which occupies the conservative position in financial matters.

Second, trump can implement released earlier populist measures with respect to trade, immigration and the fed’s policy, undermining the confidence of market participants and harm growth. Drastic changes in trade policy threatens to send her to a recession, experts warn BofAML.

Developing countries are vulnerable to both extremes of American politics: a large-scale fiscal stimulus can Jack up interest rates, and thereby accelerate the withdrawal of capital from emerging markets. Significant trade restrictions is likely to have a negative impact on countries which heavily depend on exports to the American market.