The budget rule has been changed: how will this affect the filling of the treasury
Photo by: duma.gov.ru
The State Duma approved in the third reading a law that actually returns the previous budget rule scheme. True, in a slightly modified version: instead of the previous $44.2 per barrel, the base oil price necessary to determine the fixed amount of oil and gas revenues to the treasury is taken at $60. And although, according to the leaders of the Ministry of Finance, this will have a beneficial effect on budget revenues from the activities of the raw materials sector, the meaning of the decision is not entirely clear.
Let us remember that we are talking about a mechanism designed to protect the national economy from the negative impact of price fluctuations on the world oil market. Under the budget rule, the state determines the level of prices for raw materials — the cut-off price — which is used as a guide when planning the budget. If the price of exported oil is above the cut-off, the surplus (in the form of additional income) is used to purchase foreign currency for the National Wealth Fund. If, on the contrary, actual oil prices are below the cutoff, the difference is compensated by the sale of currency from the National Welfare Fund. At least, that's how it was originally intended.
The first budget rule appeared in Russia back in 2004. In total, from 2004 to the present day, the Ministry of Finance has developed as many as five versions of it. The option, which had been in effect since 2017, involved purchasing currency from the National Welfare Fund when Urals oil prices were above $40 per barrel. The “cut-off” was indexed annually by 2%, and in 2022 it amounted to $44.2. This year, the budget rule operates on the basis of determining a fixed amount of budget raw material revenues at the level of 8 trillion rubles per year. And now it has been decided to return in 2024 to the previous version of the rule, but presupposing the establishment of a cut-off price of $60 per “barrel” of the Russian Urals variety. According to Deputy Head of the Ministry of Finance Alexei Lavrov, this will allow an increase in basic oil and gas revenues and at the same time expenses of the federal treasury by approximately 1.7 trillion rubles.
Meanwhile, the innovation alarmed the Accounts Chamber. As state auditors noted, the explanatory note to the bill does not contain a justification for the measure. At the same time, there are “risks of not achieving” the declared $60 per barrel: the joint venture recalls that the price of Urals fell below this threshold amid crises in 2015-2017 and in 2020. Commenting on the remark of the supervisory agency, Deputy Minister of Finance Vladimir Kolychev explained that $60 per barrel is the same annual 8 trillion rubles expressed in rubles, but it is better to calculate in a new way, “and the market asked us for this.” But a question arises that remains unanswered: why is it better to count, how should it be understood?
“I think there is no fundamental difference between the two values - 8 trillion rubles (calculated value) and $60 per barrel,” says Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences. – Accordingly, one should not overestimate the new scheme and expect that it will somehow magically affect the level of filling the budget and the National Welfare Fund. In fact, everything depends on the situation with commodity revenues: if problems arise with them, the budget rule can be adjusted, as has already happened more than once. It’s useless to guess why this was done now.”
As for the risk of Urals not reaching $60 per barrel, it is insignificant. Currently, the Russian export grade is trading above $80 per barrel and it is difficult to imagine that in the current geopolitical conditions, world oil prices could collapse significantly. Moreover, Nikolaev argues, another formidable circumstance has been added that will spur quotes — in the form of a powerful and, without a doubt, long-term armed conflict in the Middle East.
“Of course, there are risks for the budget,” Financial analyst and private investor Fedor Sidorov agrees with the conclusions of the Accounts Chamber. — The cut-off level of $60 per barrel of Urals is calculated based on Brent quotes in the region of $95 in 2024. At this price level for the reference grade, the cost of Russian raw materials will be in the range of $70-80 per barrel. Accordingly, if the forecasts do not come true, then the stated cut-off price will not be achieved.”
At the same time, the probability of the Brent price falling below $75 is small. OPEC countries are generally able to keep prices around $105 per barrel. Of course, they will not agree to such an extreme option, so as not to lose benefits in the long term. But the level of $90-95 per barrel seems quite realistic, Sidorov sums up. This means that the new budget rule will significantly fill the Russian treasury. Indeed, with the new calculation system, a change in the price of oil by $1 per barrel will give approximately $2 billion in additional income per year.