Russian Finance Minister Alexey Kudrin at a forum of state borrowers in St. Petersburg on May 25, 2006
Photo: Mikhail Razuvaev
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Self-Imposed Restrictions According to Kudrin
// Idea of a Non-Oil Budget is Politically Difficult to Realize
The Finance Ministrywould have liked to curb the influx of excess oil and gas revenues into the Russian economy. The current method of managing the excess revenues does not suit the ministry, and so yesterday a project concerning a methodology for the formulation of a non-oil and gas balance in the federal budget was submitted to the government.
Currently, the Russian budget is formulated according to the principle of an "average price." In other words, if oil becomes more expensive than the cut-off price, then all of the taxes received from these "excess revenues" are diverted into the stabilization fund, while only the taxes from "ordinary" revenues go into the budget. The idea of a stabilization fund was proposed several years ago by Andrey Illarionov, an economic advisor to the president. Illarionov proposed to consider the cut-off price to be the long-term price of oil, which would have been around $12-$15 for a barrel of Urals oil. But instead of that, the cut-off price after the creation of the stabilization fund was set anew every year along with the budget. In total, the cut-off price has risen from $20 for a barrel of Urals in 2004 to $27 today. The increase in the cut-off price is attributable to politics, i.e., to the necessity of financing all of the government's social obligations for 2006.
Kudrin's proposed creation of a non-oil budget should spell the end of such creeping waste of excess revenues. Under the conditions of a mobile cut-off price, "in a period of favorable market conditions, budget restrictions on the use of incoming revenues turn out to be extremely lenient: there is financing even for risky or shakily grounded projects," reads the project's methodology. But this is not so terrible. As the finance minister explained in an article for the magazine "Economic Questions," in practice the stabilization fund does not receive all of the revenues in the budget, just the natural resources tax (NDPI) and export duties on oil. Taxes on the extraction of gas and on profits in the oil and gas sector, as well as export duties on oil products and gas, are not included (in the minister's opinion, this is around 20% of all current revenues).
How, then, should the excess oil revenues be managed? Norway is considered an example. There the oil fund generally receives the government's entire share of the proceeds from the sale of "black gold," and the monies from the fund are invested in securities. Under this system, the Norwegian government's budget deficit (purged of raw materials) should not exceed 4% of the fund's volume. The crux of the matter is that 4% is the average yearly profitability of the oil fund, while the oil fund itself approaches the size of the country's non-oil GDP. In such a manner, the budget deficit can be completely compensated for by the revenues from the fund even while the fund's size does not decrease. In such a scenario the government resembles a rentier, living on the continuous yearly revenues from a bank account. But in Russia the Norwegian scheme is not applicable: "the quantity of revenues [from the investment of the stabilization fund], in comparison with the calculated deficit of the non-oil and gas budget is almost nothing. The calculated volume of investment earnings in 2007 will be around 0.1% of GDP for a calculated deficit of 5.4% of GDP in the non-oil and gas budget.
Inasmuch as the stabilization fund is too small to cover the budget's deficit, like a rentier, the Finance Ministry proposes to go to the road followed by Kazakhstan. There the deficit in the non-oil and gas budget can be compensated for by the stabilization fund itself. However, the size of this compensation (the transfer) should be a fixed percentage of GDP. The Russian Finance Ministry is proposing to divert not more than 3-4% of GDP yearly from the stabilization fund to the budget. In 2007, the deficit in the Russian non-oil and gas budget will be 4.8% of GDP. This means that 3-4% will be compensated for from the stabilization fund, while the rest will come from foreign loans, earnings from privatization, the sale of government surpluses, etc. In Russia, like in Kazakhstan, it is planned to over time decrease both the deficit in the non-oil budget and, correspondingly, the size of the oil transfer figure: in other words, to make the economy less dependent on the export of raw materials. Aleksey Kudrin first proposed this method at an Economics High School roundtable discussion organized by Kommersant, and it was later published as an article by Kommersant (see the issue from March 20, 2006).
Kudrin's idea is a good one. But the original idea from Andrey Illarionov, who proposed to fix a lower and more reasonable cut-off price, is no worse. Like Illarionov before him, Kudrin hopes to prod the government into self-imposed restrictions, and for this it is necessary to "finally" and "inflexibly" fix some abstract quantity, i.e., either the price cut-off or the size of the transfer. Illarionov's proposal was not implemented according to political considerations, but why should Kudrin hope that another fate awaits his ideas? Elections are approaching, but in agreement with the budget project for 2007, the growth of expenses will again outstrip the country's GDP.
All the Article in Russian as of Aug. 29, 2006
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