Finance Minister Siluanov Expects the Budget Deficit to Exceed the Target

Russian federal budget deficit reached 4.3% of BDP during the first half of 2016, indicating that the figure for the full year will exceed the planned 3% of BDP, writes Reuters.  Finance Minister Siluanov stated that the deficit will be higher than planned by 420 billion rubles (approximately USD 6.6 billion) and promised that the Reserve Fund will spend a maximum of 2.2 trillion rubles (USD 34.4 billion) by the end of the year to balance the budget.  Privatization of Rosneft scheduled for this year should also help stabilize the budget, and other privatizations might follow as the Government considers selling stakes in Rostelekom, Transneft, Aeroflot, Sovkomflot and other companies.

The deficit overshot the target because of lower than expected oil prices – the Government hoped for the average of USD 50 per barrel.  Finance Minister Siluanov also expressed his concern with the rate of the Reserve Fund depletion.

Russian Utility Bills Will Continue to Rise – But Slower

Russian daily Kommersant writes about the steadily rising utility bills in Russia. Annual price adjustments are scheduled for July and consequently don’t reveal the effect on heating bills until the winter. The good news, however, seems to be that the rises will no longer outpace inflation, at least according to Deputy Prime Minister Dmitry Kozak.

Cost of utilities should rise by an average 7.5% in Moscow, the highest increase in Russia. Water bills will increase by 7%, heating by 8.1% and electricity between 7-15%. Last year was tougher – the bills increased by 10% and a new tax to finance capital repairs was introduced (it was disputed at the Constitutional Court that found no reason to strike it down).  Many Russians fail to understand why the cost of utilities shifts only upwards while some inputs are becoming cheaper, but the reason is in consistent disregard for maintenance of the infrastructure that lasted for too long and now requires catching up.  
Rising utility costs are motivating the customers to control their usage of electricity and water – households with installed water meters as a rule pay less than average. Others are making local small technological breakthroughs: a programmer in Kaliningrad installed solar cells on the roof of his building, making it a net seller of electricity.

Russian Government Dumps Business Zones

In today’s edition of, economist Vladislav Inozemtsev writes about President Putin’s decision to stop the expansion of special business zones and close some of the existing ones.  Management of the business zones, as well as their financing, will be transferred to respective local governments.  Russian Accounts Chamber, the government entity in charge of auditing state finances, reported that the central government spent 186 billion rubles (approximately USD 2.85 billion) on establishing business zones during the last 10 years, while the combined tax revenues generated by the zones amounted to mere 40 billion rubles.  The Government spent approximately 10 million rubles (USD 154,000) per job created in business zones.
After transferring the responsibility for business zones to local governments, Kremlin will still retain the management of the so-called Accelerated Growth Territories.

Brexit, Another Worry for Russian Pensioners

Russian independent TV station Rain TV considers the possible impacts of Brexit on Russian pensions.  According to Deputy Finance Minister Ayrat Farrakhov, the primary concern for the Russian pension fund managers is the ensuing volatility on the financial markets.  However, the Russian Central Bank doesn’t think that Brexit represents a direct threat to the Russian economy, while “United Russia” party officials stated that they won’t insist on pegging the pensions to the actual inflation this year, which certainly makes the problem of the pension fund deficit more manageable.
Professor of finances at the Russian Economic School Oleg Shibanov stated that Brexit already negatively affected the oil market, but that he doesn’t expect the oil price to fall by more than three dollars per barrel. He believes that the Government might use external volatility to justify internal economic problems, as the central government budget is well underway to breach the planned deficit of 3% of BDP.  Professor Shibanov believes that the markets will continue to fall, but other circumstances will prove to be just as important as Brexit – for example, changes to the FED rate.  He advises against moving personal savings from one currency to another in times of volatility, as ordinary investors will hardly be able to guess the direction in which the exchange rates will move.  

