Free exchange | The Russian budget

Economic pain, caused by Ukraine

By C.W. | LONDON

TODAY Russia submitted its budget to the Duma, the lower house of the parliament. After three rounds of discussions, Vladimir Putin, the president, will sign it into law. The budget shows how much trouble the Russian economy is in—and how unwilling the government is to face up to reality.

It’s an austere affair: 700 billion roubles ($17.8 billion) of previous spending plans have been axed. New taxes on tobacco and alcohol will probably be imposed. These measures are partly to do with Russia’s poor economic growth, which has crimped tax revenues. The World Bank has cut its forecast for Russian economic growth to 0.3% in 2015 and 0.4% in 2016, down over one percentage point on previous projections. The rouble has lost about 20% of its value against the dollar since October 2013. There are rumours that the central bank will soon enact controls on capital outflows, which in the first quarter were about $50 billion.

But amid the austerity there are some winners. Mr Putin wants to make good on an electoral promise to hike social spending (say, in the form of higher public-sector wages). Defence, with a 20% rise, is another beneficiary. According to Julian Cooper of Birmingham University, this largesse has little to do with the recent Ukraine crisis, but is part of a long-term plan to modernise the military. Spending on defence will rise by 85% between 2012 and 2017.

Then there is the question of oil. In 2015 Russia will need an oil price of about $105 a barrel to balance its budget (see chart). But crude is currently trading in the mid-$90s, down by about 10% since May. Weak demand from China and healthy supply from America help explain the drop.

Break-even oil price, dollars (Source: Deutsche Bank Markets Research; Economist Intelligence Unit).

Lower dollar-denominated oil prices are not so bad for Russia, given that the rouble has weakened so much. But over the past few years the budget’s reliance on oil revenues has increased. When excluding oil, there was a shortfall of 3.6% of GDP in 2007, but now it is more like 10%. Russia expects to run a small budget deficit (about 0.6% of GDP) this year. That prediction is optimistic—the Kremlin is banking on an oil price of $100 The latest predictions from Energy Aspects, a consultancy, show that the price of Brent is not expected to pass $100 for about nine months.

There are other strange assumptions in the budget. The Kremlin's economic growth projection (of 1.2% in 2015) is much higher than the market consensus. It reckons that the inflation rate will be 5% next year, even though European and American sanctions have helped push the current rate to 7.6%. High inflation over the long term will make Russia less competitive. It could also force the central bank to raise interest rates further, which would weigh on growth. Since March the bank has hiked rates by 2.5% points and they are now at 8%. The budget looks like a desperate attempt by the Kremlin to project strength and maintain public support, when in fact it is looking ever weaker.

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