5Section 2. Monetary and fiscal policy
2.1. Monetary policy1
2.1.1. Monetary policy trends
The Bank of Russia eased at slow enough pace its monetary policy in 2017 despite substantial deceleration in inflation, holding that ongoing inflation risks were high, including a possible decline in crude oil prices and capital outflow, upturn in consumer demand, fiscal policy uncertainty, as well as a relatively high and unstable degree of inflation expectations. In 2017, the monetary policy rate was cut by 2.25 percentage points to 7.75 percent per annum as the inflation rate over the same period (same-month-year-ago comparison) was down 2.6 percentage points to 2.5 percent. The Russian central bank cut the key interest rate six times: by 0.25 percentage points on March 27, by 0.5 percentage points on May 2, by 0.25 percentage points on June 19, by 0.5 percentage points on September 18, by 0.25 percentage points on October 30, and by 0.5 percentage points on December 15.
Amid moderate cuts in the key interest rate, the substantial deceleration in inflation and inflation expectations in 2017, the causes of which are considered below, led to further tightening of terms of lending that started in 2016. For example, there were months when the real interest rate on corporate loans with maturities of less than one year reached the level seen in December 2014 (Fig. 1). Keeping a positive money market real interest rate was a headwind to growth in consumption, placing downward pressure on inflation, which nonetheless posed risks of economic growth deceleration.
International comparisons of the key interest rate with the inflation rate show that despite the fact that the Russian inflation reached low rates in 2017 that are comparable with inflation rates in developed countries, the key interest rate still remained at a relatively high level comparable with countries facing inflation rates that are 2-4 times higher than the Russian inflation rate (Table 1). The same is true only for Brazil with an inflation rate of 2.7 percent and the central bank key interest rate of 7 percent per annum. Therefore, the Russian Federation and Brazil rank on top in terms of real key interest rate (Fig. 2).
1 This section is written by Alexandra Bozhechkova, the Gaidar Institute, the Institute of Applied Economic Studies (IAES) of the Russian Presidential Academy of National Economy and Public Administration (RANEPA); Anna Kiyutsevskaya, the Gaidar Institute, IAES-RANEPA; Alexander Knobel, VAVT under Russian Ministry of Economy, the Gaidar Institute, IAES-RANEPA; Pavel Trunin, the Gaidar Institute, IAES-RANEPA.
Note: The real interest rate was calculated using data on the inflation rate over the previous 12 months, based on the assumption of adaptive nature of inflation expectations in Russia.
Fig. 1. Real interest rate on corporate loans with maturities of less than one year in the Russian Federation in 2011-2017, percent per annum (based on inflation rate over
the previous 12 months)
Table 1
Inflation rate and key interest rate in developed and developing countries*
Inflation rate, % Key interest rate, percent per annum
Developing countries
Peru 1.4 3.25
Hungary 2.2 0.90
Poland 2.2 1.50
Chile 2.3 2.50
Russian Federation 2.5 7.75
Brazil 2.9 7.00
India 3.2 6.00
Indonesia 3.6 4.25
Colombia 4.1 4.75
South Africa 4.5 6.75
Mexico 6.8 7.25
Kazakhstan 7.3 10.25
Turkey 11.9 8.00
Developed countries
Norway 1.6 0.50
Canada 1.9 1.00
European Union 1.7 0.00
Island 1.9 4.25
New Zealand 1.6 1.75
United States 2.1 1.50
Australia 1.9 1.50
Czech Republic 2.4 0.50
United Kingdom 3.0 0.50
* Data on 2017 inflation rate is presented on a December over December basis, data on key interest rate as of the end of December 2017
Sources: data posted on central banks' official websites.
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Fig. 2. Real key interest rate as of 2017 year-end, percent per annum (measures are based on inflation rate over previous 12 months)
Sources: data posted on central banks' official websites, own calculations.
Note that the Bank of Russia estimates 2-3 percent per annum of the equilibrium real key interest rate for the Russian economy with a target inflation rate of 4 percent. It appears that the Russian central bank will continue to ease its monetary policy by making incremental cuts (within a 1.5-2-year horizon) in the key rate to reach a neutral level of 6-7 percent.
2.1.2. Money market
Structural liquidity surplus in the Russian banking sector was a key feature of the money market in 2017. In this context, the Bank of Russia introduced measures to reduce the number of instruments providing liquidity to banks and to broaden approaches towards liquidity absorption.
Since April 3, 2017, for instance, the Bank of Russia discontinued providing gold-secured loans because of poor demand for this instrument from credit institutions faced with liquidity surplus. As a reminder, banks' debt on this instrument was zero since August 2016, averaging RUB 540.5 million in the period between March 2012 and June 2016.
With the aim to absorb ruble liquidity surplus, the Bank of Russia launched auctions for Bank of Russia coupon bonds (coupon OBRs). Outstanding securities were worth RUB 328.2 billion, according to data for November 1, 2017. The initial coupon OBR auction was held on August 15, 2017, at which the regulator offered OBRs worth RUB 150 billion to credit institutions, whereas the demand was worth RUB 173.5 billion (to mature on November 15, 2017). During the second OBR issue in October and November the supply surpassed the demand from banks: OBR issue was worth RUB 500 billion, whereas the demand was RUB 226.1 billion (to mature on January 17, 2018). The third OBR issue of RUB 500 billion was even weaker than the previous demand of RUB 77.8 billion. In December 2017, the fourth OBR issue worth RUB 200 billion saw a demand of RUB 48.4 billion. That was apparently associated with uneven distribution of liquidity between banks despite liquidity surplus.
On September 1, 2017, the Bank of Russia introduced a framework for emergency liquidity provision (FELP) designed for bank resolution, allowing banks faced with temporal liquidity
problems to apply to the Bank of Russia for a 90-day loan at a fixed interest rate equal to the key interest rate plus 1.75 percentage points. Regulator's loan decision within the FELP framework relies on financial sustainability as well as systemic importance of the target bank. In 2017, for instance, RUB 1.06 trillion were allotted for the resolution of Otkritie Bank within the FELP framework as well as via fixed-rate repo loans.
Banks' demand for central bank's foreign-currency refinancing facility was on the slide during the year on the back of ruble appreciation and stable foreign exchange market. As a reminder, banks' demand for the foreign-currency refinancing facility was in great demand in 2014-2015. At the height of 2015 crisis, for example, banks owed USD 35 billion to the Russian central bank on foreign-currency repos, whereas in September 2017 their debt was considerably reduced, running at just USD 897.6 million. Note that the foreign-currency refinancing facility facilitated stabilization in the foreign exchange market in times of crisis. However, while banks' foreign-currency repo debt to the central bank averaged USD 14.3 billion in 2016, it was reduced considerably in 2017 to an average of USD 3.4 billion. Since the beginning of 2017, the bulk of funds allotted during foreign-currency repo auctions had a 28-day maturity (Fig. 3) at an average weighted interest rate of 3.1 percent (4.2 percent per annum in 2016). The Russian central bank discontinued holding regular foreign-currency repo auctions with maturities of 7 and 28 days since September 11, 2017.
In 2017, banks increased their demand for foreign-currency refinancing through foreign-currency swap lines. The average foreign-currency liquidity swap line for the banking sector stood at USD 576.7 million in 2017 (USD 498.4 million in 2016). Interest rates on the ruble and foreign-currency legs stood at 6.75-9 and 2.2-2.9 percent, respectively. Note that demand for foreign-currency swaps surged in December 2017, when the average foreign-currency swap line increased to USD 1.4 billion, 2.3 times higher than that of December 2016. The increase in demand for foreign-currency swaps was apparently associated with growth in banks' demand for foreign-currency liquidity by the end of the year amid discontinued foreign-currency repos.
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Fig. 3. Credit institutions' liability to Russia's central bank in second leg of foreign-currency repos in 2014-2017
Source: Bank of Russia.
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It appears that liquidity surplus will continue in 2018 and, therefore, the regulator will continue to use in a flexible manner liquidity absorption instruments in the banking sector, seeking to maintain the money market overnight interest rate close to the monetary policy rate. Furthermore, the regulator will broaden the range of instruments to provide liquid assets as may be required.
In 2017, credit institutions' debt to the Bank of Russia was reduced amid structural liquidity surplus (Table 2). As of January-December 2017 period-end, loans, deposits and other funds raised by credit institutions decreased by 1.4 times to RUB 2.0 trillion (the value was halved to RUB 2.7 trillion in 2016) (Fig. 4). As a reminder, credit institutions started reducing their debt to the central bank in 2015 in response to influx of funds to the banking sector via the budget channel. Furthermore, banks' debt to the central bank peaked RUB 9.3 trillion, according to data as of the beginning of 2015.
Up until July 2017, loans secured by nonmarketable assets (RUB 329 billion, according to data dated June 30) prevailed in the structure of banks' debt to the central bank, whereas their debt on repo auctions was only RUB 77.2 billion as of the same date. In July-August 2017, however, banks' repo debt to the central bank climbed RUB 664 billion mostly due to regulator's loan to Otkritie Bank. Note that the foregoing amount does not include RUB 330 billion, according to our estimates, that were allotted via the FELP framework to Otkritie Bank. The structure of banks' debt to the central bank was back to its previous ratio in late September as a result of full repayment of loan by Otkritie Bank.
Table 2
Bank of Russia Balance Sheet of 2015-2017
January 1, 2016 January 1, 2017 December 1, 2017
Rubles in billions percent of assets/ liabilities Rubles in billions percent of assets/ liabilities Rubles in billions percent of assets/ liabilities
Funds placed with nonresidents and securities issued by nonresidents 21,995,2 62.9 18,005,1 62.1 19,608,4 62.2
Credits and deposits 6,400,3 18.3 4,175,1 14.4 3,816,7 12.1
Precious metals 3,647,3 10.4 3,747,5 12.9 4,537,3 14.4
Securities 719,9 2.1 528,9 1.8 433,9 1.4
Other assets 920,4 2.6 1,013,4 3.5 1,616,1 5.1
Total assets 34,947,2 100 28,974,1 100.0 31,523,7 100.0
Cash in circulation 8,522,5 24.4 8,790,1 30.3 8,864,3 28.1
Balance of accounts with the Bank of Russia 12,573,3 36.0 9,985,5 34.5 11,697,2 37.1
of which: Russian government funds 8,130,7 23.3 4,662,0 16.1 5,950,7 18.9
funds of resident credit institutions 2,528,3 7.2 3,093,3 10.7 3,905,9 12.4
Float 0,4 0.0 2,8 0.0 10,5 0.0
Outstanding securities - - - - 306,2 1.0
Liabilities to IMF 1,074,2 3.1 1 392,9 4.8 1,417,6 4.5
Other liabilities 160,4 0.5 111,4 0.4 576,1 1.8
Capital 12,503,7 35.8 8,647,85 29.8 8,651,9 27.4
Profit for current FY - - 43,7 - - -
Total liabilities 34,947,2 100 28,974, 1 100 31,523,7 100
Source: Bank of Russia.
In 2017, banks actively increased their 1-7-day deposits in the Bank of Russia. Note that 1-week deposit auctions were most popular auctions. An average of RUB 814.6 billion were raised at like auctions, and the average weighted interest rate came out to be 9.0 percent per annum.
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Overnight loans ■ Other loans ■ Lombard loans ■ REPOs ¡2 Unsecured loans
Fig. 4. Commercial banks' ruble-denominated debt (under key instruments) to Bank of Russia in 2008-2017
Source: Bank of Russia.
In 2017, the interbank interest rate1 in the interbank lending market was down 2.4 percentage points (from 10.1 percent per annum on average in January 2017 to 7.7 percent per annum on average in November 2017). Overall, in 2017 the interbank interest rate stood within the boundaries of interest rate band set by the Russian central bank. At some periods of the second half of the year the money market saw excessive volatility and the MIACR shifted to the lower boundary of the interest rate band probably due to increased supply in the interbank lending market from banks facing a great influx of liquidity from their customers' operations/transactions as well as operations of the Banking Sector Consolidation Fund that was established in May 2017 for the resolution of failing banks. The average annual MIACR on overnight interbank ruble-denominated loans loosened from 10.5 percent per annum in 2016 to 8.9 percent per annum in 2017 (Fig. 5).
Like in 2015-2016, the principal sources of accumulation of the broad monetary base in January-December 2017 were changes in the balance on the general government's accounts with the central bank as well as Bank of Russia's operations providing liquidity to the banking sector. For instance, the monetary base in 2017 saw a positive increase of RUB 3.9 trillion through raising money from sovereign funds, whereas it contracted by RUB 3.2 trillion as a result of reduction of banks' debt to the regulator. Overall, in 2017 the broad monetary base swelled by 23.7 percent to RUB 14.7 trillion as of January 1, 2018. Note that in 2016 the monetary base advanced 7.6 percent to RUB 11.9 trillion (Fig. 6). It appears that the pattern for
1 Interbank interest rate (Moscow InterBank Actual Credit Rate) is monthly average MIACR on overnight interbank ruble-denominated loans.
money supply formation will remain the same in 2018 because the National Wealth Fund will be a principal source to cover the federal budget deficit in 2018.
