An exercise in denial, Russia’s budget underscores the malaise of its economy.
What’s Inside?
Russia’s budget epitomizes the troubles in its economy. Questionable logic appears to inform spending decisions.
How Is This Article Useful to Practitioners?
Vladimir Putin is about to sign into law a new budget that takes a very austere path. The World Bank has forecast weak economic growth for Russia—0.3% in 2015 and 0.4% in 2016. In the face of this reality, the government has cut $17.8 billion of planned spending. The ruble has lost about a fifth of its value. The central bank may also impose controls on capital outflows.
Public sector wages and defense are two areas that have escaped cutting, particularly because the latter is in need of an overhaul. But current oil prices will not help a nation whose revenues rely on them. Hovering around the mid-$90s, the price would need to reach or exceed $105 a barrel to produce a balanced budget.
Some assumptions in the budget seem to deny reality. For example, the Kremlin’s growth projections far exceed the market consensus. Additionally, its forecast inflation rate of 5% is far less than the current rate of around 7.6%, which is related to the European and US sanctions. Inflationary pressures could, in turn, force Russia’s central bank to increase interest rates, which would further dampen growth.
Economists, policymakers, and scholars of the Russian economy should be interested in this analysis and what it implies for the future of Russia’s economy.
Abstractor’s Viewpoint
The more things change, the more they stay the same. Russia’s decision to modernize its military, although important for its national security, seems to be misplaced given lackluster growth projections. Budgetary politics also seem to evoke a Soviet-era posture of trying to look stronger in the face of weakness.