Originally published on 18 December 2014
The nearly forgotten word from the 1990s, “sequestration,” apparently returns to Russian lexicon. Reportedly, the Russian government has decided to cut government spending in the budget for the coming 2015. It was even said that public spending would be cut by a tenth, although reductions would not affect social spending.
Spokeswoman for the Russian Prime Minister, Natalia Timakova, stated that the decision to reduce costs by ten percent in 2015-2017 had not been made, at least, for the time being. However, she said, the Russian government considers different options on how to respond to new global market conditions.
Many believe that if officials suddenly deny something, it means that what they deny is actually true. However, how exactly can the government cut spending? What oil prices should Russia put in its budget, taking into account most recent statements from the United Arab Emirates, where it was said that OPEC would not reduce oil production even at $40 a barrel?
“Government spending should be cut in most extreme cases. There is no country in the world that likes doing so, – Doctor of Economics, Professor of the Kuban State University, Alexander Ishkhanov said in an interview with Pravda.Ru . – The real state of affairs in the world today is even darker than the media paint it. Russia should be happy about the fact that the cost of a barrel of oil that we have is about 12 dollars, and the cost of shale oil is around $60. If we have oversupplies of oil, it will fall a lot lower than sixty dollars per barrel. As a result, it will make production of shale oil in the US unprofitable, let alone subsidies on it.
“Therefore, it will kill shale oil production in the US, and the United States will never accept it. Possibly, the US will cut shale oil production, leaving only most profitable fields. I can not imagine the decline in oil prices lower than $55 per barrel. Most likely, oil prices will bounce back to $70, although it is hard to make any forecasts, of course,” the expert said.
Get poorer as IMF says or get richer as Putin says
“The directive of the IMF in relation to Russia clearly says that one needs to tighten the course on inflation targeting, reduction of government spending, increase of taxes and strengthening fiscal rules, – deputy of the State Duma of the Russian Federation, member of the Budget and Taxes Committee, Yevgeny Fyodorov, shared his opinion with Pravda.Ru. – I understand that the directive already says what needs to be done, and it is up to our government to prescribe what articles of budget spending need to be cut under instructions from the IMF.
“One can go another way: cut interest rates that the president indicated in his three addresses, run the model of the banking system and the Central Bank and dramatically boost the national economy. One should proceed to investments, to zero inflation and prosperity of the country. It is up to us to choose what to do – get poorer as directed by the IMF or prosper as directed by Putin. This applies to decisions made by the government too,” Fyodorov said.
When asked what oil price should the Russian government put in the budget against the backdrop of OPEC’s intention not to cut oil production even if oil drops to $40 per barrel , Fyodorov said that the figure should be around 50 dollars per barrel. Although, by and large, the oil problem is a far-fetched one.
Oil does form budget revenue to a large extent, although this revenue is backed with government reserves. That is, in the coming years, there will be no problem as long as there are reserves. Secondly, one needs to count on domestic investment, industry and science, rather than oil. To do this, one needs to make loans cheaper. In a nutshell, one must do the things that will go contrary to what the Central Bank is doing now. In this case, Russia will not depend on oil revenues, Yevgeny Fyodorov believes.
The draft budget for 2015 includes the price of $95 per barrel. In late November, Finance Minister Anton Siluanov proposed to develop a backup budget plan for 2015-2017. Brent crude, on the basis of which the value of Russia’s Urals crude is calculated, has fallen to the lowest level in the past five years. The Russian currency continues to become cheaper. The devaluation of the ruble makes Russians convert their ruble savings in dollars and euros, even though government officials tell them not to act so.
The statements, views, and opinions expressed in this article are solely those of the author and do not necessarily represent those of EMerging Equity.
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