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Minimum repo rate on overnight or one-week auctions ™ ~ ™ Deposit Rate for One Day
Fixed interest rate on liquidity provision operations Interest rate on overnight loans « ™ « Maximum interest rate on 1-week deposit auctions
Fig. 5. Bank of Russia's interest rate band and dynamics of interbank lending
market in 2013-2017
Sources: Bank of Russia, Gaidar Institute's calculations.
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Fig. 6. Key factors that influenced monetary base (broad definition) in 2008-2017
Sources: Bank of Russia, Gaidar Institute's calculations.
2
Banks' deposits in the Bank of Russia that tripled to RUB 2373.2 billion were definable as fastest growing components of the broad monetary base as of 2017 year-end. That was associated with liquidity surplus in the banking sector and banks' low readiness to provide loans to other banks and companies due to persisting high risks and uncertainty surrounding Russia's economic development in years to come. Cash in circulation advanced 8.5 percent to RUB 9539.0 billion, correspondent accounts were up 5.9 percent to RUB 1930.7 billion as required reserves picked up 4.4 percent to RUB 506.2 billion. The Bank of Russia issued bonds worth RUB 352.4 billion. Overall, surplus reserves1 doubled to RUB 4656.3 billion in 2017. (Table 3).
Table 3
Broad monetary base dynamics of 2017, rubles in billions
January 1, 2017 April 1, 2017 July 1, 2017 July 1, 2017 January 1, 2018
Monetary base (broad definition) 11,882,7 11543,5 11596,4 12916,2 14701,5
- cash in circulation including cash in vaults of credit institutions 8,789,8 8394,9 8752,7 8895,1 9539,0
- correspondent accounts of credit institutions with the Bank of Russia 1,822,7 2143,9 1675,3 2225,0 1930,7
- required reserves 484,7 510,5 509,7 536,7 506,2
- deposits of credit institutions with the Bank of Russia 785,5 494,2 658,6 1109,8 2373,2
- Bank of Russia's bonds held by 0 0 0 149,7 352,4
credit institutions
For reference: surplus reserves 2608,2 2638,1 2333,9 3484,5 4656,3
Source: Bank of Russia.
The Bank of Russia added USD 55 billion (14.6 percent) to its 2017 year-end international reserves that totaled USD 432.7 billion as of the beginning of 2018 (Fig. 7). Russia's foreign exchange reserves increased USD 38.5 billion (12.1 percent). Note that the increase in foreign exchange reserves was in part due to foreign exchange purchases by the Russian Ministry of Finance in the internal foreign exchange market, a total of about RUB 827.7 million as of 2017 year-end (36.8 percent of the increase in foreign exchange reserves), and banks' repayment of their debt to the central bank (USD 7.9 billion as of 2017 year-end, or 20.5 percent of the increase in foreign exchange reserves). In 2017, Russia added USD 16.5 billion (27.3 percent) to its monetary gold reserves since the beginning of the year, due to positive revaluation (USD 7.4 billion) of the reserves in 2017 despite the fact that gold prices declined in the global market in some months of 2017. As a result, as of January 1, 2018, the foreign exchange reserves accounted for 82.3 percent of the total reserves (84.1 percent in 2016) and gold represented 17.7 percent (15.9 percent in 2016). Today, Russian reserves are sufficient to ensure a sustainable balance of payments in Russia because they cover both 16 months of imports of goods and services into Russia (17 months in 2016) and external debt repayments that fall due in 2018.
1 Surplus reserves in the banking system comprise deposits of credit institutions with the Bank of Russia and correspondent accounts of credit institutions with the Bank of Russia, as well as Bank of Russia bonds held by credit institutions.
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Fig. 7. Dynamics of monetary base (narrow definition) and Russia's foreign currency and gold reserves (international reserves) in 2008-2017
Source: Bank of Russia.
In 2017, M2 increased monthly by an the average of 10.3 percent (7.4 percent in 2014, 6.5 percent in 2015, 11.3 percent in 2016). In 2017, the annualized monetary base saw an average increase of 11.2 percent. As a result, the money multiplier (the M2 to monetary base ratio) remained almost unchanged, 3.2 compared to 3.3 in 2016 (3.2 in 2014, 3.3 in 2015). The money multiplier value equals the average for emerging economies (Ukraine, Belarus, Kazakhstan), whereas it tends to vary within a range of 5-8 in developed countries. Note that East European countries saw their money multiplier rise over the past two decades as their banking system advanced further. In Poland, for example, the money multiplier advanced to 5.7 from 3.1 in the period between 1993 and 2017.
According to preliminary estimates, the level of monetization of the Russian economy (the M2 to GDP ratio) in the period between 1999 and 2017 tripled to 59.4 percent in 2017, reaching the ratio seen in Central and East European countries that are traditionally characterized by higher degree of monetization. In Poland, for example, the M2 to GDP ratio in 2016 stood at 68.1 percent (40.2 percent in 1999). In contrast, the M2 to GDP ratio in the same period increased by 2.2 times to 36.0 percent in Belarus, by 3.1 times to 42.4 percent in Kazakhstan, by 2.8 times to 46.3 percent in Ukraine. Developed countries had even higher GDP monetization owing to a more advanced financial system: in 2016, for example, the M2 to GDP ratio reached 142.5 percent in the United Kingdom, 190 percent in Switzerland.
2.1.3. Inflationary developments
Inflation in Russia stood at 2.5 percent at 2017 year-end, way below the value (5.4 percent) seen in 2016. In January-December 2017, the inflation rate continued to slide to 2.5 percent from 5.0 percent, with just a minor spike in June (Fig. 8). Furthermore, the target rate was for the first time achieved in mid-May 2017, and the Russian economy saw a deflation of -0.5 percent in August and -0.1 percent in September 2017, for the first time since August 2011. Inflationary developments slowed on the back of ruble appreciation, good crop as well as a moderately tough monetary policy of the Bank of Russia. As a result, the inflation rate was down to a level surpassing the previous year's all-time low.
12,0 10,0 8,0
6,0 4,0 2,0 0,0
Fig. 8. CPI growth rate in 2016-2017, % change over the last 12 months
Source: Rosstat; Gaidar Institute's calculations.
As shown in Table 4, the deceleration of inflation in 2017 was driven by price movements for foodstuff products, a decline of 1.1 percent in December 2017 over December 2016 compared with 4.6 percent in December 2016 over December 2015 (Fig. 9). For instance, the industry saw a deflation in July-September 2017 (down 1 percent in July, 1.8 percent in August, 0.7 percent in September) driven mostly by falling prices of fresh fruit and vegetables (down 8.3 percent in July, 15.5 percent in August, 6.9 percent in September) because of a record-high crop. Note that a similar slump of foodstuff prices (down 1.7 percent) was seen only in August 2003, with a 7.2 percent fall of prices for fresh fruit and vegetables. Prices of foodstuff products in December 2017 over December 2016 were pushed up by increase in prices for butter (up 9.6 percent), milk and dairy products (up 5.2 percent), fish and seafood products (up 3.8 percent), alcoholic beverages (up 2.9 percent).
Non-foodstuff price growth decelerated from 6.5 percent in December 2016 over December 2015 to 2.8 percent in December 2017 over December 2016. The deceleration of inflation was led primarily by prices of home appliances (down by an average of 2.3 percent in December 2017 over December 2016) and medicines (down 3.4 percent in December 2017 over December 2016) that were dragged down by the ruble's appreciation given a large proportion of non-foodstuff imports. Note that prices of tobacco products (up 8.6 percent) and
motor gasoline (up 7.3 percent) rose at higher rate than other products of this group due to heightened excise duties.
In December 2017, prices of paid services to individuals increased 4.4 percent over December 2016. The major contributors to the increase in prices of paid services were educational services (up 7.5 percent), passenger transport services (up 6.8 percent), early childhood educational services (up 5.2 percent), medical services (up 5.0 percent), communication services (up 4.7 percent).
The core inflation, an indicator excluding changes linked to seasonal and administrative factors, was on a smooth slide in 2017, from 5.5 percent year-on-year in January 2017 to
2.1 percent in December 2017, thus evidencing that the deceleration of inflation in 2017 was overall resistant to temporary factors.
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Fig. 9. Structure of inflation in 2008-2017, percent change compared to the previous year's month
Source: Rosstat, Gaidar Institute's calculations.
Household inflation expectations continued to fall in 2017. The median one-year ahead expected inflation rate was down from 10.9 percent in January to an all-time low (during the period of monitoring) of 8.7 percent in November and December 2017, according to InFOM's survey published by the Bank of Russia. Bank of Russia's estimates based on the data from respondents of an inflation expectation survey is another evidence of declining household inflation expectations. The inflation probability in December was estimated 2.4 percent, down
2.2 percentage points from the value recorded in January.1 Note that the median one-year ahead expected inflation rate in January-November 2017 was higher than the actual inflation rate seen over the past 12 months by 5.8-7.1 percentage points. Overall, relatively heightened inflation expectations, including their unstable and sluggish nature, was a headwind to the transition
1 The Bank of Russia Bulletin "Inflation Expectations and Consumer Sentiment", No. 8 August 2017.
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from a tight to a neutral monetary policy. Note, however, that the fact that inflation expectations are higher than the target inflation rate is typical of both developed and developing countries. It's therefore unlikely that inflation expectations will slip to 4%. Inflation expectations in 20182019 will probably reach a steady-state level thus allowing the Russian central bank to switch to a neutral monetary policy.
Note that consumer demand recovery on the back of real wage increase amid decelerating inflation remained a source of risks of inflation. The retail trade turnover increased since April 2017 (for the first time since December 2014) to an average of 1.9 percent year-on-year in April-November, most likely due to the growth in consumer lending. Another source that can possibly boost inflation in the next few months is persisting uncertainty about external environment for the Russian economy; in particular, the oil market remains unstable, and capital inflows into Russia can be decreased if the Federal Reserve tightens its monetary policy along with a key interest rate cut in Russia.
Table 4
Annual growth rate of prices for certain consumer goods and services in 2015-2017, % change, December over December
2015 2016 2017 2015-2017
CPI 12.9 5.4 2.5 22.0
Foodstuff products 14 4.6 1.1 20.6
Butter 10.6 20.5 9.6 46.1
Fish, other seafood and products thereof 20.9 8.6 3.8 36.3
Sunflower oil 37.2 3.4 -8.6 29.7
Milk and dairy products 11.5 9.5 5.2 28.4
Pasta-based food products 19.5 4.5 -0.7 24.0
Bread and bakery products 13.2 5.9 2.7 23.1
Alcoholic beverages 10.7 6.4 2.9 21.2
Fresh fruits and vegetables 17.4 -6.8 1.2 10.7
Grains and legumes 15.5 6.4 -13 6.9
Meat and poultry 4.3 1.6 -2.3 3.5
Eggs 9.8 -0.7 -14.2 -6.5
Nonfoodstuff products 13.7 6.5 2.8 24.5
Tobacco products 26.6 17.8 8.6 62.0
Textiles 19.7 7.6 3.7 33.6
Washing and cleaning agents 22.4 6.3 0.6 30.9
Footwear 15.1 9.2 4 30.7
Textile goods 13 7.5 3.3 25.5
Clothing and underwear 12.8 7.3 3 24.7
Medicines 19.6 4.9 -3.4 21.2
Motor gasoline 4.8 3.8 7.3 16.7
Services 10.2 4.9 4.4 20.7
Early childhood educational services 16.8 9.3 5.2 34.3
Passenger transport services 10.7 6.6 6.8 26.0
Medical services 11.1 7.8 5 25.8
Educational services 8.7 4.9 7.5 22.6
Utility services 10.1 5.4 4.6 21.4
Communication services 2.9 3.7 4.7 11.7
Source: Rosstat.
We finally compare Russia's consumer price growth rates with those of other countries (Table 5).
Table 5
Consumer price index dynamics of various countries in 2015-2017, percent a year
2015 2016 2017 2015-2017
Azerbaijan 7.6 15.7 12.9 40.6
Armenia -0.1 -1.1 2.6 1.4
Belarus 12.0 10.6 4.6 29.6
Kazakhstan 13.6 8.5 7.3 32.3
Kyrgyzstan 3.4 -0.5 3.7 6.7
Moldova 13.6 2.4 7.3 24.8
Russian Federation 12.9 5.4 2.5 22.0
Tajikistan 5.0 6.1 6.7 18.9
Ukraine 43.3 12.4 13.7 83.1
Germany 0.2 0.5 1.7 2.4
France 0.0 0.2 1.2 1.4
United States 0.1 1.3 2.1 3.5
The Netherlands 0.6 0.3 1.3 2.2
Sources: Interstate Statistical Committee of the Commonwealth of Independent States (http://www.cisstat.com/), OECD database (http://stats.oecd.org/).
The Russian Federation ranked 1st among CIS countries with slowest consumer price growth rates at 2017 year-end. Ukraine and Azerbaijan ranked 1st and 2nd, respectively, among CIS countries with highest rates of inflation (13.7 and 12.9 percent, respectively). While the 2016 inflation rate in Russia averaged 16 times the inflation rate in developed countries, in 2017 Russia had consumer price growth rates comparable with developed countries (1.7 percent in Germany, 2.1 percent in the United States). Given the said risks and the ongoing inflationary dynamics, inflation can be expected to gear up in the first half of 2018, but it's highly likely that inflation will stay at about 4 percent, similar to the target inflation set by the Russian central bank.
