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Finance Ministry Cleanses Budget of Oil
// Kudrin Proposes Replacing Stabilization Fund with Oil and Gas Fund
Today Finance Minister Aleksey Kudrin introduced a project entitled "Methodology of Formulating a Non-Oil and Gas Balance in Russia's Budget." In a draft of the project obtained by Kommersant, the finance minister proposed replacing the current stabilization fund with an oil and gas fund "into which all oil and gas revenues will be diverted." In this proposal, the revenues would be slowly released into the economy as 3-4% of GDP. The "Methodology…" is a comprehensive proposal from Mr. Kudrin to the government concerning a restructuring of the government's financial system.
The finance minister will submit the "Methodology of Formulating a Non-Oil and Gas Balance in Russia's Budget" to the government today. Kommersant succeeded in becoming familiar with the project at the same time as Prime Minister Mikhail Fradkov, who received the document yesterday. Finance Minister Aleksey Kudrin proposed that the prime minister "charge the Ministry of Finance and the Ministry of Economic Development and Trade, together with the Bank of Russia, with thinking up coordinated proposals concerning the possibility of putting the project to practical use in budget planning."
The essence of the finance minister's proposal centers on the "separate accounting of oil and gas (raw materials) revenues and non-oil and gas revenues." Mr. Kudrin proposes to administer these revenues according to a special regime: to withdraw them from the economy and direct them into a separate fund with special spending oversight, or at least to count them separately from the rest of the budget.
According to one of the drafts of the project, the finance minister is planning to use the already existing mechanism of the stabilization fund but to scrap fixed price cut-offs. The stabilization fund will then be divided into a reserve portion and a fund for future generations. Another variant of the project proposes the creation of a new "oil and gas fund, into which all oil and gas revenues will be directed." In other words, the stabilization fund, which today stands at more than two trillion rubles garnered from two currently important sources – the natural resource tax (NDPI) on oil and oil export duties – will become the basis for an oil and gas fund, and only after that can the revenues from these sources be spent.
With regard to oil and gas revenues, Mr. Kudrin considers them to be "a tax on the profits of organizations, which will be included in the federal budget as revenues received from oil and gas production." Excise taxes on gasoline, diesel fuel, and motor oil will also fall into this category. In order to separately delineate revenues from the export of gas, which the Finance Ministry lumps into the same category as oil revenues, it was proposed to reinstate the excise taxes on natural gas that were removed in 2004. The oil and gas revenues would then be entered into the federal budget as NDPI on oil, natural gas, and gas condensate. Export tariffs from the export of gas and oil products would also fall into this category.
Finally, it is possible that oil and gas revenues will be considered both "revenues from different forms of shares in capital, dividends from shares owned by the Russian Federation, that come from ventures carrying out the extraction of hydrocarbon raw materials and the production of oil products, and revenues from the activities of the company "Vietsovpetro." In the document it is noted that "other revenues from the oil and gas sphere, such as VAT, income tax, and social deductions, will probably not be counted in the total oil and gas revenues." The Finance Ministry calculated that oil and gas revenues in the 2006 federal budget total 3.119 trillion rubles. In 2007, these revenues will decrease to 3.095 trillion rubles, while in 2009, the figure will be 2.457 trillion rubles.
The current mechanism of budgeting revenues from raw materials is such that it is regulated only by a price cap for the stabilization fund, which is fixed at $27 per barrel of oil. According to the ministry's plan, the price cap "is not a definitive measure for the formulation of budgetary expenditures," and "the average price cap in 2007-2009, according to the financial plan, will be $33 per barrel." As such, in the minister's opinion, "sharp changes in currency earnings may lead to sudden changes in the exchange rate, inflation, and interest rates, as well as to a dominant role for short-term speculative investment and to an absence of conditions conducive to stable economic growth."
In sum, in the place of a fixed price cap, Aleksey Kudrin is proposing to introduce an "oil and gas transfer" into the budget that will be calculated as percentages of GDP, which will make up for a "non-oil and gas deficit" in the budget. Along with this, the ministry proposes to "not necessarily make up for the non-oil and gas deficit with oil and gas revenues"; "[the deficit] can be financed by borrowing, by receipts from privatization, by the sale of government reserves, and by other sources."
According to the ministry's calculations, the non-oil and gas deficit will be 5.5% of GDP in 2006, while in 2007 it will drop to 4.8%, but the ministry calls equivalent oil and gas transfers "excessive." The proposed plans calls for restricting that transfer to "4% of GDP, with a subsequent shift to a decline to 3% of GDP." Another variation of the plan immediately "fixes the volume of the oil and gas transfer at 3% of GDP." If this mechanism had already been adopted, in connection with the fixing of the size of the oil and gas transfer at 4% of GDP, under 2006 conditions the federal budget outlays would be reduced by 408.3 billion rubles, while if it were fixed at 3%, the decrease would be 680.5 billion rubles. Aleksey Kudrin is certain that a similar mechanism "is equivalent to a real decrease in the price cap from $37 per barrel to $28."
In point of fact, the "Methodology" is a political proposal from the Finance Minister to the government, and its implementation is possible only in case of changes in the government's stance on raw materials exports. Mr. Kudrin is presumably counting on the document being discussed with an eye towards this, since the proposal's technical fulfillment is impossible without the acceptance of political changes.
Peter Netreba
All the Article in Russian as of Aug. 28, 2006
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