The Ministry of Finance proposed to buy foreign currency for income from the sale of oil at a price of over $60 per barrel, by Dmitry Grinkevich for Vedomosti.ru. 19.07.2022.
The concept of the budget rule updated by the department will allow to weaken the exchange rate by 10–20 rubles.
The Ministry of Finance proposed to modify the budget rule in the following parameters: to focus on the cut-off price of $60/bbl when calculating basic oil and gas revenues. and fix the production volume at the level of 9.5 million barrels per day. A source close to the Cabinet of Ministers told Vedomosti about these details of the ministry's initiative, and a federal official confirmed the information. As previously reported by the media, citing a representative of the ministry, the Ministry of Finance submitted proposals to adjust the mechanism to the government, but the parameters were not disclosed.
The representative of the Ministry of Finance said that the updated design of the budget rules is now being discussed at the government site, but it is too early to talk about specific decisions. Similarly, "Vedomosti" was answered by the press service of the Ministry of Economic Development. A government spokesman left the request unanswered.
The operation of the system of budgetary rules was suspended almost immediately after the introduction of anti-Russian sanctions. Prior to this, the mechanism performed mainly two functions. Firstly, it stabilized budget expenditures at a certain level: during periods of favorable conditions, their growth was limited, but during the decline in oil prices, the amount of spending did not decrease, since they were provided by reserves accumulated from super-incomes - their source was the National Welfare Fund (NWF). The second function of the rule is to influence the ruble exchange rate and increase its predictability. Taxes from the sale of oil at a price higher than the cut-off price were used to buy foreign currency, which kept the ruble from strengthening during periods of commodity market growth. During the worsening market conditions, the foreign assets accumulated in the National Welfare Fund, on the contrary, were sold for rubles.
The Central Bank acted as the agent of the Ministry of Finance for operations within the framework of the budget rule, which also accumulated gold and foreign exchange reserves and could independently, at the expense of its assets, carry out foreign exchange interventions to stabilize the exchange rate. Russian reserves, both of the Ministry of Finance and the Bank of Russia, denominated in the currencies of unfriendly countries, were frozen as a result of sanctions: approximately $300 billion, i.e., about half of all assets, were blocked.
Refused and changed their mind
The budget rule had to be suspended, firstly, in order to use the entire amount of budget oil and gas revenues, and not just the basic ones, to finance expenses, and secondly, because of the objective impossibility due to sanctions to buy foreign currency for additional revenues. When the value of the dollar and the euro soared over 100 rubles after the introduction of the first rounds of sanctions, few people were worried about the rate predictability function that the budget rule had previously performed. But after the ruble moved to a steady strengthening, the authorities started talking about the need to resume foreign exchange interventions.
In an interview with Interfax at the St. Petersburg International Economic Forum ( SPIEF ) in mid-June, First Deputy Prime Minister Andrey Belousov reported on the discussion of the advisability of switching to exchange rate targeting in the face of a re-strengthening ruble. But the Central Bank, commenting on this topic, flatly refused to return to this practice, which was discontinued in 2014.
At the same SPIEF, Finance Minister Anton Siluanov discussed the advisability of resuming the budget rule, but, firstly, only in the relatively distant future of 2025, and secondly, for the most part in the context of its function limiting the growth of expenses. But two weeks later, speaking at the RUIE congress, Siluanov announced his readiness to quickly restore the rule and start buying foreign currency for excess budget revenues.
According to him, the removal of currency restrictions imposed in response to the sanctions did not help to weaken the ruble, and so far it has not been possible to create an outflow of currency and thus weaken the ruble due to the growth of imports. According to the minister, the authorities have only one tool left to influence the exchange rate from the "heavy artillery": "... either the Central Bank or the Ministry of Finance should participate in the market."
Previously, the Ministry of Finance could influence the exchange rate by buying foreign currency as part of the budget rule, but due to sanctions, it lost this opportunity, he recalled. The strengthening of the Russian currency by 1 ruble, according to various estimates, costs the budget 130-200 billion rubles, he added. Siluanov admitted that if the rule is renewed, part of the budget expenditures will have to be abandoned, but its impact on the exchange rate will protect exporters from a decrease in production volumes.