2.1.4. Balance of payments and ruble exchange rate
In 2017, the Russian ruble appreciated substantially in nominal and real terms against national currencies of Russia's trade partners. In nominal terms, the ruble posted a 14.7 and 12.6 percent y-o-y annual average gain against the US dollar and the euro, respectively. The ruble nominal effective exchange rate against foreign currencies advanced 15.5 percent in 2017, which, given the consumer price dynamics deceleration to a historical low, became the key factor of ruble's 15.9 percent appreciation in real terms by 2016 (Fig. 10).
The ruble's appreciation in 2017 was determined mostly by rising energy prices in the global markets. At the same time, notwithstanding the continuing close correlation between crude oil prices and the ruble exchange rate, the 2017 average intramonth volatility of the US dollar and Euro exchange rate against the Russian ruble1 fell furhter to 1 percent (compared with previous year's 1.6 percent) and to 1.1 percent (compared with 1.8 percent a year earlier), respectively. Note that the ruble exchange rate was generally in line with the dynamics of currencies of developing countries and of primary commodities' exporting countries, although the ruble appreciated at substantially high rates (Fig. 11, 12).
Data for the 2017 Balance of Payments show that the current account surplus increased considerably over 2016. At the same time, private capital net ouflow increased mostly because Russian banks slimmed their foreign liabilities.
1 Intramonth volatility of the ruble exchange rate against foreign currencies is calculated using daily official exchange rates and is expressed as a percentage ratio of exchange rate standard divergence to its average monthly value.
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■ Real effective exchange rate index (right scale)
Fig. 10. Dynamics of Russian ruble exchange rate, 2003-2017 Sources'. Bank of Russia, own calculations.
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-8,0
-3,0
Turkish lira 2,0 7,0
12,0
Russian ruble Kazakhstan tenge Chilean peso Australian dollar New Zealand dollar Norwegian krone Mexican peso
ZI □
-2,0
3,0
8,0
13,0
Note: The signs "+"and "-" denote appreciation and depreciation, respectively, of a national currency against the US dollar.
Fig. 11. Dynamics of nominal exchange rate for developing countries' currencies in 2017, percent change year over year
Fig. 12. Dynamics of nominal exchange rate for primary commodities' exporting countries in 2017, percent change year over year
Sources: data posted on central banks' official websites, own calculations.
According to Bank of Russia's preliminary data on the 2017 Balance of Payments, the current account balance ran at USD 40.2 billion, gaining 58 percent (or USD 14.7 billion in absolute terms) over 2016.1
The balance of trade in goods reached USD 115.8 billion, adding 28 percent, USD 25.5 billion in absolute terms, to the value (USD 90.3 billion) seen in 2016 (Fig. 13). The pivotal contribution came from increased exports, up 26 percent in value terms, USD 71.9 billion in absolute terms, from USD 281.8 billion in 2016 to USD 353.7 billion in 2017, governed by heightened average annual crude oil prices amid stable supplies in volume terms (crude oil export prices averaged ~USD 364 a ton in January-November 2017, whereas in 2016 they stood at an average of USD 289 a ton). That also pushed average annual prices for refined petroleum products (export prices of refined petroleum products averaged ~USD 388 a ton in January-November 2017, whereas in 2016 the average price was USD 295 a ton) and natural gas (export prices of natural gas averaged ~USD 179 TCM in January-November 2017, USD 157 TCM in 2016). Therefore, crude oil, refined petroleum products and natural gas accounted for 55.2 percent of Russia's total exports, adding 0.6 percentage points to the value recorded in 2016 (Fig. 14).
Prices for other Russian primary exports rose on the back of further global economic growth and therefore heightened demand for resources such as ferrous metals (up from USD 321 to USD 440 a ton), hard coal (an increase from USD 52 to USD 74 a ton), wheat and meslin (wheat-rye mixture) (up from USD 166 to 176 USD a ton), nonferrous metals (up 10-30 percent for aluminum, copper, nickel).
The balance of trade in goods was also influenced by a 24 percent growth in imports (up USD 46.3 billion in absolute terms) from USD 191.6 billion in 2016 to USD 237.9 billion in 2017, mostly as a result of the ruble's appreciation, leading to a substantial relative fall of costs of imports for Russian economic agents.2
In 2017, the balance of trade in services worsened to -USD 30.2 billion, which is (in absolute terms) 27 percent above -USD 23.8 billion seen in 2016. Export of services in 2017 increased 15 percent to USD 58.1 billion from USD 50.6 billion mostly due to inbound tourism and transport services as import of services gained 19 percent to USD 88.3 billion from USD 74.4 billion, mostly on the back of outbound tourism, transport services and other types of business services, with the latter surpassing the former both in relative and absolute terms. If the ruble's real effective exchange rate continues to appreciate, import of services would continue to outpace export of services, and therefore a negative balance of import of services would further deteriorate. However, since the ruble's appreciation may be led mostly by increasing prices for primary export items, such a deterioration is known to be offset by increase in the trade in goods balance.
Both the investment income balance and the compensation of employees balance underwent minor changes in 2017, with the former down USD 0.7 billion (from -USD 2.2 billion to
- USD 2.9 billion) as the latter dropped USD 2.8 billion (from -USD 32.5 billion to
- USD 35.3 billion). Like in 2016, the rent balance in 2017 came out to be zero as the secondary income balance contracted to -USD 7.2 billion (-USD 6.3 billion in 2016).
1 See A. Bojechkova, A. Knobel, P. Trunin. Russia's Balance of Payments of 2016 // Russian Economic Developments. 2017. Vol. 24. No. 2. PP. 3-6.
2 For more details on the exchange rate influence on trade see A. Knobel, A. Firanchuk. Specifics of Russia's exports and imports in January-August 2017 //Economic Development of Russia. 2017. Vol. 24. No. 11. PP. 12-18.
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■ Balance of Trade Oil Price Index (Q1 1995 =1
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2014
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900% -- 800% 700% 600% 500% 400% 300% 200% 100% 0%
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2017
Fig. 13. Russia's balance of trade and global oil price index in 2006-2017
Sources: Bank of Russia, own calculations.
Therefore, the trade in services balance and the trade in goods balance, with the latter being heavily reliant on hydrocarbon price movements, continued to be the principal driver of the amount of the current account balance in the Russian economy.
600
500
M 400
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m £ 300
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.0
£ 200
100
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80 70 60 50
40 % 30 20 10 0
] Export
Share of oil, oil products and gas in exports
Fig. 14. Dynamics of exports of goods and of percentage share of fuel and energy
sector products in 1994-2017
Source: Bank of Russia.
0
The increase in the current account surplus occurred with a comparable increase in financial account deficit, up USD 21.0 billion in 2017 (up USD 11.9 billion in 2016). In 2017, the nongovernment sector of the Russian economy saw a net capital outflow of USD 31.3 billion, a 1.6-fold increase over 2016 (Fig. 15). The dynamics of capital outflow was driven mainly by banks' transactions. In particular, banks saw a net capital outflow of USD 28.6 billion in 2017, whereas there was an inflow of USD 1.1 billion in 2016. The major contribution to the balance of bank transactions with the rest of the world came from the repayment of banks' foreign liabilities which in 2017 were trimmed by USD 31.4 billion (USD 27.1 billion in 2016) as banks' foreign exchange assets in 2017 were down USD 2.9 billion (USD 28.3 billion in 2016).
DNet capital outflow (USD in billions) —♦—Net capital outflow/foreign trade turnover (%)
Fig. 15. Private sector's net capital outflows in 2005-2017
Sources: Bank of Russia, Gaidar Institute's calculations.
Meanwhile, other sectors saw a considerable decline in net capital outflow in 2017, down to USD 2.7 billion from previous year's USD 20.9 billion. The non-bank sector's foreign liabilities increased USD 15.7 billion compared with previous year's increase of USD 17.6 billion, mostly on the back of USD 23.2 billion in direct investment (USD 30.9 billion in 2016). At the same time, portfolio investment liabilities decreased by USD 5.9 billion (no changes were recorded in 2016) as total loans and credits dropped USD 1.7 billion (a decrease of USD 12.0 billion in 2016), whereas other liabilities increased USD 0.1 billion (an outflow of USD 1.3 billion in 2016). Overall, positive growth in foreign liabilities was indicative of the fact that the non-bank sector in 2017 managed to raise more funds than was needed for foreign debt repayments. That was also due to non-bank sector's successful foreign debt refinancing despite sanctions-induced limited access to global capital markets. Other sectors' foreign debt increased USD 10.7 billion to USD 354.0 billion (a decline
of USD 1.9 billion in 2016). Other sectors' foreign exchange assets increased USD 22.7 billion in 2017 (up USD 34.9 billion in 2016), mainly as a result of outbound foreign direct investments of USD 30.1 billion (USD 20.1 billion in 2016). Other sectors' portfolio investments increased USD 5.0 billion (USD 3.6 billion in 2016).
Note that substantial contribution to the increase in foreign liabilities in 2017 also came from the growth in portfolio investments in liabilities of federal agencies of state administration (USD 15.3 billion in 2017 vs. USD 5.2 billion in 2016). That was due to foreign investors' heightened interest in the Russian Federal Loan Obligations (OFZs) amid a relatively high level of interest rates in Russia. A point to note, however, is that public sector inbound portfolio investments dropped considerably by the end of 2017 (down to RUB 1.2 billion in Q4 2017), probably as a result of weakening foreign investment demand for this type of assets amid lower interest rates in Russia and concerns surrounding an extension of Western sanctions against Russia.
In 2017, Russia saw its external debt increase USD 15 billion to USD 529.1 billion as of January 1, 2018 (Table 6). The debt of federal agencies of state administration increased by 1.8 times to USD 55.6 billion as a result of considerable foreign investment in Russian federal bonds (OFZ) was offset by a decline of 20.7 percent to USD 104.5 billion in banks' external outstanding loans.
Table 6
Balance of payments' principal accounts and dynamics of external debt
in 2015-2017, USD in billions*
Indicator 2015 2016 2017
Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Balance of current accounts and of capital accounts 30.0 16.5 7.7 14.5 68.8 12.9 2.0 0.4 10.3 25.5 22.6 2.3 -2.5 17.8 40.2
Financial account (excluding reserve assets)** 37.2 19.3 2.1 11.1 69.8 7.5 -1.7 -1.0 7.1 11.9 11.4 -2.2 -10.2 22.1 21.0
Change in foreign exchange reserves ('—' denotes decrease in reserves) -10.1 -2.2 9.7 4.3 1.7 2.6 4.4 3.1 -1.8 8.2 11.3 7.5 6.5 -2.7 22.6
Net errors and omissions -2.9 0.8 4.1 1.0 2.9 -2.8 1.9 1.7 -5.5 -4.6 0.1 3.2 -1.1 1.7 3.8
Change in Russia's external debt ('—' denotes decrease of debt) -43.5 -0.4 -18.9 -18.0 -80.8 2.1 3.3 -4.3 -6.2 -5.0 11.4 7.1 4.0 -7.6 15.0
Change in Russia's sovereign external debt -8.1 2.9 -4.1 -1.8 -11.1 1.5 3.9 4.4 -1.2 8.6 6.7 0.7 7.8 1.3 16.5
Change in Russian private sector's external debt -36.0 -2.3 -15.0 -17.5 -70.9 1.4 -0.4 -8.9 -6.3 -14.2 2.7 3.4 -8.1 -2.2 -4.1
* preliminary estimate.
** excluding foreign currency reserves.
Source: Bank of Russia.
Our capital flight estimate for 2017 year-end (Fig. 16) came out to be positive, at a level of USD 6.1 billion (USD 4 billion in 2016).1
1 We use the IMF method to measure capital flight, that is, the sum of "trade credits and advances", "dubious operations" and "net errors and omissions."
■ ■ Capital flight (USD in billions) > Capital flight/foreign trade turnover (%)
Fig. 16. Capital flight dynamics in 2005-2017 Sources: Bank of Russia, Gaidar Institute's calculations.
If the ongoing trends in the Russian economy and in the global energy market continue further, Russia's Balance of Payments and therefore the ruble's exchange rate will remain stable: a possible growth in the average annual crude oil price will be offset by increased imports as well as Ministry of Finance's much bigger foreign exchange purchases under a new budgetary rule. In addition, the ruble's appreciation will be dampened by a decline in short-term foreign capital inflows as the central bank continues to ease its monetary policy. What should not be left unnoticed, however, is risks that may come from a possible fall of crude oil prices induced by increased output and from new tough sanctions against Russian assets.
2.2. Fiscal policy1
2.2.1. The characteristic features of budgets across the RF budgetary system
The basic parameters of the RF budgetary system
The year 2017 saw some notable changes in the main parameters of the execution of the general government budget of the Russian Federation: the budgetary system's revenue gained nearly 1 percentage point of GDP, while expenditure, on the contrary, lost 1.2 percentage points of GDP. Thus, the revenue volume amounted to 32.6 percent of GDP, and that of expenditure -
1 This section is written by Igor Arlashkin, IAES-RANEPA; Natalya Barbashova, the Gaidar Institute, IAES-RANEPA; Sergey Belev, the Gaidar Institute, IAES-RANEPA; Alexander Deryugin, IAES-RANEPA; Maria Deshko, the Gaidar Institute; Arseny Mamedov, the Gaidar Institute, IAES-RANEPA; Ilya Sokolov, VAVT under Russian Ministry of Economy, IAES-RANEPA; Tatina Tishchenko, IAES-RANEPA.
to 34.1 percent of GDP. As a result, the budgetary system's deficit shrank by 2.2 percentage points of GDP, to 1.5 percent of GDP (TTable 7).
