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The renewed decline in oil prices means the Russian government needs to cut budget spending and boost revenue to prevent the fiscal deficit exceeding 3 percent of economic output and avoid depleting one of its wealth funds, Finance Minister Anton Siluanov said.
Measures totaling 1.5 trillion rubles ($20 billion), including a 10 percent cut in spending that spares outlays on the military and social services, are needed to avoid a shortfall of more than 6 percent of gross domestic product this year, Siluanov said in a Bloomberg Television interview in Moscow on Wednesday. Unlike last year, there's no need to support the ruble with foreign-currency sales by the Treasury, he said.
Oil's slump to a near-12-year low has prompted governments from Norway to Saudi Arabia to prepare for lower energy revenue and rethink how they spend their cash reserves. Russia is in a bind, having planned its 2015 budget around an average oil price of $50 a barrel. Locked out of international debt markets because of sanctions over Ukraine, Siluanov warned that the Reserve Fund, one of Russia's two sovereign wealth coffers, risks full depletion by the end of the year if no measures are taken.
"If we consider today's oil price and the ruble exchange rate and don't take any measures, the deficit could more than double compared with the budget we have passed," Siluanov said. "We have enough reserves, resources for 2016, but we need to make decisions this year that would allow to balance state finances in 2017, 2018, 2019 and beyond."
The government wants to keep the deficit at no more than 3 percent of gross domestic product this year, after a shortfall of 2.6 percent in 2015. The Reserve Fund had $59 billion at end- November in dollar terms, down a third from a year earlier.
"Russia is still puzzled over how to deal with falling oil revenues to avoid a second year of recession," Vladimir Miklashevsky, a strategist at Danske Bank in Helsinki, said by email. "If a sustainable realistic plan is agreed, the ruble may halt its devaluation. Yet, there's plenty of room for the ruble's further convergence with low oil prices."
Aside from spending cuts, the government aims to boost budget revenue by cracking down on tax fraud and auctioning off state assets, Siluanov said. The government should revisit the idea of selling shares in Sberbank and VTB Group, the nation's two largest lenders, Economy Minister Alexei Ulyukayev said at the Gaidar forum in Moscow earlier on Wednesday.
Siluanov said he sees no need to sell currency from the Treasury's accounts, which may be needed to cover Russia's debt obligations this year, and which was used previously to stem the ruble's slide.
"We don't see a need for any measures to stabilize the exchange rate like last year because the ruble's exchange rate is absolutely adequate in the present situation," Siluanov said. "There isn't such volatility as there was last year, so it's not necessary for the Treasury or the government to interfere in the currency market."
Russia should use debt to fund the fiscal gap and keep currency reserves intact for "harder times," as risks on commodity markets remain high, Bank of Russia First Deputy Governor Ksenia Yudaeva said in Moscow on Wednesday.
That runs counter to the Finance Ministry's position. The country should resist increased borrowing because raising capital at a rate of 10 percent in rubles and more than 4 percent in dollars is "still expensive for Russia," Siluanov said. "We're not supporting a sharp increase of borrowing."
Russia has a "high level" of reserves at the central bank, along with two wealth funds, which will help the economy endure a recession, President Vladimir Putin said in an interview with German newspaper Bild this month. If needed, the government may also tap the $72 billion National Wellbeing Fund, something that's not on the agenda this year, according to Siluanov.
"If no steps are taken or revenue and consolidation, we will use up the whole Reserve Fund this year," Siluanov said. "We also have National Wellbeing Fund money that hasn't been used for infrastructure projects. That's also our reserve for the coming years."