Presentation on Russia's fiscal policy and pressures by Vesa Korhonen (June 2017)

1. Russia's fiscal policy and
pressures
International Conference
The Russian economy – stagnation
or modernization?
Organized by SITE, UI, and FOI
Stockholm, 13 June 2017
1
Vesa Korhonen
BOFIT, Bank of Finland

2. Suomen Pankki – Finlands Bank – Bank of Finland 2
Inflation erodes purchasing power,
including the government’s
-10
-5
0
5
10
15
20
25
30
35
40
45
-10
-5
0
5
10
15
20
25
30
35
40
45
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Industrial
producer
prices
Investment
deflator
Consumer
prices
Import
prices
12-month / 4-quarter average / annual, % change y-o-y
Source: Rosstat
Public
consumption
deflatorPublic
sector
wages

3. Suomen Pankki – Finlands Bank – Bank of Finland 3
Government budget revenues and spending
in 2001–12 increased 60–70 % = 4–4½ % per year,
2014–mid16 revenues -14 %, mid2015–mid16 spending -9 or -5 %
Government consolidated budget revenues and expenditures in real terms
(federal, regional and local budgets, and state social funds)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
22000
24000
26000
28000
30000
32000
34000
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
22000
24000
26000
28000
30000
32000
34000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Revenues
Expenditures
12-month sum in fixed (2016) roubles
Sources: Ministry of Finance, IMF, Rosstat, BOFIT
Other revenues
(than oil & gas tax
revenues)
Oil & gas tax
revenues
For the deflator used to deflate revenues and expenditures in nominal roubles into real terms, see last slide.
incl. Rosneft share sale
Expenditures
Revenues

4. Suomen Pankki – Finlands Bank – Bank of Finland 4
The floating exchange rate has cushioned the fall
of government budget oil revenues
Consolidated government budget revenues from oil & gas taxes
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
100
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
100
07 08 09 10 11 12 13 14 15 16 17
% change of 3-month sum from 12 months earlier
in dollars
in real terms
in roubles
Sources: Ministry of Finance, Bank of Russia, Rosstat, BOFIT
For the deflator used to deflate revenues in nominal roubles to real terms, see last slide.

5. Suomen Pankki – Finlands Bank – Bank of Finland 5
Targets for reducing government deficit announced
(from 2017, by about 1 %-point of GDP each year)
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
2008 09 10 11 12 13 14 15 16 17
Sources: Ministry of Finance, Rosstat and BOFIT
12-month sum, % of GDP*
Consolidated budget
Consolidated budget without
oil & gas tax revenues
Federal budget
incl. sale of
Rosneft shares
(0.8 % of GDP)
with oil (Urals) price
assumption
USD45.6
* For comparability over time, GDP levels of 2008–13 have been adjusted upwards in accordance
with Rosstat's methodological change for GDP data of 2011–14 published in early 2016.
Government budget balance
 Usual efforts − try to increase revenues and contain expenditures …

6. Suomen Pankki – Finlands Bank – Bank of Finland 6
Increases
mainly in
smaller
taxes,
collection,
changes
in large
taxes
planned
Consolidated government budget revenues
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
5,5
6
6,5
7
7,5
8
8,5
9
9,5
10
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
5,5
6
6,5
7
7,5
8
8,5
9
9,5
10
08 09 10 11 12 13 14 15 16 17
12-month sum, % of GDP*
Oil & gas taxes,
(production taxes on
crude oil and natural gas
and export taxes on crude oil,
oil products and gas)
Social taxes
VAT
Labor income tax
Corporate profit tax
Other
Excise taxes
Property taxes
Investment income, dividends, rents,
share of central bank surplus etc.
incl. Rosneft
share sale
* For comparability over time, GDP levels of 2008–13 have been adjusted upwards in accordance with Rosstat's methodological change for GDP data
of 2011–14 published in early 2016.
Sources: Ministry of Finance, Rosstat, BOFIT

7. Suomen Pankki – Finlands Bank – Bank of Finland 7
Growth of public sector wages and pensions
contained
Average nominal public sector wage and pension
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
06 07 08 09 10 11 12 13 14 15 16 17
% change from 12 months earlier
Public sector wage *
Consumer prices
Pension
* Average weighted by the number of employees of average wages in public administration, education and health care
Sources: Rosstat and BOFIT

8. Suomen Pankki – Finlands Bank – Bank of Finland 8
Consolidated government budget expenditures in real terms
Pension
spending
contained.
Will
defence
spending
stay at
a lower
level?
Most other
spending
has
declined
- - serious
or not so? 0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
12000
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
12000
08 09 10 11 12 13 14 15 16 17
Defence
Internal security & order
Economy
Housing sector
Health
Education
Administration
Sources: Ministry of Finance, Rosstat, BOFIT
For deflators used to deflate sector expenditures
in nominal roubles to real terms, see last slide.
Economy incl.
bank support pack
Social expenditures,
of which pensions
12-month sum in fixed (2016) roubles
Defence incl.
lump sum to
defence industry
for repaying
bank loans

9. Suomen Pankki – Finlands Bank – Bank of Finland 9
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
07 08 09 10 11 12 13 14 15 16
MinFin
in fixed (2016) roubles
SIPRI
IEP
MinFin excl. the sum paid
in 2016 to the defence industry
for repaying bank debts, but
incl. the industry's bank borrowing
For the deflator used to deflate expenditures in nominal roubles to real terms, see last slide.
Sources: Ministry of Finance, SIPRI, Zatsepin/IEP (2017), Rosstat, BOFIT
Boost of military expenditures
seems behind so far
Consolidated government budget military expenditures in real terms

10. Suomen Pankki – Finlands Bank – Bank of Finland 10
The proxy for a general government budget deflator for deflating revenues and total
expenditures is a weighted basket of:
Weight, avg 2000–15 (GFS) Level in 2016, avg. (2000=100)
# Consumer prices (CPI) 0.37 (social benefits) 527
# Public consumption deflator (PCD),
includes public sector wages 0.43 (wages, goods & services) 1171
# Industrial producer prices of goods
supplied to domestic buyers (IPPI)
and import prices (IP); weight of
imports is assumed at 20 % 0.13 (subsidies) 536 (IPPI 591, IP 319)
# Investment deflator (ID) 0.07 (consumption of fixed capital) 490
 General budget deflator (GBD) 786
CPI, IPPI-IP and ID are general (not government-budget-specific).
Deflators for the functional government expenditure categories, the sector deflators, are
weighted baskets of
# average sector wage (SW), as sector PCDs, which include SWs and purchasing prices of
goods & services, are not available; and
# the general IPPI-IP, as data on sector consumption of fixed capital (weight for ID in GBD)
and sector subsidies (weight for IPPI-IP in GBD) is not available; for the social policy sector
IPPI-IP is replaced by CPI.
The weight for SW is the sector’s wage sum (in the sector’s public consumption) per
government total expenditure on the sector, and the sector weight for IPPI-IP is the rest. The
weight for SW varies a lot across the sectors (from 0.03 to 0.66 as an average for 2008–14).