Economic Development Minister Maxim Reshetnikov, in his speech at the congress, did not support the idea of directing part of budget revenues to foreign exchange interventions. Such a decision would have a negative impact on the economy and could only aggravate the situation, he said. Sterilization of part of the income and, accordingly, a reduction in spending by this amount could lead to a deflationary spiral, Reshetnikov said.
Moreover, in his opinion, this would not solve the situation with the exchange rate. “Unfortunately, there is such an excess of foreign currency on the market that we will not be able to reduce budget expenditures so much in conditions when we have an increased need for money in order to stabilize the exchange rate with this additional demand,” Reshetnikov explained then. “If a decision is made to renew the fiscal rule, then interventions should be made only in the currencies of friendly countries. Then the ratio of the ruble to the dollar and the euro will change through cross-rates,” Siluanov said in an interview with Vedomosti.
Previously, according to him, the mechanism of the rule was determined by predictable parameters: a cut-off price of $40/bbl. taking into account its annual indexation by 2% since 2018, as well as a relatively forecasted production of about 10.5 million barrels per day. Now, according to the minister, the situation has changed: there is high volatility in both the first and second parameters. “Therefore, we will propose to focus on the nominal level of ruble oil and gas revenues. It would allow, on the one hand, to ensure a stable, non-decreasing volume of budget expenditures, on the other hand, it would protect them from fluctuations in the external market.
Such a volume can be calculated empirically using three components: the forecast of oil production in Russia, the cost of a barrel of oil, the exchange rate of the ruble,” Siluanov said. According to the main directions of the budget, tax and customs tariff policy of the Ministry of Finance for 2023-2025. (available from Vedomosti), the ministry proposed fixing the basic oil and gas revenues of the budget for the next three years at the same level of 7.5 trillion rubles.
Impact on the ruble
With the parameters of the budget rule proposed by the Ministry of Finance and the price of oil at current levels, the excess budget revenues will amount to 2.5-4.5 trillion rubles. per year, estimated the macro-analyst of Raiffeisenbank JSC Stanislav Murashov. Such a high spread, according to him, is due to the fact that there is no final clarity on how excess profits from the sale of gas, whose share in the total volume of oil and gas revenues is growing, will be calculated, as well as with the generally unpredictable cost of Urals. One way or another, it will be difficult for the market to digest such a significant volume of interventions, since dollar and euro purchases are excluded, he noted. If the market capacity of the currencies of friendly countries is sufficient, then the impact on the ruble will be significant: interventions will weaken the exchange rate against the dollar by 10–20 rubles, the economist believes. The resumption of the fiscal rule is justified not only in the context of the impact on the exchange rate: at least.
The forecast values of budget revenues and expenditures this year and in 2023–2025, which were presented by the Ministry of Finance in the draft main directions, will in any case adapt online to changing external conditions, said a senior researcher at the IPEI Fiscal Policy Research Laboratory RANEPA Alexander Deryugin. If, relatively speaking, from tomorrow the budget rule will be launched in the parameters proposed by the department, then part of the treasury's expenses will most likely have to be abandoned, he suggested.
On the other hand, foreign currency purchases will have a positive impact on the ruble exchange rate, which will partially compensate for the sterilization of excess profits from the economy, Deryugin said. Judging by the preliminary projections, the Ministry of Finance does not include too risky a deficit in the budget for the next years - in the region of 1% of GDP, Deryugin recalled.
The volume of interventions in the amount of $ 20-25 billion per quarter could bring the ruble exchange rate closer to the levels of 70-75 rubles / $ within six months, Denis Popov, chief analyst at PSB, noted earlier in a conversation with Vedomosti. But these are very rough estimates, which can be significantly adjusted depending on the dynamics of oil prices, the speed of recovery of imports and the growth of sanctions pressure, the expert noted.
Basic income, according to the draft main policy directions of the Ministry of Finance, is fixed at the level of 7.5 trillion rubles. for the next three years, said Victor Tunev, Chief Analyst of Ingosstrakh Investments Management Company. Probably, they are calculated just from the price of oil at $60 and the dollar exchange rate expected by the Ministry of Economics at about 77 rubles. But at a rate of 50-60 rubles. oil and gas budget revenues will be lower and there will actually be nothing to buy foreign currency, the economist stated.
Lyubov Romanova participated in the preparation of the article.