Table 7
The main parameters of the RF budgetary system
2013 2014 2015 2016* 2017* Change in 2017 relative to 2016, percentage points of GDP*
st-o 3 8 S 2 3 5 S percentage points of GDP f o e £ •S !E percentage points of GDP Trillions of rubles percentage points of GDP f of ns les s 3 a s S percentage points of GDP f of ns les s 3 a s S percentage points of GDP
Revenue 24.4 33.3 26.7 33.7 26.6 31.9 27.6 (27.2)* 32.1 (31.6)* 30.0 32.6 1.0
Expenditure 25.2 34.5 27.5 34.8 29.4 35.3 30.7 (30.3)* 35.7 (35.2)* 31.4 34.1 -1.2
Deficit (-) / Suplus (+) -0.8 -1.2 -0.8 -1.1 -2.8 -3.4 -3.1 -3.7 -1.3 -1.5 2.2
For reference: GDP, trillions of rubles 73.13 79.20 83.39 85.92 92.08 -
Note: The total volumes of revenue and expenditure volume are adjusted by the 'duplicated' records of insurance contributions for the non working population.
*To achieve full comparability with 2017, the indices for 2016 are supplemented by data (shown in brackets) derived from reports of the Federal Treasury as of January 1 for each relevant year (cash basis accounting); these indices are lower than the indices taken from the annual reports for each relevant year (accrual basis accounting), first of all due to the specificities of the Federal Social Insurance Fund's operations. Growth in terms of share in GDP (last column) reflects data from the reports as of January 1 for each relevant year. Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
When reviewing the main parameters of the budgetary system in 2017, it is worthwhile to note that the government has indeed succeeded in halting the trend that began to emerge in 2015-2016 - that of a budget deficit surge. The budget volume returned to its level observed in 2013-2014. This was achieved thanks in part to the budget consolidation measures, and in part to the positive budget revenue movement. As a result, the movement of the deficit and expenditure over the period 2015-2017 displayed a counter-cyclical pattern, i.e., their indices rose during the period of economic decline, and then shrank when the rate of economic growth returned into positive zone by the year-end of 2017 (according to Rosstat's preliminary data, the growth rate of GDP amounted to 1.5 percent).
It became possible to suppress budget expenditure growth, the necessity to comply with the goals set by the May 2012 Presidential Executive Orders notwithstanding, by saving the surplus oil and gas revenues through their conversion into foreign currency, and also by the early redemption, in 2016, of a significant portion of the loans issued to enterprises of the defense-industrial complex, thus significantly reducing the amount of expenditure earmarked for defense in 2017. The reduction of both budget expenditure and the budget deficit alongside an aggressive monetary policy translated into an inflation plunge from 5.4 percent at year-end of 2016 to 2.5 percent in 2017.
The Main Tax Receipts in the RF Budgetary System
According to data for 2017, the level of general government budget revenue rose by 1.0 percentage point GDP, from 31.6 to 32.6 percent of GDP. Revenue growth was observed across nearly all the components of the aggregate tax load (see Table 8).
Table 8
The main tax receipts in the general government budget of the Russian Federation,
percent of GDP
2013 2014 2015 2016 2017 Change in 2017 relative to 2016
percentage points of GDP growth in real terms, percent
Revenue, total 33.3 33.7 31.9 32.1 (31.6)* 32.6 1.0 7.9
Corporate profit tax 2.9 3.0 3.1 3.2 3.6 0.4 15.9
PIT 3.5 3.4 3.4 3.5 3.5 0.0 5.1
Insurance contributions 6.3 6.3 6.4 6.6 (6.3)* 6.4 0.1 6.3
VAT 5.0 5.0 5.1 5.4 5.6 0.2 8.2
Excises 1.4 1.4 1.3 1.6 1.7 0.1 15.1
MRET 3.6 3.7 3.9 3.4 4.5 1.1 37.5
Customs duties and fees 7.0 6.9 4.0 3.0 2.8 -0.2 -2.6
Note. Total revenue and insurance contributions are adjusted by the 'duplicated' records of insurance contributions for the non working population.
* To achieve full comparability with data for 2017 taken from the Federal Treasury's report as of 1 January 2018 (cash basis accounting), the indices for 2016 are supplemented by data (shown in brackets) derived from reports of the Federal Treasury as of 1 January 2017 (cash basis accounting); these indices are lower than the indices taken from the annual reports for each relevant year (accrual basis accounting), first of all due to the specificities of the Federal Social Insurance Fund's operations. Growth indices (last two columns) relative to data in the corresponding rows are taken from the reports as of 1 January for each relevant year. Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
The amount of the budgetary system's oil and gas revenues, after having shrank in 2016, then significantly increased in 2017 due to the rising global prices for raw materials, and primarily energy resources. Thus, in particular, the amount of MRET receipts increased by 1.1 percentage points of GDP (or 37.5 percent in real terms). At the same time, the overall volume of customs duties and fees continued to decline (by -0.2 percentage points of GDP relative to 2016, or -2.6 percent in real terms), which can be explained by the ongoing 'tax maneuver' in the oil and gas sector (for more details, see below). Insurance contributions, excises and VAT increased at about 0.2 percentage points of GDP. PIT receipts remained practically unchanged.
Oil and gas revenues. The movement patterns of MRET and customs duties on energy carrier exports are shown in Table 9.
Table 9
The receipts of MRET and export duties on energy carriers, percent of GDP
2013 2014 2015 2016 2017
MRET 3.6 3.7 3.9 3.4 4.5
Export duties for: - energy carriers 5.7 5.8 3.3 2.3 2.1
- crude oil 3.3 3.3 1.7 1.2 1.1
- petroleum products 1.7 1.9 0.9 0.5 0.4
- natural gas 0.7 0.6 0.7 0.6 0.6
Source: Rosstat; RF Central Bank; RF Federal Customs Service, RF Federal Tax Service; Gaidar Institute calculations.
An analysis of the movement patterns of the tax and customs bases demonstrates that in 2017, exports and crude oil production remained practically unchanged relative to 2016. Exports amounted to 256.9 million t (+3.2 million t relative to 2016), and the production volume - to 546.7 million t (-0.5 million t relative to 2016).
The growth of oil and gas revenues was positively influenced by the movement pattern of the price of Urals crude. Meanwhile, the USD to RUB exchange rate responded weakly to changes in oil price (see Fig. 17).
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-Rate of MRET, adjusted by Cp, RUB/t (left-hand side axis)
Average exchange rate of USD (right-hand side axis) Average price of Urals crude, USD/barrel (right-hand side axis)
Fig. 17. The movement patterns of the actual rate of MRET, prices of Urals,
and the exchange rate of USD
Note. Cp is the coefficient describing the movement of world oil prices (in ruble terms, i.e., prices in USD and the USD to RUB exchange rate)
At the same time, the main input in the oil and gas revenue increase was made by the continuing tax maneuver in the oil and gas sector: from January 1, 2017, the basic rate of MRET for oil was raised from RUB 857 to RUB 919 per t, while the rate of export duty was reduced from 42 to 30 percent. In response to the combined effects of the price factor (the price of oil in rubles) and the legislative factor (raised basic rate), the actual ruble denominated rate of MRET amounted on the average in 2017 to more thane RUB 7,800 per t, while in 2016 is was on the average slightly above RUB 3,000 per t, thus not only compensating for the shrinkage of the amount of customs duties in the framework of the tax maneuver, but also triggering growth of the total volume of oil and gas revenues.
As before, the bulk of the tax burden associated with MRET is borne by the oil industry: the tax receipts generated by crude oil production increased, in 2017, by 0.9 percentage points of GDP, or 43.1 percent in real terms, while those generated by natural gas production gained only 0.2 percentage points (48.1 percent in real terms). It should be noted that the budget dependence on MRET has been gradually on the rise: while in 2013 the receipts of MRET accounted for
0
0
38.0 percent of the total volume of oil and gas revenue and for 19.1 percent of total federal budget revenue, in 2017 these indices amounted to 67.7 and 26.8 percent respectively.
Corporate profit tax. The year 2017 saw a rather notable growth of the corporate profit tax receipts (by 0.4 percentage points of GDP). As can be seen in Fig. 18, the profits of profitable companies slightly increased (by 0.1 percentage points of GDP), while the share of loss-making ones declined (by 3.2 percent). At the same time, a significant additional factor shaping the movement pattern of the tax receipts was the restriction on the possibility of carry-forward of the losses of previous periods in the amount of not more than 50 percent of the amount of taxable profit, which entered into force on January 1, 2017.
35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0%
2013 2014 2015 2016 2017
□ Corporate profit tax □ Profits of profitable companies □ Share of loss-making companies (right-hand side axis)
Fig. 18. The movement patterns of the corporate profit tax receipts in the RF budgetary system
Source: RF Federal Ta Service; Rosstat.
Value added tax. In 2017, the receipts of VAT on goods sold in RF territory ('domestic VAT') somewhat increased in terms of share in GDP (by 0.2 percentage points), while the receipts of VAT on goods imported into RF territory slightly decreased, returning to their 2014 level (Table 10). As before, Russia's typical feature is the higher collectability of VAT on imports than that of VAT on goods produced in RF territory.
Table 10
The movement patterns of VAT receipts in the RF budgetary system,
percent of GDP
2013 2014 2015 2016 2017
Revenue generated by VAT 5.0 5.0 5.1 5.4 5.6
VAT on goods sold in RF territory 2.6 2.8 2.9 3.1 3.3
VAT on goods imported into RF territory 2.4 2.2 2.1 2.3 2.2
For reference: Effective rate of VAT,1 percent 6.8 7.0 7.3 7.7 7.7
Effective rate of VAT on goods sold in RF territory 2 5.0 5.4 6.0 6.3 6.3
Effective rate of VAT on goods imported into RF territory3 11.2 10.8 10.4 10.8 10.8
1VAT receipts to final consumption ratio.
2 Ratio of receipts of VAT on goods sold in RF territory to final consumption, less value of imports. 3Ratio of receipts of VAT on imported into RF territory to value of imports.
Source: Rosstat; RF Ministry of Finance; Gaidar Institute calculations.
Payroll taxes. The year 2017 saw no changes in the rates of insurance contributions. The total charged wages and salaries in terms of share in GDP lost nearly 0.2 percentage points of GDP; however, the receipts of insurance contributions gained 0.1 percentage points of GDP, in the main due to the increased wage and salaries level in the groups with incomes below the income threshold, to which the basic rate applies.
The receipts of PIT in terms of share in GDP remained at the same level as in 2016.
37,5
37,0
36,5
36,0
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34,0
6,4
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I
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35,4
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3,5 /
36,9
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7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00
2013
2016
2017
2014 2015
i i Total (charged) wages and salaries
^ ^ Insurance contributions (right-hand side axis) PIT (right-hand side axis)
Note. Insurance contributions data are derived from the monthly reports released by Roskazna (RF Federal Treasury) (as of January 1 of the corresponding year) and adjusted by the 'duplicated' records of insurance contributions for the non working population.
Fig. 19. The receipts of insurance contributions and PIT, total (charged) wages and salaries,
percent of GDP
In 2017, the total volume of mandatory social insurance contributions amounted to RUB 4,495.3 billion (or 4.9 percent of GDP). When taken in nominal terms, the volume of social insurance receipts increased by 8.5 percent, and in real terms - by 4.6 percent. The compulsory medical insurance contributions of the working population (including self-employed individuals) amounted in 2017 to RUB 1,089 billion, and the compulsory medical insurance contributions for the non working population - to about RUB 619 billion.
Excises. In 2017, the aggregate revenues generated by excises on tobacco and alcohol products significantly increased, rising above 1 percent of GDP (see Table 11).
Table 11
The input to the budget of the excises on tobacco and alcohol products
2012 2013 2014 2015 2016 2017
Receipts of excises on tobacco products, billions of rubles 183 253 319 386 483 591
Receipts of excises on alcohol products, billions of rubles 255 307 333 294 349 397
Source: RF Federal Tax Service.
The data presented above are sufficiently positive, considering the fact that over recent years, both the tobacco and alcohol markets have been displaying a downward trend in consumption in terms of physical volume.1 So, there exist some grounds for arguing that at present, two possible excise policy goals can be achieved in the addictive product markets:2 consumption decline and budget revenue increase. Thus, increasing excises translate into increasing consumer prices, and these, in their turn, influence retail sales volumes. However, due to the low price elasticity of demand, raised excises, as a rule, trigger growth of their receipts in the national budgetary system. According to these data, in 2017 the revenues generated by excises on tobacco products amounted to RUB 591 billion vs. RUB 483 billion a year earlier, while those generated by excises on alcohol products increased from RUB 349 to RUB 397 billion.
Among the revenues from alcohol products, the biggest input was made by those from beer and liquor, in particular in 2017, the share of excises on liquor gained 2.5 percentage points relative to 2016, rising to 54.7 percent; meanwhile, the share of excises on beer lost 4.4 percentage points, shrinking to 38.9 percent. Due to the significantly raised rates, the input of revenues from wines increased.
