Russian Lawmakers Just Passed A Delusional Budget Based On An 'Alternative Economic Reality'
According to Vedomosti, the independent Russian business daily newspaper, the draft budget is based forecasts an average oil price of $100 a barrel over the next three years, Western sanctions being lifted in 2015 and an acceleration of growth from next year. Right now, those assumptions look delusional.
Since the middle of the year the oil price has been crashing, falling from a high of $115 a barrel in June to below $86 a barrel Monday. Goldman Sachs believes oil will fall to $80 a barrel with Morgan Stanley giving a 45% probability that it could hold around that level.
This has mainly been due to positive supply shocks with oil production in Libya, Russia and Iraq all coming in above estimates, and the US shale boom continuing to put downwards pressure on prices.
EIAThe collapse in the oil price has put huge pressure on Russia's government finances with oil and gas accounting for half of the country's budget revenues. The falls have compounded the impact of Western economic sanctions over Ukraine, with the IMF forecasting meager GDP growth of 0.2% this year and only 0.5% in 2015 (vs an average of 7% a year from 1998-2008).
Morgan Stanley
Fears of its impact on the Russian economy have also caused foreign capital to flee the country. The Russian central bank reports that the country has seen $85 billion worth of capital outflows so far in 2014 forcing it to spend over $15 billion of the country's foreign currency reserves propping up the Russian ruble in October alone.
Finance Minister Anton Siluanov said that although the government can dip into its reserve fund to meet its spending commitments "reserves are not infinite, and the poor economic situation may be protracted". The Ministry of Finance is set to propose spending cuts of around 10% of the draft budget with ministry sources briefing that each state program will be considered.
However, the proposals may run into resistance from the Kremlin. Earlier this month President Vladimir Putin firmly ruled out any cuts to social programs stating that "we will not have to sacrifice that".