Urals price drop may result in Russia's budget deficit

Updated September 17, 2008

   It is the oil prices drop, rather than the collapse of the stock market and the lending problems, that has become the most severe consequence of the financial crisis for Russia’s budgetary system - on September, 16, the price for Urals crude fell to $85,3 per barrel. Vice Premier Aleksey Kudrin reported that if the oil prices continued falling, the budget parameters would be recalculated, since it had been calculated using the price of $78 per barrel, and at the price less than $70, the budget surplus would be replaced with the deficit.

   On September, 16, the financial crisis became the threat to Russia’s budget for the first time. One barrel of Urals crude was sold at $86-88 against $120-140 in June-July, and as of September, 17, Platts fixed the price in Novorossiysk at the level of $85,3 per barrel. It is already below the level used to calculate the budget for 2008 - $92 per barrel. The current price for Urals differs significantly from the average annual value the agencies have expected - after the forecasts had been revised several times, it was raised from $55 to $112 per barrel. If Urals price continues to fall, the average annual value may be below the forecast, and the extra income to the budget may be lower than it has been expected for the first time since 2004.

   When Russia’s Ministry of Finance calculates the budget, it uses two prices - the one forecasted by the Ministry of Economy and the lower one used to balance the incomes and expenditures when drafting the law about the federal budget. So, according to the explanatory note to the budget project of 2009-2011, the forecasted price is $95, the "legal one" - $78 for 2009. However, on September, 16, within the preliminary discussion of the budget project in the State Duma, Vice Premier Aleksey Kudrin announced other numbers. According to him, the deficit-free budget, both in 2008, and in 2009, will be only in that case, if one barrel of oil costs $70. "We are on the edge of the values, on which the parameters the budget are based", Mr. Kudrin stated. Thus, he marked that the current forecast for the next year at the level of $95 per barrel was "too optimistic", since, according to his forecast, the price might fall to $70 per barrel.

   The Finance Ministry’s head marked that in 2012-2014 Russia can move to the deficit budget in accordance with the budgetary strategy to 2023. This year may become the critical one from the viewpoint of the oil and gas profits’ volume - then, their stake in GDP will go down. Thus, this process will take place due to the stake cut of the oil and gas sector in GDP, rather than the oil price drop. According to him, even if the oil price grows by $30 annually, the tendency of the oil and gas profits’ drop will not recover. The stake of the oil and gas sector in GDP will fall from 11,2% in 2008 to 9,1% in 2009, and then from 7,7% in 2010 and to 6,9% in 2011.

   In the long-term prospect these tendencies will remain, in Russia’s Finance Ministry consider. As per the budgetary strategy to 2023, the budget’s revenues will continue to cut. In this document, the Ministry of Finance disputes with the Ministry of Economic Development and Trade, since the former considers that the long-term forecast of the oil prices of the latter is overestimated. According to this forecast, in 2012-2023, the average oil price is $75 as per the prices of 2012. On the background of the impossibility to cut the tax burden, the oil extraction falls along with the price drop. As Rosstat reported on September, 16, in January-August, 2008, the extraction volume of oil and gas condensate fell by 0,7% to 2007.

   The September drop of Urals’s actual price to the forecasted one below $75 per barrel will lead both to the revision of the Finance Ministry’s budgetary strategy, and to the revision of the current three-year budget being in the State Duma. Under such conditions, it will be impossible to discuss the increase of the budget’s defense expenditures within the meeting held by the State Duma on September, 19, since no additional unshared profits (the regular Ministry of Finance’s resource for such operations) are left. The revision of the outlay accounts of the budget project will require more significant price changes. However, it is not eliminated that Russia’s Finance Ministry will force the budget adoption for 2009-2011 in the current version. In this case, its revision in 2009 is inevitable, as well as the "manual" management of the budget by Prime Minister and Vice Premier on finances in spring, 2009.