The Expenditure Side of the RF Budgetary System
The total expenditure of the budgetary system of the Russian Federation shrank in 2017 by 1.2 percentage points of GDP relative to 2016 (see Table 12). Meanwhile, the changes in the volume of general government budget expenditure, when broken down by function, varied in the range from -1.3 to +0.18 percentage points of GDP.
Table 12
General government budget expenditure, percent of GDP
2013 2014 2015 2016 2017 Change in 2017 relative to 2016, percentage points
Expenditure, total 34.5 34.8 35.3 35.7 (35.2)* 34.1 -1.2
Nationwide issues 2.1 2.1 2.2 2.2 2.1 -0.0
National defense 2.9 3.1 3.8 4.4 3.1 -1.3
National security and law enforcement activity 3.0 2.8 2.5 2.3 2.2 -0.1
National economy, including: 4.5 5.7 4.5 4.5 4.7 0.2
agriculture and fisheries 0.5 0.4 0.4 0.4 0.4 -0.0
transport 0.7 0.8 0.8 0.8 0.9 0.1
motor road system (road funds) 1.6 1.5 1.5 1.6 1.6 0.0
communications and IT 0.1 0.1 0.1 0.1 0.1 0.0
Housing and community amenities 1.4 1.3 1.2 1.2 1.3 0.2
Environmental protection 0.1 0.1 0.1 0.1 0.1 0.0
Education 3.9 3.8 3.6 3.6 3.5 -0.1
Culture, cinematography 0.5 0.5 0.5 0.5 0.5 0.0
Healthcare 3.1 3.1 3.1 3.0 3.1 0.1
Social policies 12.0 11.1 12.5 12.6 (12.1)* 11.9 -0.2
Physical culture and sports 0.3 0.3 0.3 0.3 0.4 0.1
Mass media 0.2 0.1 0.2 0.1 0.1 0.0
Government and municipal debt servicing 0.6 0.7 0.8 0.9 0.9 0.0
1 For example, there have been a stable decline in the consumption of tobacco products: while in 2006 total tobacco product consumption amounted to 380 billion units, in 2016 this index was 290 billion units. The situation in the alcohol market, according to Rosstat data, has been similar: the consumption record high, observed in 2007, amounted to 1.47 billion dal for all types of products, and in 2016, the total market volume did not exceed 1.07 billion dal.
2 Addictive products are those that, once consumed, may trigger addiction effects. The majority of products in this category are demerit goods, i.e. goods that can have a negative impact on the consumer.
Note. The total expenditure volume, as well as the government spending under the Healthcare and Social Policies sections are adjusted by the 'duplicated' records of insurance contributions for the non working population. *To achieve full comparability with data for 2017 taken from the Federal Treasury's report as of 1 January 2018 (cash basis accounting), the budget system expenditure indices for 2016 are supplemented by data (shown in brackets) derived from the Federal Treasury's report released as of 1 January 2017 (cash basis accounting); these indices are lower than the indices taken from the annual reports for each relevant year (accrual basis accounting), first of all due to the specificities of the Federal Social Insurance Fund's operations. Growth indices (last column) relative to data in the corresponding rows are taken from the reports as of 1 January for each relevant year. Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
The most significant cuts were made in the government spending under the National Defense section (-1.3 percentage points of GDP), thus interrupting the constantly upward trend in military expenditure observable over recent years. In addition to the early redemption (in 2016) of the loans issued to defense enterprises, the shrinkage of expenditure allocated to National Defense may also have to do with the fact that the new government armaments program was approved only as late as 2018 (for 2018-2027), which means that this movement pattern may simply represent a 'technical pause'.
At the same time, the latest federal budget for 2018-2020 envisages a volume of spending to be allocated to this budget function that is slightly below the level of 2017, even when taken in absolute terms. In this connection it should be borne in mind that in accordance with the practice typical of recent years, the initial budget version is drawn up less the funding earmarked for the repayment of bank loans to the organizations belonging to the defense-industrial complex, received by the latter against government guarantees granted to secure the fulfillment of state defense orders. It is not known if the corresponding spending volumes are included in the approved budget functions for the period 2018-2020, or not. So, the possibility of an upward adjustment of the allocations to defense relative to the planned targets already in the course of execution of the 2018 federal budget cannot be ruled out, and we should not make any definite conclusion as to the sustainability of this change in trend from growth to a gradual reduction in the volume of government spending.
In 2017, a slight decline on 2016 (in the range of 0.1 percentage points of GDP) was also demonstrated by allocations to National Security and Law-Enforcement Activity and Education.
At the same time, there was an increase in the amount of funding designated to some expenditure functions: National Economy (by 0.2 percentage points of GDP), Housing and Community Amenities (0.2 percentage points of GDP), and Healthcare (0.1 percentage points of GDP). If we take a closer look at the items listed in the National Economy section, it can be noticed that more than half of the increased government spending was accounted for by infrastructure projects (allocations to transport, roads, and communications), and this should be interpreted as a positive fact.
As far as social policy is concerned, we may note the reinstatement of the long-established practice of indexation of pensions and social benefits (in this connection it was decided that the size of pensions should be adjusted not by the actual inflation rate, but by the targets approved alongside the budget projections for 2017).
On the whole, from the point of view of the ratio of 'productive' to 'unproductive' spending (the former meaning the allocations to infrastructure and human capital), the year 2017 saw a certain improvement in the general government budget expenditure structure. 1 However, this
1 For more details concerning 'productive' and 'unproductive' spending, see Kudrin A., Sokolov I. Fiscal maneuver and restructuring the Russian economy. Voprosy Ekonomiki, 2017, No. 9, pp. 5-27. (In Russian).
happened largely due to a sizable shrinkage of the government spending on defense coupled with a slight increase of that allocated to infrastructure, and a somewhat decreased amount of government spending on education. As a result, even without our earlier considerations concerning changes in the government spending under the National Defense section, it can still be concluded that so far, there has been no definite trend reversal and a switchover to a systematic and targeted shift in the government expenditure structure in favor of 'productive' spending items.
The Deficit of the RF Budgetary System
Table 13 presents data concerning the sources of general government budget deficit financing in 2013-2017.
Table 13
The sources of deficit financing in the RF budgetary system
2013 2014 2015 2016 2017 Change in 2017 relative to 2016, percentage points of GDP
billions of rubles percent of GDP billions of rubles percent of GDP billions of rubles percent of GDP billions of rubles percent of GDP billions of rubles percent of GDP
Sources of deficit financing, total 849 1.2 845 1.1 2,814 3.4 3,142 3.7 1,349 1.5 -2.2
Deficit financing from domestic sources 797 1.1 992 1.3 3,110 3.7 3,127 3.6 1,475 1.6 -2.0
Government securities 436 0.6 1,016 1.3 9 0.0 524 0.6 1,221 1.3 0.7
Loans issued by credit institutions 283 0.4 217 0.3 102 0.1 -103 -0.1 -126 -0.1 0.0
Movement of residuals -715 -1.0 -3,047 -3.8 1,339 1.6 3,492 4.1 632 0.7 -3.4
Other sources 793 1.1 2,805 3.5 1,660 2.0 -786 -0.9 -250 -0.3 0.6
Deficit financing from external sources 52 0.1 -147 -0.2 -296 -0.4 15 0.0 -126 -0.1 -0.2
Government securities 185 0.3 -47 -0.1 -183 -0.2 110 0.1 41 0.0 -0.1
Credits granted by foreign states -22 0.0 -25 0.0 -51 -0.1 -17 0.0 -20 0.0 0.0
Loans denominated in foreign currencies, issued by credit institutions -1 0.0 0 0.0 0 0.0 -28 0.0 0 0.0 0.0
Other sources -110 -0.2 -74 -0.1 -63 -0.1 -50 -0.1 -147 -0.2 -0.1
Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
In 2017, the entire general government budget deficit was covered by financing from domestic sources (in the amount of approximately RUB 1,475 billion (or 1.6 percent of GDP), whereas the repayment of borrowings from external sources exceeded that of new borrowings, thus producing a negative balance of RUB 126 billion (or -0.1 percent of GDP).
The bulk of financing that was used to offset budget deficit in 2017 (to the value of approximately RUB 1,221 billion, or 1.3 percent of GDP) was received from the source Government Securities. The section Movement of Residuals in Budget Accounts generated a total of RUB 632 billion (or 0.7 percent of GDP). This budget function is formed in the main by the operations involving the use of sovereign reserves.
Generally speaking, we may note the increased importance of government bonds as a source of financing to cover the budgetary system deficit in 2017, alongside an emerging upward trend in government borrowing in the domestic market. If this trend should persist over the course of next year, it may give rise to some potentially negative macroeconomic effects, when private investment will be replaced by government funding.
2.2.2 The characteristics of the federal budget The Basic Parameters of the Federal Budget
In 2017, federal budget revenue amounted to 16.4 percent GDP, which is 0.7 percentage points of GDP above its 2016 level (Table 14). The growth of aggregate federal budget revenue was caused by the increase of its oil and gas component by 0.9 percentage points of GDP, while the volume of non-oil and gas revenues shrank by 0.2 percentage points of GDP.
Table 14
The main parameters of the federal budget, percent of GDP
2013 2014 2015 2016 2017 Change in 2017 relative to 2016, percentage points of GDP
2017 Federal Budget Law* 2017 Federal Budget Law, as amended ** Budget execution
Revenue 17.8 18.3 16.4 15.7 15.5 16.0 16.4 0.7
oil and gas revenues 9.0 9.4 7.0 5.6 5.8 6.3 6.5 0.9
non-oil and gas revenues 8.8 8.9 9.4 10.1 9.7 9.7 9.9 -0.2
Expenditure 15.7 18.7 18.7 19.1 18.7 18.1 17.8 -1.3
Deficit (—) / suplus (+) 2.1 -0.4 -2.3 -3.4 - 3.2 -2.1 -1.5 2.0
Non-oil and gas deficit -6.9 -9.8 -9.3 -9.0 - 9.0 -8.4 -7.9 1.1
Price of Urals crude, USD/ barrel 108.0 97.6 51.2 41.9 40.0 49.9 53.0 -
* Federal Law No 415-FZ dated December 19, 2016 'On the Federal Budget for 2017 and the Planning Period 2018-2019'.
** As amended by Federal Law No 326-FZ dated November 14, 2017. Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
In 2017, the volume of federal budget expenditure amounted to 17.8 percent of GDP, which is 1.3 percentage points of GDP below the 2016 level, and 0.9 percentage points of GDP below the initially approved expenditure projection for 2017. The amount of deficit in 2017 shrank by 2.0 percentage points of GDP relative to 2016, while at the same time staying at -1.5 percent GDP, a level that was sufficiently high to ensure budget sustainability. Meanwhile, the actual amount of federal budget deficit turned out to be far below both the projection entered in the first version of the budget law for 2017-2019 (-3.2 percent of GDP) and that approved in the latest amendment thereto (-2.1 percent of GDP). This can be explained by the reduced volume
of expenditure relative to the planned target, as well as by the high volume of revenue. On the revenue side, this effect was produced by its oil and gas component is a situation where the actual prices of oil turned out to be far above the corresponding budget projection (Table 14).
It should be noted that there was a shrinkage of the non-oil and gas deficit: its volume, in 2017, amounted to 7.9 percent of GDP, which is 1.1 percentage points of GDP below the 2016 level, and 1.9 percentage points of GDP below the record high of the past 5-year period (-9.8 percent of GDP in 2014). At the same time, the year 2017 interrupted the downward trend displayed by the index of the federal budget's dependence on the situation in the global markets for energy carriers: the share of oil and gas revenues in total budget revenue consistently declined from 51 percent in 2014 to 43 and 35 percent in 2015 and 2016 respectively, and then, in 2017, it surged to 39.6 percent.
In 2017, the RF Budget Code was amended, with the introduction of the basic parameters of a new budgetary rule (hereinafter - BR)1. Although the new BRs formed the foundation only of the Law of the Federal Budget for 2018-2020, the parameters of the 2017 federal budget were also projected with due regard for their structure (e.g., the oil price level projected in the budget for 2017), in order to ensure a smoother transition to the new set of rules.
The new BR determines the expenditure cap as a sum of the following three components: 1) the basic volume of oil and gas revenues calculated at a constant baseline price of Urals crude amounting to USD 40 per barrel (with a subsequent annual upward adjustment by 2 percent, from 2018 onwards); 2) the volume of non-oil and gas revenues calculated in accordance with the basic medium-term economic development scenario of the RF Ministry of Economic Development; 3) the cost of debt servicing.
Importantly, the new budgetary rule has a number of significant drawbacks.2
Firstly, it should be noted that the new BR lacks flexibility. The justification for setting price of oil at USD 40 per barrel (even with the subsequent annual 2-percent upward adjustment). The current long-term forecasts place the oil price significantly above that level, while oil price is influenced by multiple factors, and it is very difficult to predict technological and other shifts in the structure of demand over a period longer than 3 years. Besides, these BRs do not protect the National Welfare Fund (NWF) from political pressures aiming at a revision of the basic oil price applied; these pressures will potentially mount as the amount of accumulated sovereign reserves increases (as it already happened in 2005), which in its turn casts doubt on the possibility of properly implemented fiscal maneuver.