Svetlana Alexievich: Suffering is More Abundant Than Oil in the Russian World

Svetlana Alexievich was awarded the Nobel Prize in literature in 2015 for building a “monument to suffering and courage in our era“.  This was the first time that the award went to a professional journalist, but other circumstances were pretty much standard for the “Russian writer and Nobel Prize” scenario, writes  Official and unofficial voices in Russia criticized Aleksievich without even having read her work, and Prime Minister Medvedev revoked his congratulatory note after Aleksievich referred to the annexation of Crimea as “political banditry”.  Her books were translated to more than 70 languages, and “Chernobyl Prayer” alone was printed in four million copies.  On the occasion of her U.S. book tour, Random House published a hardcover edition of “Secondhand Time”.  During her visit to a Brooklyn library earlier in June, Alexievich talked to Sophie Pinkham, journalist and expert on contemporary Eastern European history.
Alexievich focused on the history of the “red civilization”, talking to hundreds of people who lived under the communist ideology in the former USSR, including some witnesses who interacted with Lenin and Stalin.  Her most disturbing realization is that the communist mentality is very much alive regardless of the dramatic fall of the Berlin wall and the dissolution of the Soviet Union.  The nineties were a period of economic troubles and rampant crime, but nobody foresaw that the next millennium will bring back the ideology of besieged fortress and Russian chauvinisim.  As Alexievich said, “Once again we hear that we’re surrounded by enemies, that Russia represents a separate civilization, that the entire world is alien to us… Russia permanently needs some big idea, it is always a hostage to some super-idea. It is boring to build roads, decent homes – we’re building big Russia, we’re saving Europe.”  Alexievich talks about the new Cold War paradigm and asks herself how come deceived Russians turned their hatred toward the West instead of the oligarchs and the Kremlin authorities.
Explaining why she looked for victims and sufferers, Alexievich stated that human beings express themselves beautifully and profoundly either when they’re in love or close to death.  All her books feature testimonies of people who are at the very limits of their abilities.  She says it wasn’t difficult to find such individuals, as suffering is more abundant than oil in the Russian world.  If there is a ray of hope in her works, it is contained in the testimonies of people who managed to retain human traits regardless of the cruel circumstances.  This is usually characteristic of women, who tend to view human suffering and death from a higher, cosmic vantage point, disregarding the historic perspective.  Alexievich found a particularly disturbing story about a woman who informed on her own brother during the purges of 1937, putting him away in a labor camp where he perished.  When she was faced with her misdeed years later, she attempted to justify herself by saying that it was very difficult to find a honest individual in the Stalin era.  However, when asked about what was 1937 like for her, she replied: “My God, those were the happiest years of my life. I loved and was loved back.”  Describing the faces of labor camp commanders exhibited in the Victims of Political Oppression Museum in Irkutsk , Alexievich remarks that they weren’t beasts, but looked like ordinary human beings.  Evil is more sophisticated than we can imagine, she concludes. 

Russia Considers Tweaking the Tax System to Help Exporters

Russian Government is forced to consider extraordinary solutions to solve the budget deficit, writes business daily Vedomosti. One of the ideas is to increase the VAT at the expense of social contributions. The measure would help the employers and motivate them to report wages instead of paying them under the table. Federal sources were unwilling to discuss exact figures and said that the idea, if accepted, wouldn’t be implemented before 2018.

Lowering social contributions is supposed to make Russian exports more competitive, while higher VAT would discourage imports. One Russian government official stated that the reduction in social contributions should be way bigger than 2-3 percentage points in order to make a difference. Other officials recommend corporate income tax breaks instead of lower contributions, but this would affect local government budgets that collect the respective taxes.

There’s no consensus on whether the aforementioned measure would motivate the companies to invest or simply pay out larger dividends. Increasing the VAT would cause the inflation to overshoot the target set by the Government. Russian Government officials and experts in favor of the measure refer to a studies performed in the EU, indicating an expected increase in BDP of 0.3-1%. The MMF recommended a similar measure for Greece. Those opposing the measure are doing so as a matter of principle – dabbling with taxes too much undermines the reliability of the system.

Ivanov is Wrong: Sanctions Hurt Russian Exporters

Russian daily Vedomosti writes about decreasing Russian exports to the EU in the period 2013-2015.  Some Russian government officials, most notably President’s Chief of Staff Sergei Ivanov, stated that the international sanctions imposed after Russia’s annexation of Crimea are hurting the EU more than Russia.  However, the data indicates that total Russian exports to the EU dropped from USD 275 billion to USD 150 billion, mainly due to falling oil and gas prices.  The EU now sources only 7.9% of its imports from Russia, compared to 12.3% in 2013.  The EU is still the biggest export market for Russia, accounting for close to half of its total exports.

While Russia boosted its exports of copper, fertilizers and wheat, its vehicle exports dropped by 26%.  It turns out that the only exporters benefiting from the falling ruble are those that have little need for processing; Russian production with a higher share of processing is actually becoming less competitive in foreign markets. This is because the international sanctions and falling ruble are preventing Russian exporters from sourcing the most competitive production equipment and raw materials from abroad, leaving them with domestic suppliers as the only choice. Although this conclusion sounds counterintuitive at first, Russian exporters that create higher added value are actually benefiting from the ability to import competitive raw materials and processing equipment.