Back to the future: why the Ministry of Finance returns the budget rule

The tradition was interrupted only in February 2022 with the abolition of the budget rule. But this break is coming to an end.

Victoria Pavlova

The budget rule is back: the Ministry of Finance is ready to buy foreign currency again for oil and gas windfalls. It is only necessary to approve the concept before the submission of the draft federal budget for 2023-2025, that is, before October 1. The Central Bank in its recent report on the prospects for monetary policy for the next 3 years also directly points to a return to the fiscal rule next year.

By itself, the budget rule looks as boring as possible to an outside observer. It's just buying currency with the proceeds from selling oil above a certain level and moving it into reserves. Now this is how the FNB is being formed - the notorious "pod". But in reality, the budget rule brings big changes for every Russian. Optimists see its return as the end of the economic crisis, while pessimists see it as a rollback to the previous policy of inaction and conservation of the economy: the more money goes into reserves for a rainy day, the less is left for current development. If at the beginning of March 2022 the reserves of the National Wealth Fund fell to $154.82 billion, then by July 1 they exceeded $210.6 billion - an increase of 36% over 4 months. Together with experts, we will figure out what all this can actually turn out to be for an ordinary citizen.

Only a cheap ruble will save the budget

At the end of last year, 75% of non-food retail products were imported. Yes, and domestic ones are often produced on imported equipment. For import substitution (real, and not in the reports of officials), large investments are needed. Back in 2021, surveys of entrepreneurs conducted by the Gaidar Institute showed that the lack of investment is one of the most important constraints on industrial growth. Ahead is only a shortage of qualified personnel. It is not particularly necessary to hope for state assistance, because oil and gas revenues in the economy will decrease. Presumably , the profits received from the sale of oil for more than $60 per barrel will go to the money box. And the Central Bank will buy Chinese yuan with this money instead of dollars, euros, British pounds and Japanese yens, as it did before. Doctor of Economic Sciences, director of the Institute for Psychological and Economic Research Alexander Neverov believes that this is a bad sign for the country's economy.

- The return to the budget rule means that over these six months no tools have been found to use additional oil and gas revenues as long-term investments in the development of the economy. It would be more logical to link the budget rule to long-term import substitution programs. And so, in fact, an application is being made to preserve the financial and economic model of 2012-2020, only with a turn to the East instead of the West. Everything would be fine, but with this model, our economy did not demonstrate economic growth, even at the level of average world indicators, and the real incomes of the population were declining. It is unlikely that its conservation is an effective response to the current situation.

New approaches have not been found, but the budget rule will certainly affect the ruble exchange rate. It's simple: the more the state buys currencies, the cheaper the ruble becomes. Senior Economist of Sinara Investment Bank Sergey Konygin gives a forecast on the change in the ruble exchange rate after the introduction of a new budget rule.

- According to our estimates, one billion dollars of purchases/sales of currency leads to a shift of the ruble against the dollar by 1 ruble. The movement in the ruble-dollar exchange rate will occur due to the cross-rate of the yuan-dollar. We think it is likely that the ruble will weaken to 70-75 rubles per dollar within six months.

Commodity dependence intensifies

The budget will definitely benefit from the weakening of the ruble. According to the financial analyst of CMS Group Vladimir Sagalaev , the exchange rate of the ruble determines whether the federal budget will be executed with a deficit, or there will be enough money.

- A strong ruble has a negative impact on the Russian budget, since one of the main sources of its replenishment is payments from foreign exchange exporters. For example, if the dollar exchange rate is below 70 rubles, the budget of the Russian Federation will be in deficit, and if the exchange rate is 50-55 rubles per dollar, the budget may lose 1.6 trillion rubles or 1.2% of GDP in 2022. Therefore, a return to the mechanism with accumulation will make it possible to weaken the exchange rate by 10-20 rubles, which is extremely necessary in difficult economic conditions. According to the forecasts and calculations of the Ministry of Finance, additional revenues from the sale of energy resources in 2023 under the new budget rule may amount to 2.5–4.5 trillion rubles.

At the same time, a cheap ruble should be beneficial for manufacturers who export their products - recently, due to the rise in price of their products in dollars and euros, they have had a lot of problems. This means that domestic production should grow and import substitution should flourish. But experts generally do not share this optimism. Independent analyst Dmitry Milin is sure that only commodity companies will become profitable among exporters.

- The weakening of the ruble plays into the hands of the government (since it increases budget revenues) and commodity companies. The current exchange rate of the ruble does not help or hinder import substitution. The sanctions reduced the ability to purchase industrial equipment, but at the same time limited the availability of imported goods for final demand, freeing many market niches from imported goods.

And Sergei Konygin says that the weakening of the national currency has a too short-term effect on the industry.

- According to industrial production data, the number of industries that benefited from import substitution in June decreased by half compared to spring figures. The effect of import substitution is fleeting. With the weakening of the ruble, part of the industrial impulse will return. However, according to the experience of 2015, import substitution will not be the main driver of the economy.