Secondly, the new BRs lack counter-cyclical effects. Because the non-oil and gas revenues are pegged to GDP and display a pro-cyclical behavior, the pattern of government spending allocated to debt servicing is acyclical, and oil and gas revenues are correlated with the price of oil (it is exogenous relative to the structural cycle of Russia's economy), none of the components of the BRs takes into account the cyclical character of Russia's economic development, and this means that they neither sustain the economy during its decline phase (by functioning as a substitute for the diminished market demand), nor restrain the economic growth rate during the upward movement phase (and thus avoid economy overheating).
Thirdly, the RF Ministry of Finance, by means of introducing the BR, aims only at smoothing the shocks of oil and gas revenues caused by the behavior of price of oil. However,
1 Federal Law No 262-FZ dated July 29, 2017 'On the Introduction of Alterations in the Budget Code of the Russian Federation in the Part Regulating the Use of the Oil and Gas Revenues of the Federal Budget'.
2 Kudrin A., Sokolov I. Fiscal rules as an instrument of balanced budget policy. Voprosy Ekonomiki, 2017, No. 11, pp. 1-28. (In Russian).
global experience demonstrates that non-oil and gas revenues may also be sensitive to shocks produced by price of oil (first of all, corporate profit tax), and at the same time incorporate a cyclical component unrelated to price of oil.
Fourthly, there is the issue of approaches to spending the NWF. In the current version, it is suggested that a cap of 1 percent of GDP should be set on the amount of spending if the NWF has accumulated no more than 5 percent of GDP. However, if the government of the Russian Federation should attempt to launch a comprehensive anti-crisis program (as it happened in 2009), the rule will not allow it, and so the rule will have to be suspended.
The Main Revenue Sources
The parameters of execution of the revenue side of the federal budget for 2017 are presented in Table 15. In 2017, the aggregate revenue of the federal budget increased by 0.7 percentage points of GDP relative 2016.
Table 15
The main tax receipts in the federal budget
Percent of GDP Change in 2017 relative to 2016, percentage points of GDP
2013 2014 2015 2016 2017
Revenue, total 18.3 18.3 16.4 15.7 16.4 0.7
Oil and gas revenues 9.2 9.4 7.0 5.6 6.5 0.9
including:
MRET 3.5 3.6 3.7 3.3 4.4 1.1
export duties 5.7 5.8 3.3 2.3 2.1 -0.2
Non-oil and gas revenues 9.1 8.9 9.4 10.1 9.9 -0.2
including:
corporate profit tax 0.5 0.5 0.6 0.6 0.8 0.2
VAT on goods sold in RF territory 2.6 2.8 2.9 3.1 3.3 0.2
VAT on goods imported into RF territory 2.4 2.2 2.1 2.2 2.2 0.0
excises on goods produced in RF territory 0.6 0.7 0.6 0.7 1.0 0.3
excises on goods imported into RF territory 0.1 0.1 0.1 0.1 0.1 0.0
import duties 1.0 0.8 0.7 0.7 0.6 -0.1
export duties 0.2 0.2 0.1 0.0 0.0 0.0
other revenues 1.7 1.6 2.3 2.7 1.9 -0.8
Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
As noted earlier, thanks to the ongoing tax maneuver in the oil and gas sector, the increased MRET fully offset and even overshot the shrinkage of receipts of export duties, and thus the volume of oil and gas revenues gained 0.9 percentage points of GDP.
In 2017, the non-oil and gas component of tax-generated revenues in the federal budget increased, relative to 2016, thanks to receipts of corporate profit tax (by 0.2 percentage points of GDP), of VAT on goods sold in RF territory (by 0.2 percentage points of GDP), and of excises on goods produced in RF territory (by 0.3 percentage points of GDP). At the same time, there was a drop in the receipts of import duties — by 0.1 percentage points of GDP. The growth of receipts of corporate profit tax in the federal budget was generated, in part, by the centralization, in 2017, of 1 percentage point of the tax rate, with a subsequent redistribution of these receipts in the form of equalization subsidies transferred to regional budgets.
The volume of non-tax revenues in the 2017 federal budget lost 0.8 percentage points of GDP relative to 2016. This revenue shrinkage was caused by the absence of any sizable income generated by state property, in contrast to 2016, when this revenue category notably surged at year-end in response to the additional inflow of proceeds generated by the partial privatization of PAO Rosneft.
Federal Budget Expenditure
In 2017, the volume of federal budget expenditure amounted to 17.8 percent of GDP, which represented a drop by 1.3 percentage points of GDP relative to 2016, or by 0.3 percent in nominal terms (see Table 16).
Table 16
Federal budget expenditure (by-function classification of federal budget expenditure)
2016 2017 Change Budget execution, relative to approved annual budget projections , percent
percent of GDP percent of GDP nominal growth rate, percent percentage points of GDP 2016 2017
Expenditure, total 19.1 17.8 -0.3 -1.3 98.7 96.1
Nationwide issues 1.3 1.3 7.6 0.0 97.1 94.5
National defense 4.4 3.1 -24.4 -1.3 99.2 93.2
National security and law enforcement activity 2.2 2.1 1.0 -0.1 100.4 97.8
National economy 2.7 2.6 4.8 -0.1 95.9 93.5
Housing and community amenities 0.1 0.1 64.0 0.0 95.5 94.8
Environmental protection 0.1 0.1 46.4 0.0 99.6 99.2
Education 0.7 0.7 2.9 0.0 99.1 98.7
Culture and cinematography 0.1 0.1 2.0 0.0 96.3 90.5
Healthcare 0.6 0.5 -13.1 -0.1 97.6 97.3
Social policies 5.3 5.4 8.8 0.1 99.7 99.2
Physical culture and sports 0.1 0.1 61.4 0.0 88.7 93.8
Mass media 0.1 0.1 8.6 0.0 99.9 99.9
Government debt servicing 0.7 0.7 9.3 0.0 97.1 92.9
General-purpose inter-budgetary transfers 0.8 0.8 17.6 0.0 99.8 95.3
Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
The deepest drop was demonstrated by the government spending under the National Defense section (by 1.3 percentage points of GDP) as a result of cuts of allocations to the 'Armed Forces' stream from 4.4 percent of GDP in 2016 to 3.1 percent of GDP in 2017, while its cash execution amounted to 95.1 percent. Besides, downward movement could be observed in the National Security and Law-Enforcement Activity and Healthcare sections (by 0.1 percentage points of GDP each). The increased volume of financing allocated to Social Policy by 0.1 percentage points of GDP in 2017 occurred in response to growth in the amount of on pension provision liabilities, including the one-time payment, in the amount of RUB 5,000 in January 2017, by way of compensation for the lack of full pension indexation in 2016. As far as all the other significant budget expenditure functions are concerned, these in 2017 did not change on 2016 in terms of share in GDP.
With regard to the cash execution level of federal budget expenditure over the period 20162017, it can be noted that, while in 2016 the execution level was at 98.7 percent the budget revenue and expenditure targets, in 2017 that index plunged to 96.1 percent. As in the previous year, the highest budget execution level in 2017 relative to the total amount of budget allocations (above 99.0 percent) was noted under the sections Environmental Protection, Social Policy, and Mass Media. At the same time, the lowest year-end cash execution index for 2017 was achieved for Culture and Cinematography (90.5 percent), Government Debt Servicing (92.9 percent), National Defense (93.2 percent), National Economy (93.5 percent), and Housing and Community Amenities (94.8 percent). In this connection, it is worthwhile to note that the
cash execution level of budget expenditure allocated to defense declined from 99.2 percent in
2016 to 93.2 percent in 2017.
In the framework of by-department classification of federal budget expenditure, we can analyze the evenness and the implementation rate of budget spending by each of the government ministries and departments. Table 17 shows the list of chief budget funds managers (CBFMs) with the least year-end indices of federal budget expenditure implementation over the period 2016-2017. It is noteworthy that 6 out of 9 CBFMs improved their cash execution indices in
2017 relative to 2016.
Table 17
CBFMs with the least degree of budget expenditure implementation
relative to annual targets*
No CBFMs CBFM code Budget execution, percent
2016 2017
1 Federal Agency for Ethnic Affairs 380 67.1 61.5
2 Federal Agency for Air Transport 107 70.9 83.5
3 RF Ministry of Justice 318 86.9 94.5
4 RF Ministry of Economic Development 139 88.1 91.3
5 RF Ministry of Sport 777 88.8 93.9
6 State Duma of the Federal Assembly of the Russian Federation 330 91.9 92.8
7 Executive Office of the President of the Russian 303 92.2 95.2
Federation
8 Federal Agency for Mineral Resources 49 93.1 88.9
9 Federal Water Resources Agency 52 93.5 92.9
* Annual budget revenue and expenditure projections as of October 1, 2017 (with due regard for amendments introduced into
the Law on Federal Budget for 2017).
Source: Federal Treasury; Gaidar Institute calculations.
Deficit and Debt at the Federal Level
The volume of the federal budget deficit in 2017 amounted to RUB 1,338 billion, or 1.5% of GDP, having shrunk more than by half on the previous year (the corresponding indices for 2016 are RUB 2,956 billion, or 3.4 percent of GDP). Table 18 presents data concerning the sources of federal budget deficit financing in 2013-2017.
Table 18
The sources of federal budget deficit financing
In absolute terms, billions of rubles Percent of GDP
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Sources of deficit financing, total 323 334 1,955 2,956 1,338 0.4 0.4 2.3 3.4 1.5
Deficit financing from domestic sources 270 480 2 251 2 914 1464 0.4 0.6 2.7 3.4 1.6
Government securities 358 1,025 15 492 1,123 0.5 1.3 0.0 0.6 1.2
Movement of residuals -951 -3,248 954 3,506 852 -1.3 -4.1 1.1 4.1 0.9
Other sources 863 2,703 1,282 -1,085 -518 1.2 3.4 1.5 -1.3 -0.6
Deficit financing from external sources 53 -147 -296 43 -126 0.1 -0.2 -0.4 0.1 -0.1
Government securities 185 -47 -183 110 41 0.3 -0.1 -0.2 0.1 0.0
Credits granted by foreign states -22 -25 -51 -17 -20 0.0 0.0 -0.1 0.0 0.0
Other sources -110 -74 -63 -50 -147 -0.2 -0.1 -0.1 -0.1 -0.2
Note. The difference between the total and the corresponding indices in each row is explained by smoothing of the resulting values, as well as by the exclusion, from this table, of some subsections with a negligible financing volume (of not more than several billion rubles). Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
In 2017, most of the funds spent on financing the federal budget deficit came from domestic sources (RUB 1,464 billion, or 1.6 percent of GDP), while the balance of external sources provided was negative: -RUB 126 billion (or -0,1 percent of GDP), that is, the volume of redemption was higher than that of new borrowing.
In the contrast to the period 2015-2016, the federal budget deficit in 2017 was covered in approximately equal proportion from the following two sources: Government Securities (about RUB 1,123 billion, or 1.2 percent of GDP) and Movement of Residuals in Budget Accounts (about RUB 852 billion, or 0.9 percent of GDP). The balance for 2017 of the section Other Sources was negative, amounting to about -RUB 511 billion (-0.6 percent of GDP). As a result, the role of government ruble-denominated bonds in the structure of federal budget deficit financing became much more prominent in 2017, surging above the balance for Movement of Residuals.
The section Movement of Residuals in the main reflects the operations involving the use of the Reserve Fund, which covered much of the deficit in the 2017 federal budget, and thus the Fund was eaten up. However, given that the amount of deficit turned out to be notably below its target projected in the previous autumn,1 and also that according to data released by the Federal Treasury,2 operations in the Reserve Fund's accounts were conducted only in December 2017, to the amount of slightly over RUB 1 trillion (entered in records as financing to cover federal budget deficit), it may be assumed that the fact that the Fund was totally expended as of January 1, 2018 can be viewed in part as a 'technicality'. The reason may be that, in accordance with the recent amendments to the RF Budget Code,3 the Reserve Fund is expected to cease to operate (from 2018). (It should be added that in this connection, the new legislative provisions allowed the transfer of the Reserve Fund's residuals to the accounts of the National Welfare Fund before February 1, 2018).
Table 19 shows the composition of the government debt of the Russian Federation in 20132017.
Table 19
Government debt of the Russian Federation
In nominal terms, billions of rubles percent of GDP
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
RF domestic debt, billions of rubles 5,722 7,241 7,308 8,003 8,690 7.8 9.1 8.8 9.3 9.4
less government guarantees, billions of rubles 4,432 5,476 5,573 6,100 7,247 6.1 6.9 6.7 7.1 7.9
RF foreign debt
billions of rubles, at RF Central Bank's exchange rate 1,822 3,057 3,647 3,106 2,870 2.5 3.9 4.4 3.6 3.1
less government guarantees, billions of rubles 1,450 2,377 2,781 2,395 2,273 2.0 3.0 3.3 2.8 2.5
Total, billions of rubles 7,544 10,298 10,955 11,109 11,560 10.3 13.0 13.1 12.9 12.6
less government guarantees, billions of rubles 5,882 7,853 8,354 8,495 9,520 8.0 9.9 10.0 9.9 10.3
Source: RF Ministry of Finance; Rosstat; Gaidar Institute calculations.
