For a finance minister who many thought would be a pushover after taking up his job last autumn, Anton Siluanov seems surprisingly determined to implement his own policy preferences. “We must develop financial-policy counter-measures against the risks of a fall in the oil price,” he says, in an interview in his office near the Kremlin.
As Siluanov is only too aware, roughly half of Russia’s budget revenues come from oil exports. According to him, as little as a $1 drop in the price of a barrel of oil means that the annual budget loses between R55 billion and R60 billion [$1.9 billion]. That fact lies behind his efforts, he says, to reintroduce limits to government spending according to a budget rule.
Under the new rule, as Siluanov explains, government spending plans would be limited to the historical average oil price of the past 10 years, plus a maximum deficit of 1% of GDP. It would mean a big change of mindset.
Russia has about $500 billion in reserves, while public debt is around 10% of GDP. But since the financial crisis of 2008 the oil price at which Russia’s government revenues and spending break even has risen from $45 to $115 a barrel. The average oil price of the past 10 years, by comparison, is only around $70.
“Government ministries and departments are finding it extremely difficult to adjust to the new fiscal situation,” says the minister. “They entertain the hope that they will be able to get more funds to finance their programmes, but that is not going to happen.”
Whether or not Siluanov gets his way, or the other ministers get theirs, his efforts at least show that investors still have a friend in the finance ministry. Indeed, Siluanov’s predecessor, Alexei Kudrin, names him as one of his few remaining fellow liberals in the Russian government.
Siluanov is perhaps not quite as close to Russia’s most powerful man, president Vladimir Putin, as Kudrin is. Siluanov followed his father into the finance ministry straight after university. Until autumn last year he served in the relatively obscure position of head of the department coordinating central and regional budgets.
Even before the new budget rule has been adopted – and probably watered down to garner parliamentary approval – Siluanov says the budgeted oil price will initially be based on a five-year rather than 10-year historical average. At $82 a barrel, the five-year average is much higher than the 10-year. Siluanov says one year will be added to the historical average price target until the 10-year historical average is reached in 2018.
Moreover, Siluanov says that in practice the rule must be implemented with adjustments until 2015 to take into account the spending plans made around the elections, which took place in late 2011 and early 2012. That means the budget’s break-even oil price will in fact be higher than allowed by the rule: $97 a barrel in the 2013 budget.
But $97 is still much lower than $115. And if Siluanov’s intentions pass into law relatively intact, it will be an important step towards boosting investors’ faith that Russia is acting – at last – to stem its budget’s ever rising break-even oil price.
Crucially, if the oil price rises above the historical average, under the new rule, excess government revenues will flow into two sovereign wealth funds, the Reserve Fund and the National Welfare Fund. Siluanov says the government has approved a plan, initially mooted by Kudrin, to change to a more institutionalized, Norwegian-style model of investing these funds on a more returns-oriented basis.
The finance ministry will switch management of the funds, around $150 billion today, from the central bank to a new, independent federal financial agency. Some of the money will also go into assets such as equities and corporate bonds for the first time, diversifying away from the hard-currency treasury bills the ministry buys up today.
In Siluanov’s view the agency would invest between 15% and 20% of its assets under management in equity. “The range of instruments that the fund can be invested in will be substantially enlarged to get higher revenues from these investments, while at the same time retaining sufficient stability of those investments,” he says. “This agency will be staffed with top-notch managers, experienced in financial markets. […] The managers of the federal financial agency will be guided by considerations of profitability and risk. It will be up to the managers of the agency to make investment decisions.”
More money flowing into these funds and a more institutionalized framework for management of the funds would vastly improve investors’ confidence in Russia’s ability to support its economy and bolster its currency against any speculative attack in the event of a sudden drop in the oil price. Kudrin points out that at the end of 2008 the Russian central bank spent some $200 billion supporting the rouble as the economy headed towards an 8% dip in GDP in 2009.
This summer, as Russians continued to enjoy higher government spending and a consumer credit boom thanks to the state banks, the economy ministry was still expecting GDP growth of about 4% for 2012. But growth slowed in the second quarter. And after a renewed intensification of the eurozone crisis, the rouble fell around 15% against the dollar in May – a reminder of how rapidly things can change.
Siluanov says that implementing the new budget rule will be particularly difficult given the arrival of new ministers with what he calls higher ambitions – and higher spending demands – in Putin’s third administration. “The budget rule is a new development; that means all the ministries, all government departments, will find it difficult to adjust their day-to-day operations,” says Siluanov. “The experience we are going through now in developing the budget for 2013 demonstrates that amply.”
Siluanov agrees that spending plans made in the run-up to the last elections – particularly pay promises to the military, teachers and medical workers – have had big implications for an already stretched budget. He says ministries will have to find their own ways of implementing the government’s pay promises without new cash from the finance ministry.
In addition, Siluanov says his ministry is now proposing that some of the planned spending increases, particularly in the military, should be postponed for between three and five years. Prime minister Dmitry Medvedev pledged to triple military salaries last year. He also intends to spend as much as $700 billion on updating the country’s Soviet-era armaments.
“Both the president and prime minister are very concerned about recent developments in the world economy,” says Siluanov when asked about Putin and Medvedev’s support for the budget rule. “They are certainly very concerned about the need to balance the domestic budget.”
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| Anton Siluanov, Russia’s finance minister |
Plans to raise cash from privatization could help the post-election budgetary situation. According to Siluanov, the government hopes to raise $10 billion from privatization for the 2013 budget. But the sale on the stock exchange of a 7.6% stake worth up to $6 billion in Russia’s biggest lender, Sberbank, has been delayed several times by the eurozone crisis.
According to Siluanov, the government should still be extremely hesitant to lower its target prices. “I would agree there is high risk of not getting the anticipated revenues,” he says. “We may not receive the expected revenues, and the reason for that is clear. I believe it does not make sense to sell the government’s assets for any price the market offers. The government should not sell its assets for peanuts, and then see the price of those assets rise exorbitantly.”
Siluanov also hopes to save money via pension reform. According to research from Citi, the drag on the federal budget from the pension deficit has increased to around 5% of GDP and could rise to 10% by 2030 if the government keeps to its stated intention that pensions, as a percentage of average salaries, continue to rise.
Russia has the ageing demographic of a developed country, and pensions are perhaps the budget’s biggest structural challenge. The National Welfare Fund, which was designed to finance any future pension deficit, stopped growing after 2009. It now amounts to only about one year’s financing of the pension deficit.
Russia has relatively low retirement ages of 60 for men and 55 for women. Raising the pension age would be unpopular, and almost impossible to implement at a politically sensitive time. But an even bigger problem for the budget is that the average age when Russians take their pensions is as much as 10 years younger than this, according to some studies.
“We are not considering increasing the retirement age in Russia,” says Siluanov. “I do not think we will be in a position to raise the retirement age before 2020. What we are trying to do now is fine-tune, if you will, the pension system,” he says, although he adds the methods are to be decided later this year.
“The current pension laws in this country have a lot of provisions to allow for early retirement. They allow people to receive their pensions with a total work record of as little as five years. We can postpone addressing the issue of retirement age and, today, focus on measures that will allow us to find reserves within the system to make it more sustainable.”