It turns out that the oil industry and the state budget will benefit from the budget rule. But the industry is not very good. The government not only does not leave dependence on raw materials, but even encourages it. But so many words have been said about the need to be self-sufficient and independent in a situation where many countries are refusing Russian resources. But Dmitry Milin says that there will be no radical turn to raw material dependence.

- A return to the budget rule does not mean "abandoning the intensive development of the economy and maintaining dependence on raw materials", for one simple reason: there was no policy aimed at intensive development of the economy and the rejection of raw material rent. The refusal to live at the expense of "raw material rent" is carried out by the West, regardless of the will of the Russian authorities. Just now, temporarily due to the growth in the cost of energy carriers, a huge foreign trade surplus has formed. And the intensive development of the economy begins with a sharp reduction in taxation on all businesses without exception. Everything else is a policy aimed at increasing the withdrawal of "corruption rent" from business, no matter what "good intentions" it would be. Helping part of the business on the "list" is a way for officials to earn money and nothing more.

Russia is a "Chinese vassal"

Previously, the government bought dollars, euros, pounds, Japanese yen and Chinese yuan. Now you can forget about the currencies of Western and similar countries in spirit: Russia has already lost $ 300 billion in the freeze. What remains? Yuan and currencies of other friendly countries. But according to the managing director of AM Capital Alexey Murashev , the choice here is exclusively virtual.

- As for the currency that will be purchased for the Fund, the financial authorities have little choice. The Turkish lira is too volatile and unpredictable to seriously consider it as an alternative to the dollar and the euro. Similarly, you can evaluate the Indian rupee. If they enter the final currency basket, then they, along with Iranian reals, will be given a small share necessary for direct settlements with trading partners. Dollars and euros are also likely to remain, as their role in external transactions is still high. The Chinese yuan looks promising, given that it is backed by a powerful Chinese economy, it begins to play an important role in trade and its exchange rate is quite stable due to the monetary policy of the Central Bank of China.

The image of Mao Zedong on banknotes may soon become as familiar as that of Benjamin Franklin. But where is the guarantee that sooner or later China will not restrict payments in yuan for Russia? Associate Professor of the Faculty of Economics of the Peoples' Friendship Friendship University Vladimir Grigoriev believes that excessive enthusiasm for the yuan can be harmful.

- You should not increase reserves in yuan in the volumes and proportions that the dollar and the euro had. First, it will really make Russia dependent on China. Secondly, the Chinese yuan, despite the status of a reserve currency, is infinitely far from the level of use of the dollar and the euro in international reserves and settlements. And it is unlikely that it will have this level of use. Third, China prefers to express moral support to Russia, carefully refraining from any action that could seriously anger the West. This is due to the fact that China is not equal to the United States and Western Europe, as an economic value, and is not equal to the United States, unlike Russia, militarily. China is seriously afraid of Western sanctions in the field of finance and technology, so an excessive build-up of reserves in yuan will not give Russia anything.

Alexander Neverov also believes that the yuan now has no alternatives. Not now, they may appear in the future.

- Until a pool of BRICS reserve currencies or a single currency of the EAEU is created, there will be no other reserve currencies except for the yuan and a little later the Indian rupee. Yuan, rupee, the use of national currencies in settlements between countries now act as an analogue. In the future - a pool of BRICS reserve currencies. There is an opinion in expert circles that if there is political will, the BRICS reserve currency can be made in a year

Dmitry Milin is quite loyal to savings in yuan. But not because they can be useful.

- With or without accumulation of yuan, Russia becomes dependent on China, becomes a Chinese vassal. China cannot have friends, it can only have vassals. And the ratio of the size of the economy does not leave any other relationships, especially in a situation where the Chinese economy is growing rapidly, and the Russian economy has been stagnating for more than 10 years, and now it will also be greatly reduced under sanctions.

Is there light at the end of the tunnel?

The budget rule carries with it increased dependence on oil and gas revenues and on China, a depreciation of the ruble, does not bode well in terms of import substitution - not the most cheerful prospect. But at the same time, Alexey Murashev finds really positive moments.

- The funds accumulated from oil and gas revenues are not only a tool to support the economy in times of crisis, but also a way to combat the “Dutch disease”. Simply put, they allow you to direct resources to those areas that traditionally receive less funding, such as social.

It is a pity that there is no other way to increase the level of social security. Moreover, projects financed by the NWF sometimes raise questions. For example, the Ministry of Transport wants to spend $30.8 billion on the development of railway infrastructure: 3,000 km of new railway lines will be built to develop ties with China. But Russia will have only 369 km. The rest will appear in Kazakhstan, Mongolia and China. The NWF money goes to other countries.

The problems associated with the renewal of the fiscal rule are obvious, and lie on the surface. But the Central Bank and the Ministry of Finance are stubbornly moving in this direction - just living off oil and gas while they are expensive is easier than investing in the real sector of the economy.