The aggregate year-end 2017 government debt of the Russian Federation amounted to 12.6% percent of GDP vs. 13.2 b percent of GDP a year earlier. The shrinkage in the amount of
1 In accordance with the materials attached as an explanatory note to the draft federal budget for 2018-2020, the deficit target projected for 2017 was to be at the level of RUB -2,008.1 billion.
2 URL: http://www.roskazna.ru/finansovye-operacii/svedeniya-o-dvizhenii-sredstv-po-schetam/rezervnyj-fond/
3 Federal Law No 262-FZ dated July 29, 2017 'On the Introduction of Alterations in the Budget Code of the Russian Federation in the Part Regulating the Use of the Oil and Gas Revenues of the Federal Budget'.
government debt by 0.1 percentage points of GDP was caused by Russia's domestic debt having increased by 0.1 percentage points of GDP against the background of a 0.5 percentage point drop in the amount of foreign debt (recalculated in rubles in accordance with the official exchange rate of the ruble set by the Central Bank). In 2017, the amount of government guarantees contained in the federal budget was 2.2 percent of GDP. It can be noted that for the second year in a row, the volume of government guarantees as a share of GDP has been on the decline. Besides, while in 2016 the volume of government guarantees shrank by only 0.1 percentage points of GDP, in 2017 its plunge amounted to 0.8 percentage points of GDP.
In 2017, the share ruble-denominated debt in the total volume of government debt of the Russian Federation increased from 72 percent at the start of the year to 75 percent at year-end, due to a significant surge in the value of the market component of ruble-denominated domestic debt - by more than RUB 1.1 trillion. Meanwhile in 2017, the RF Ministry of Finance placed two Eurobond issues on the international debt market: one with a 10-year maturity to the value of approximately USD 2.4 billion, and the other with a 30-year maturity, to the amount of USD 4.5 billion. However, these operations had to do with refinancing of the previously issued debt liabilities, and so they did not produce an increase in the amount of total federal budget debt in US dollar terms.
2.2.3. Interbudgetary relations and subnational finance
Analysis of the Main Parameters of the Consolidated Budgets of RF subjects
The main trend observed in the relations between different levels of state authority are also reflected by the revenue and expenditure structure in the consolidated budget of the Russian Federation. Fig. 20 presents data on the relative shares of the tax-generated and non-tax revenues and the final expenditure of subjects of the Russian Federation in the total amount of the tax-generated and non-tax revenues and the final expenditures of Russia's budgetary system (the consolidated budget of the Russian Federation and government extrabudgetary funds).
45
42,6
41,8
25
27,4 27,1 27,0
20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Share of tax-generated and non-tax revenues Share of final expenditure
Fig. 20. Share of tax-generated and non-tax revenues Source: Federal Treasury; Gaidar Institute calculations.
The share of tax-generated and non-tax revenues and subnational budget expenditures in the revenue and expenditure of the budgetary system of the Russian Federation in 2007-2017
In Fig. 20, it can be seen that the period 2014-2016 saw some decentralization of the tax-generated and non-tax revenues, and that in 2016, the closest correlation between the revenue and expenditure decentralization levels was achieved. However, the year-end results of 2017 demonstrate that the degree of centralization of tax-generated and non-tax revenues once again slightly increased, thus giving rise to an increase in the volume of the regions' spending obligations. More particularly, the share of tax-generated and non-tax revenues of the regions in the total tax-generated and non-tax revenues of the budgetary system declined from 30.2 percent in 2016 to 30.0 percent in 2017, while that of the regions' final expenditure in the budgetary system's total expenditure over the same period increased from 30.0 percent to 32.0 percent.
Let us take a closer look at the revenue side of the subnational budgets. The movement pattern of the main revenue components in the consolidated budgets of the subjects of the Russian Federation is presented in Table 20. On the right-hand side, revenue growth is shown in real terms. 1
Table 20
Consolidated Budget Revenue of Subjects of the Russian Federation
Revenue volume (in nominal terms), billions of rubles Growth in real terms, percent
2013 2014 2015 2016 2017 2014/ 2013 2015/ 2014 2016/ 2015 2017/ 2016
Revenue, total 8,165 8,906 9,308 9,924 10,758 -2.0 -7.4 1.2 5.8
Tax-generated and non-tax revenues 6,589 7,177 7,625 8,289 8,986 -2.2 -5.9 3.2 5.8
including tax-generated revenues: 5,967 6,493 6,925 7,574 8,205 -2.3 -5.5 3.8 5.7
Corporate profit tax 1,720 1,964 2,108 2,279 2,528 2.6 -5.0 2.6 8.2
PIT 2,499 2,693 2,808 3,019 3,252 -3.2 -7.7 2.0 5.1
Excises 491 480 487 662 612 -12.3 -10.2 29.1 -9.8
Taxes on aggregate income 293 315 348 388 447 -3.4 -2.3 6.0 12.2
Taxes on property 901 957 1,069 1,117 1,250 -4.5 -1.2 -0.8 9.2
Non-tax revenues 622 685 700 715 781 -1.2 -9.4 -3.0 6.5
Transfers from other budgets 1,515 1,671 1,617 1,578 1,703 -1.0 -14.3 -7.4 5.3
Other revenues 62 58 66 56 69 -16.1 2.0 -19.2 18.7
Source: Federal Treasury; Gaidar Institute calculations.
As demonstrated by data in Table 20, in 2017, the consolidated budget revenue of the subjects of the Russian Federation increased relative to 2016 by 5.8 percent in real terms. Thus, the regions' revenue movement pattern has been dominated by an upward trend since 2016. The receipts of the following taxes displayed significant growth in real terms: corporate profit tax (8.2 percent); taxes on aggregate income (12.2 percent); other revenues (18.7 percent). For the first time over the entire period 2013-2017, growth in real terms was demonstrated by the inflow of interbudgetary transfers in the consolidated budgets of e subjects of the Russian Federation (5.3 percent relative to 2016). At the same time, there was a shrinkage in the volume of excise receipts (9.8 percent in real terms relative to 2016); nevertheless, as excises take up only a small part in the overall structure of subfederal budgets, this change had practically no effect on the total revenue movement pattern.
Now let us consider in more detail the situation concerning the by-region pattern of tax-generated and non-tax revenues (Table 21).
1 Adjusted by the inflation index in 2017 (-2.5 percent), according to Rosstat data.
Table 21
Russia's regions, grouped according to the movement of main tax-generated and non-tax revenues in the consolidated budgets of the subjects of the Russian Federation
Change in main tax-generated and non-tax revenues in consolidated budgets of subjects of Russian Federation, relative to previous year
growth by more than 25 percent growth between 10 growth by less than 10 percent decline by less decline between 10 decline by more than 25 percent
and 25 percent than 10 percent and 25 percent
2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017
in nominal terms
Tax-generated and non-tax revenues, total 5 5 47 16 26 48 5 13 0 3 2 0
Corporate profit tax 35 18 26 29 7 18 3 9 9 5 3 6
PIT 1 1 11 9 72 69 2 5 0 1 0 0
in real terms
Tax-generated and non-tax revenues, total 0 3 16 12 49 48 16 18 3 4 2 0
Corporate profit tax 29 18 23 22 11 24 8 8 8 7 6 6
PIT 1 0 4 1 46 72 31 11 1 1 0 0
Source: Federal Treasury; Gaidar Institute calculations.
A comparative analysis of changes in the volume of major revenue sources in the regional budgets for 2016 and 2017 has led to the following conclusions. Since 2016, the average movement patterns of regions' revenues across Russia has changed their vector from decline to growth. At the same time, the growth rates of tax receipts were sufficiently high: out of a total of 78 regions with positive movement patterns of their tax-generated and non-tax revenues in 2016, 52 regions demonstrated revenue growth by more than 10 percent in nominal terms. When taken in real terms, revenue growth was observed in 65 regions, and in 16 of them the rate of growth was above 10 percent. The highest input into revenue growth was made by corporate profit tax. In 2016, the receipts of that tax in real terms increased in 68 regions, and the growth rate of that index was above 25 percent in 29 subjects of the Russian Federation.
In 2017, the revenue movement patterns in the consolidated budgets of the Russian Federation's subjects continued their positive trends. However, after the 'breakthrough' of 2016, the tax receipts in regions' budgets began to display more moderate growth rates, both in nominal and real terms. Over the course of 2017, the amount of revenues increased in 69 regions in nominal terms, and 63 regions - in real terms. The growth rates of corporate profit tax receipts became slower. While the number of regions where the amount of revenues generated by corporate profit tax had increased in real terms remained approximately at the same level as in 2016 (64 regions), the number of regions with the growth rates of corporate profit tax receipts above 25 percent plunged from 29 to 18.
It is necessary to point out the increased number of regions demonstrating growth of PIT receipts in real terms. In 2016, their number was 51, and in 2017 it jumped to 73. In 2016, PIT receipts were on decline in real terms in 33 regions. In 2017, the number of such regions shrank to 12.
In 2017, the best movement patterns of tax-generated and non-tax revenues were demonstrated by the Republic of Crimea (47 percent1), Yamalo-Nenets Autonomous Okrug (43 percent), the Republic of Kalmykia (29 percent), Belgorod Oblast (26 percent), and Kemerovo Oblast (26 percent). All these regions became leaders in growth thanks to their
1 Hereinafter, the indices are presented in nominal terms.
increased corporate profit tax receipts. Besides, in all these regions the rates of growth displayed by corporate profit tax receipts in 2017 were exceptionally high: 239 percent in the Republic of Kalmykia (vs. 26 percent in 2016); 222 percent in the Republic of Crimea (vs. decline by 18 percent in 2016); 108 percent in Yamalo-Nenets Autonomous Okrug (vs. decline by 55 percent in 2016); 99 percent in Belgorod Oblast (vs. growth by 5 percent in 2016); 97 percent in Kemerovo Oblast (vs. growth by 11 percent in 2016). It is worthwhile to note that among the regions with the highest growth rates of corporate profit tax receipts relative to the previous year, only the Republic of Tyva retained its leader position (139 percent in 2016, and 70 percent in 2017) In the Republic of Ingushetia, corporate profit tax receipts displayed 100-percent growth in 2016, which in 2017 gave way to a plunge by 10 percent.
Some regions, according to their consolidated budget data, demonstrated a notable decline in the amount of their tax-generated and non-tax revenues. Thus, the tax-generated and non-tax revenues in Chukotka Autonomous Okrug and Sakhalin Oblast shrank by 22 percent and 17 percent respectively on the previous year, and the same index for the Republic of Kabardino-Balkaria - by 15 percent. A notable decline of that index could also be observed in Khanty-Mansi Autonomous Okrug, where the downward movement of tax-generated and non-tax revenues had persisted since 2016 (-9 percent in 2016, and -7 percent in 2017.)
Thus, in 2017 relative to 2016, the rates of growth, in the regions budgets, of aggregate receipts from tax-generated and non-tax sources, as well as those of corporate profit tax receipts, became lower. At the same time, there was growth of PIT receipts in real terms, which is an indirect indication that personal income was on the rise.
Let us now analyze the changes in the consolidated budget expenditure of the subjects of the Russian Federation that occurred in 2017 (Table 22).
Table 22
Expenditure of the consolidated budgets of the subjects of the Russian Federation
Percent of total Percent of GDP Change
in nominal terms, percent as percentage points of GDP
2016 2017 2016 2017
Nationwide issues 6.3 6.1 0.73 0.71 5.2 -0.02
National security and law enforcement activity 1.1 1.1 0.13 0.13 3.1 0.00
National economy, including: 20.2 21.2 2.33 2.49 14.3 0.16
agriculture and fisheries 2.8 2.5 0.32 0.29 -1.9 -0.03
transport 4.4 5.2 0.51 0.61 28.2 0.10
motor road system (road funds) 8.7 8.8 1.01 1.03 9.4 0.02
other national economy issues 2.3 2.6 0.27 0.31 24.1 0.04
Housing and community amenities 9.4 10.4 1.09 1.22 20.5 0.13
Environmental protection 0.2 0.3 0.03 0.03 25.2 0.00
Education, including: 25.6 24.9 2.96 2.92 5.6 -0.04
pre-school education 6.8 6.7 0.79 0.78 6.5 -0.01
general education 14.7 12.2 1.70 1.43 -10.0 -0.27
vocational training 1.9 1.9 0.22 0.22 6.0 0.00
other education issues 1.2 1.3 0.14 0.15 11.9 0.01
Culture, cinematography 3.4 3.8 0.40 0.45 20.5 0.05
Healthcare 12.9 7.8 1.49 0.92 -33.9 -0.57
Social policies 16.6 20.4 1.93 2.40 33.4 0.47
Physical culture and sports 2.1 2.3 0.25 0.28 19.8 0.03
Mass media 0.4 0.4 0.05 0.05 1.9 0.00
Government and municipal debt servicing 1.5 1.2 0.18 0.15 -12.9 -0.03
Expenditure, total 100.0 100.0 11.57 11.74 8.8 0.17
Source: Federal Treasury; Gaidar Institute calculations.
From Table 22 it can be seen that in 2017, the by-function structure of regions' budget expenditure changes only slightly relative to the previous year. We should make note of the
increased allocations to transport in the National Economy section (while those to agriculture were reduced), as well as the shrinkage of expenditures earmarked for the social sphere, especially the allocations to general education. The notable cuts in the allocations to Healthcare and increased allocations in the Social Policy section can largely (though not exclusively) be explained by technical procedures: from 2017 onwards the insurance contributions paid by the regions for their non-working population have been entered in records under the Social Policy heading, whereas in 2016, in the majority of regions these allocations were treated as part of the Healthcare section. However, on the whole over the period 2016-2017, the composition of the regions' budget expenditure followed the same trends as over the previous period.
