Putin orders cabinet to review 2002 budget

On November 5, Russian President Vladimir Putin met with members of his cabinet for new discussions on the government's spending plans for 2002 in light of the recent fall in world oil prices. Putin ordered Prime Minister Mikhail Kasyanov and Deputy Prime Minister Viktor Khristenko to submit additional proposals for revisions in next year's budget, saying that action had to be taken since Urals-blend crude prices were edging down towards $ 18.5 per barrel.
Since Russia's federal budget for 2002 is based on the assumption that prices will remain at or above the threshold of $ 18.5 per barrel, further falls could be problematic. As such, Putin said, the government must consider its options carefully and revise its budget plans as necessary so as not to remain hostage to market trends.

Andrei Illarionov, the president's top economic advisor, took a more optimistic view. Even if the price of crude drops to the level of $ 10-12 per barrel, Illarionov said on November 5, Russia will not have any trouble amassing the money needed to meet obligations to its foreign creditors. The country would be capable of paying off its debts even if it halted all crude exports and become an oil importer, he claimed.
He also told Profil that he did not think Russia should seek any more foreign credits, saying he believed that such loans hurt the country's economy in the end. The Russian government has said, however, that it may ask the International Monetary Fund (IMF) and the Paris Club of creditors for assistance if falling oil prices start to cause serious problems.

Putin's cabinet drew up the 2002 budget bill with the assumption that high oil prices would generate enough of a surplus (109.8 bn roubles, or 1.62 % of GDP) that a special reserve fund could be set up to hold money for payments on Russia's foreign debt. Those payments are due to reach a peak level of nearly $ 19 bn in 2003. The fear is that falling oil prices will erode the government's ability to stockpile funds for debt payments.
However,Prime Minister Kasyanov said on November 9 that he saw no cause for alarm. The government has drawn up three new scenarios to account for fluctuations on the world crude market, and even the worst-case scenario indicates that Russia will be able to meet its obligations, he said.
If oil prices fall to $ 15 per barrel as envisioned in the worst-case scenario, he said, the government will not be able to establish the special reserve fund. However, he said, Moscow would in this case take the following action in 2002: restructure debts so as to decrease 2003 payments by $ 1 bn; borrow $ 4 bn from foreign creditors instead of $ 2 bn as planned; and allow gold and foreign-currency reserves, now standing at $ 38.5 bn, to drop by $ 5-6 bn even as inflation rose to 13-18 %, above the target of 11-13 % stated in the 2002 budget bill.

The best-case scenario, according to Kasyanov, envisions average oil prices of $ 23 per barrel in 2002. If this comes to pass, he stated, Russia's annual inflation rate will not top 13 % and the government should be able to collect $ 3-4 bn in surplus revenue for the special reserve fund.
The other scenario, the prime minister said, assumes that oil prices will average $ 18 per barrel next year. At this price, he said, the government would not have to borrow additional funds or expend any of its gold and foreign-currency reserves. It would also be able to deposit $ 2-3 bn in surplus revenue into the special reserve fund, he said.
Finance Minister Aleksei Kudrin has said that the Russian government will use the surplus from 2001 to set up the reserve fund if no surplus revenues can be collected next year. Kasyanov did not comment on that possibility, however.

Oil market trends are major considerations in Russia's economic growth forecasts since exports of crude account for almost a quarter of the federal government's total budget revenues each year. (Natural gas exports account for nearly 25 % more, while metal exports account for an additional 25 %.) The Russian federal budgetfor 2002 was originally calculated on the assumption that the price of Urals blend crude, the most common Russian grade, would average $ 23.5 per barrel.
Russian government officials claim that the government will be able to make expenditures as planned in 2001 and 2002 as long as the price of Urals blend crude remains above $ 18.5 per barrel. It should be noted, though, that the Kremlin stands to lose about $ 1 bn for every $ 1 drop in the per-barrel price of oil.