13:19 GMT +3 hours22 November 2014
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Analysis & Opinion

Russia reviews forecast for its budget deficit

Analysis & Opinion
(updated 18:25 28.10.2014)
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MOSCOW. (RIA Novosti commentator Dmitry Babich) - Finance Minister Alexei Kudrin addressed an extended meeting of the ministry's board on Tuesday with a mien of one who has been proved right.

Indeed, the events of the past six months have shown that his advocacy of a big stabilization fund was well grounded.

He has been channeling money to the fund for the past five years despite sharp criticism from some members of parliament and party leaders. The financial crisis has shown that Kudrin was right in doing so.

According to the Finance Ministry, the federal budget revenues in 2009 will be 4.213 billion rubles ($126.18 million), or 38.6%, smaller than was planned in November 2008. This means that the budget should be reviewed.

Kudrin said that the draft law amending the budget for 2009 and through 2011 would be sent to the State Duma, the lower house of parliament, on Thursday. The reviewed parameters of the budget show a deficit of 7.4% of GDP, or 2.9784 trillion rubles ($89.2 billion).

Russia will not increase its state debt but will use the Reserve Fund to cover the shortage. To make up for the revenue shortfall and finance increased expenditures, the government will take 2.746 trillion rubles, or 62.2%, from the Reserve Fund.

Is a budget deficit of 7.4% big or small? The Reserve Fund accounts for some 12% of GDP, which means that we will spend over half of the money accumulated in it during the rich years in the first lean year.

The deficit forecast made in January-February cited a figure of 5%-6%. The public nearly panicked when presidential economic aide Arkady Dvorkovich said at a news conference that it could theoretically grow as high as 10%.

The new forecast seems encouraging, especially if we compare it to the forecasts for more economically prosperous states. The United States expects a budget deficit of 13.5% of GDP, Britain 9.3%, and France 6.6%. Given their huge budgets, these figures translate into trillions of dollars, pounds and euros. Russia's estimated deficit of 2.978 trillion rubles (7.4% of GDP) looks quite moderate against this backdrop.

Another vital question is what such a deficit implies. Joerg Bongartz, chairman of the board of Deutsche Bank Ltd., presented a forecast of Russia's economic development during the St. Petersburg Dialogue.

The bank experts' report is based on Russia's budget deficit of 7%-8% this year. According to it, Russia's economic growth should be 4% in 2010.

The St. Petersburg Dialogue was initiated by the Russian and German heads of state in 2001 as a discussion forum for representatives of the two countries' civil society supported by government agencies and the public.

According to Bongartz, their optimism is shared by a majority of German businessmen in Russia, 46% of whom expect the economic situation here to improve in 2009. Only 30% said they expected it to worsen, while 66% said they were increasing the number of their Russian personnel.

In his address to the ministry's board, Kudrin cautioned against excessive optimism. He said that last year they expected a moderate GDP growth in 2009, but have since reviewed their forecasts to predict a decline.

"However, with a wise financial policy budget expenditures should not grow faster than GDP," Kudrin said. "Our vulnerability to the crisis is higher than that of the countries with more diversified economies. This is why 2009 should be a unique year. We must not have a comparable budget deficit in subsequent years. We must work to reduce it to 3% in 2011."

Dvorkovich, who also spoke at the board meeting, said that even a 5% deficit, which Kudrin had forecast for 2010, was inadmissible. With such a deficit, he said, "we will create mid-term risks for our economy."

However, the finance minister is not a gung-ho man. Unlike many, he does not expect the crisis to end within months. Kudrin has said, for example, that the recession of the early 1990s in the United States lasted only eight months, but it took its economy 92 months to overcome its consequences.

He also said that Russia would not have the growth opportunities it had in 2000-2008 in the next "10, 20 and possibly even 50 years." This means that the ministries and departments should be assigned an expenditures limit they must not exceed under any circumstances.

The finance minister needs to be a miser and penny-pincher by definition. That's his job, and one that we badly need now.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.