Now we are going to look at the movement patterns of the main parameters of consolidated budgets of the Russian Federation's subjects in terms of share in GDP (Table 23).
Table 23
The movement of revenue and expenditure in the consolidated budget of the subjects of the Russian Federation, percent of GDP
2013 2014 2015 2016 2017
Revenue 11.16 11.24 11.16 11.55 11.68
including:
corporate profit tax 2.35 2.48 2.53 2.65 2.75
PIT 3.42 3.40 3.37 3.51 3.53
transfers from FB 2.03 2.03 1.92 1.82 1.68
Expenditure 12.04 11.81 11.37 11.57 11.74
Deficit (-) / Suplus (+) -0.88 -0.57 -0.21 -0.01 -0.06
Source: Federal Treasury; Gaidar Institute calculations.
The data in Table 23 demonstrate that over the last three years, both subnational budget revenue in general and the receipts of PIT and corporate profit tax in particular have been on the rise in terms of share in GDP. Meanwhile, the amount of transfers from the federal budget over the period 2013-2017 continued to decline. Subnational budget expenditure has been increasing since 2016. The budget deficit in 2016 hit its five-year low, and then in 2017 it somewhat increased. Let us consider in more detail the by-region execution of the consolidated budgets of RF subjects (deficit/suplus) (see Table 24).
Table 24
The execution (deficit/suplus) of the consolidated budgets of subjects
of the Russian Federation
Year Number of RF subjects executing their budget
with deficit with surplus
2013 77 6
2014 74 11
2015 76 9
2016 56 29
2017 47 38
Source: Federal Treasury; Gaidar Institute calculations.
The by-region data demonstrate that the consolidated budgets in most RF subjects have become more balanced. So, aggregate deficit growth has been caused by the dramatic deterioration of the situation in a few regions against the backdrop of increasingly well-balanced budgets in the majority of regions.
Financial Assistance from the Federal Budget
In 2017, the total volume of interbudgetary transfers from the federal budget to the regions shrank relative to 2016 both in nominal terms (-1.5 percent) and in terms of share in GDP (-0.15 percentage point GDP) (Table 25). Shrinkage was typical of all categories of targeted interbudgetary transfers, and especially the transfers earmarked for properly balancing regional budgets. At the same time, the total volume of equalization transfers was on the rise, because the increased amount of transfers earmarked for budget equalization (+0.07 percentage point GDP) was offset by the reduced amount of those earmarked for ensuring well-balanced regional budgets (-0.03 percentage points of GDP). The deepest plunge, both in nominal terms and in terms of share in GDP, was demonstrated by subsidies, and this was especially true of subsidies earmarked for the support of the national economy. These changes were also reflected by the structure of federal financial assistance to the budgets of RF subjects. Thus, in 2017 relative to 2016, the share of subsidies lost 5 percentage points, while that of equalization transfers, on the contrary, gained 7.3 percentage point
Table 25
Federal budget transfers to the budgets of subjects of the Russian Federation
2015 2016 2017 Growth in 2017 relative to 2016
billions of rubles percent of total billions of rubles percent of total billions of rubles percent of total in nominal terms, percent percent points of GDP
Transfers to regions, total 1,603.7 100.0 1,567.8 100.0 1,543.5 100.0 -1.5 -0.15
Equalization transfers 651.0 40.6 656.2 41.9 759.0 49.2 15.7 0.06
including:
transfers to budget sufficiency equalization 487.7 30.4 513.7 32.8 614.5 39.8 19.6 0.07
transfers to support measures designed to ensure well-balanced budgets 152.4 9.5 131.7 8.4 113.8 7.4 -13.6 -0.03
Subsidies 400.2 25.0 356.5 22.7 273.2 17.7 -23.4 -0.12
including:
subsidies to sustain national economy's development 258.2 16.1 231.9 14.8 106.1 6.9 -54.2 -0.15
Subventions 336.6 21.0 334.3 21.3 326.1 21.1 -2.4 -0.03
Other interbudgetary transfers 216.0 13.5 220.8 14.1 185.2 12.0 -16.1 -0.06
Source: Federal Treasury; Rosstat; Gaidar Institute calculations.
Changes in the volume of subventions point to the increasing independence of subnational budgets in executing the powers delegated to them. At the same time, in 2017, the total number of subventions was 30 - that is, the same as in 2016. Of these, 10 subventions were allocated to the Republic of Crimea and to the city of Sevastopol; some of these subventions duplicate those allocated to other subjects of the Russian Federation.
Formally speaking, the total number of subsidies allocated in 2017 was 79. However, the subsidies funded from the Reserve Fund of the Government of the Russian Federation are now entered in records as separate budget expenditure lines, and thus the total number of subsidies is artificially inflated. If one takes into account only the subsidy targets, and not their sources, the number of subsidies would shrink to 66 (in 2016 - 98). The Government Program of the Russian Federation Development of Federative Relations and Creation of proper Conditions for Efficient and Responsible Administration of Regional and Municipal Finance (hereinafter -GP Development of Federative Relations) envisages that the total number of subsidies in 2017
should be reduced to 60. Thus, in 2017, their number was significantly optimized (first of all, by pooling the subsidies allocated to agriculture), but the planned target was still not achieved.
The volume of other interbudgetary transfers shrank both in nominal terms and in terms of share in GDP, which should be regarded as a positive development, considering their inadequate transparency and distribution on the basis of formal principles.
One of the budgetary policy priorities, as before, has been the reduction of targeted financial assistance. Overall, the relative share of equalization subsidies in the total volume of federal transfers to RF subjects has increased, and in accordance with the corresponding target set by the GP Development of Federative Relations (Table 26). In 2017, that target was met, even if we take into consideration the fact that transfers earmarked for the compensation of additional expenditures to cover the raised salaries in the budget-funded sector are essentially subsidies, and not equalization transfers.
It should be noted that the increased share of equalization transfers in the overall structure of interbudgetary transfers to regions in 2017, in contrast to 2016, was achieved not only thanks to cuts in the amount of targeted interbudgetary assistance, but also as a result of the significantly increased volume of non-targeted transfers.
Table 26
The movement pattern of the share of equalization transfers in the total volume
of interbudgetary transfers
Index 2015 2016 2017
Share of equalization transfers in total volume of interbudgetary transfers as stated in government program (plan), percent 40.0 41.0 46.0
Share of equalization transfers in total volume of interbudgetary transfers (estimate), percent 40.6 41.9 49.2
Share of equalization transfers in total volume of interbudgetary transfers, less transfers earmarked for compensation, in part, of additional expenditures on increased salaries in budget-funded sector (estimate), percent 36.9 39.9 46.6
Source: Federal Treasury; Government Program of the Russian Federation Development of Federative Relations and Creation of Proper Conditions for Efficient and Responsible Administration of Regional and Municipal Finance; Gaidar Institute calculations.
When analyzing the process of transfer allocation by the federal center to the regions, it is essential to review the impact of federal budget assistance on the differentiation of the budget revenue across all subjects of the Russian Federation, and to assess its actual equalizing effect (Table 27).
Table 27
The variance coefficient of the consolidated regional budget revenue (per capita, with due regard for the budget expenditure index), percent
Year Tax-generated revenues Tax-generated revenues and equalization transfers Tax-generated revenues, transfers, subsidies
2013 63.7 55.3 48.1
2014 59.0 51.2 49.9
2015 66.1 60.3 56.0
2016 55.6 42.1 37.3
2017 55.8 41.3 37.7
Source: Federal Treasury, RF Ministry of Finance; Gaidar Institute calculations.
As seen from Table 27, in 2017 relative to the previous year, the degree of differentiation of tax-generated revenues in the subnational budgets somewhat increased. At the same time, the equalizing effect of budget equalization transfers became stronger in response to their increased
total volume and the more prominent emphasis on equalization in the methodology of their distribution, while the equalizing effect after the allocation of budget transfers and subsidies weakened as a result of the reduced total volume of interbudgetary subsidies and other budget transfers.
Deficit and Debt at the Regional Level
Table 28 presents the structure of deficit financing sources in the consolidated budgets of RF subjects over the period 2013-2017.
Table 28
The sources of deficit financing in the consolidated budgets of RF subjects,
billions of rubles
2013 2014 2015 2016 2017
Deficit financing sources — total 642.0 447.8 171.6 12.6 51.9
Deficit financing from domestic sources 642.8 447.8 171.6 40.8 51.9
Government (municipal) securities 77.6 -9.2 -5.8 32.0 97.0
Loans issued by credit institutions 282.6 217.4 101.6 -102.6 -126.3
Budget loans 43.0 169.3 167.4 181.6 19.7
Movement of residuals 98.1 19.2 77.4 -32.0 -21.2
Other sources 139.3 52.2 -168.9 -37.6 83.4
Deficit financing from external sources -0.8 0.0 0.0 -28.2 0.0
Source: Federal Treasury; Gaidar Institute calculations.
As seen from the data in this table, overall across the consolidated budgets of RF subjects, as a year earlier, the situation remained better than it had been in 2012-2015: budget deficit amounted to only RUB 51.9 billion, which is significantly below the corresponding indices for 2012-2015. At the same time, the downward trend displayed by the amount of deficit in nominal terms was reversed - now it more than tripled in nominal terms.
The balance of bank loans in 2017 was negative and, moreover, rather high in absolute terms (RUB -126.3 billion), which means that the volume of loan repayment exceeded that of new loans. At the same time, the balance of budgeting loans, on the contrary, was positive (RUB 19.7 billion); however, in contrast to the previous year, this index was lower than the balance of commercial loans. These figures reflect the changed priorities in the federal center's policy with regard to budgeting loans: the volume of newly issued loans shrank significantly, and those that had been issued previously, were restructured. In December 2017, the RF Ministry of Finance concluded 410 additional agreements with 73 RF subjects, which envisaged annual repayment of budgeting loans: over the period 2018-2019 in the amount of 5 percent of total debt; in 2020 - 10 percent of total debt; and over the period 2021-2024 - in equal annual installments, 20 percent each. According to the RF Ministry of Finance's estimations, the budgeting effect, in the form of reduction of the amount of loan repayment by the regions, in 2018-2019 will be up to RUB 418 billion (including RUB 238 billion in 2018, and RUB 180 billion in 2019). On the whole, all these changes are positive, because the massive-scale continual issuance of budgeting loans to many regions only resulted in an artificially inflated volume of regional debt and lower transparency of the interbudgetary relations.
At the same time, in conditions of diminishing accessibility of cheap budgeting loans, the role of securities grows in importance - their balance has been positive for the second year in a row (RUB 97.0 billion); besides, in contrast to the situation in 2016, it surged significantly above that of budgeting loans.
On the whole over the period 2012-2015, the regional debt movement pattern, in terms of share in GDP, displayed a stable upward trend, that index increasing from 2.38 percent of GDP at year-end 2013 to 2.78 percent of GDP at year-end 2015 (Table 29). Over the same period, the volume of debt owed by municipal formations somewhat declined - from 0.50 to 0.44 percent of GDP.
Table 29
The volume of government and municipal debt in subnational budgets,
as a percentage of GDP
2013 2014 2015 2016 2017 Growth in 2017 relative to 2016
Government debt of subjects of Russian Federation 2.38 2.64 2.78 2.74 2.51 -0.22
Debt of municipal formations 0.50 0.46 0.44 0.42 0.40 -0.02
Source: RF Ministry of Finance; Rosstat; Gaidar Institute calculations.
The year 2017 saw the emergence of a downward trend in the volume of debt owed by the subjects of the Russian Federation: according to the year-end result of 2016, it declined by 0.16 percentage points of GDP, and by the year-end 2017 - already by 0.2 percentage points of GDP, to 2.51 percent of GDP. Simultaneously, the volume of debt for the first time was reduced not only in terms of share in GDP, but also in absolute terms - by RUB 37.8 billion, or 1.6 percent (in 2016, this index had also slightly increased in nominal terms - by 1.5 percent, or RUB 35 billion). At the municipal level, the downward trend displayed by the volume of debt in terms of share in GDP was still present - that index declined by 0.02 percentage points to 0.40 percent of GDP (meanwhile, when taken in nominal terms, it demonstrated slight growth by RUB 3.6 billion, or by 1.0 percent).
Thus, in 2017, in the framework of cooperation between the RF Ministry of Finance and the authorities of RF subjects, it became possible to consolidate the trend towards halting the accumulation of sizable budget debt at the subnational level, as well as to adopt relevant decisions concerning the amount of budgeting loans already accumulated by the regions. On the whole, these measures should result in establishing more understandable 'rules of the game' and increasing the transparency of interbudgetary relations. At the same time, there still remain some unresolved issues with regard to the medium- and long-term sustainability of regional budgets, in view of the continuing trend towards reducing the volume of transfers from the federal budget and discontinuing the issuance of new budgeting loans. It is expected to become clear in 2018 if the regions will indeed possess sufficient finance resources, including the resources needed for the ultimate achievement of 'the goals set by the May 2012 Presidential Executive Orders'.
