BUDGET RISKS: INFLUENCE ON THE SOUVEREIGN WEALTH FUNDS OF RUSSIA

In recent years, the importance of the concept of the fiscal risks, which are the factors, the effect of which may lead to the deviation of actual budget performance from planned, such as the budget deficit.
Gamukin V.V.  offers the following classification of the fiscal risks [1]: 3 groups of risks with 5 subgroups of risks in each of them. Group 1 – fiscal risks, arising, as a rule, outside the scope of the budget.

This external environment risks. 1.1. Risks associated with traditional financial and business transactions. 1.2. The risk of inflation. 1.3. Risk of discrete control. 1.4. Risk connected with the reduction of the solvency of the taxpayers. 1.5. The risk of political conjuncture.
Group 2 shows the budget risks that the budgetary system generates itself. These are the risks of the budget system. 2.1. Risk rhythm of receipts and payments. 2.2. The risk of budget revenues structure. 2.3. The risk of the budget expenses structure. 2.4. The risk of an imbalance of the budget. 2.5. The risk of dependence on external sources.
Group 3 are budget risks, the occurrence of which is probabilistic in nature. They are random risks. 3.1. The risk of error. 3.2. The risk of an objective situation of unpredictability. 3.3. The risk of economic crisis. 3.4. The risk of corruption. 3.5. The risk of the development of the budget.

At the moment the Russian federal budget is in deficit. What are the sources to cover the budget deficit can be used in case of exhaustion of the resources of sovereign wealth funds?

According to the proposals of the Director of the Institute of Economics of the Academy of Sciences Ruslan Grinberg, the exhaustion of the Reserve Fund is not yet the end of the world, because it remains several options for the country through which you can neutralize the absence of provisions: 1) a tax increase; 2) reducing costs; 3) foreign debt; 4) domestic debt; 5) depreciation; 6) economic growth [2].

In the first case, the increase of the tax rate may lead to the decrease of the tax collection. In the second case, the diminishing of expenses could lead to the reduction of investments, living standards and consumer demand.

The third option is risky enough under the current external economic situation, especially in the sanctions regime, moreover, foreign loans are quite expensive.
The fourth option would mean that the money will be withdrawn from the active circulation, and will be forwarded to the ensurance of the the internal debt that will inhibit investment and economic development in general.
After the diminishment of the sovereign rating of Russia up to the “speculative” level, the market of the internal state debt will not be open for the foreign investors. The regulations of the foreign financial institutions simply do not allow them to work with the “speculative” securities.

The fifth option leads the economy to a state of shock, can cause the decrease in imports and increase of inflation. The sixth option requires structural reforms and their implementation.
The head of the stock markets and financial engineering Department of RANHiGS, the former deputy chairman of the Central Bank Konstantin Korishchenko thinks that the national debt will grow and the cost of it will decline. “Costs have already been proposed to freeze, raising taxes is extremely dangerous for political and economic reasons. Therefore we will increase the national debt, since it is very small by any standards”. [3]
This year, the planned federal budget expenditures amounted up to 16.25 trillion rubles, of which 2.2-2.3 trillion rubles will be covered from the Reserve Fund. This deficit in the first half of the year exceeded 4% of GDP, while its value forecast for this year before is 3%.
The first alarm sounded, as expected, from the Ministry of Finance, which made a radical, but inevitable proposal: the legislation must limit the budget expenditures at the level of 15.78 trillion rubles for the next three years, that means to cut them in nominal terms, adjusted for inflation at 20% [3].

After that, the Treasury presented a deficit reduction plan with diminishment of the deficit from 3,2% of GDP in 2017 to 1.2% GDP in 2019, including the limits of the transfer of the Pension fund up to 3.8% of GDP per year.
However, the Treasury made the decision about the sources of financing of the budget deficit. Thus, one trillion rubles of the Reserve Fund still remains in it in the first half of 2017, then in the second half of the year 0.8 trillion rubles will be taken from the National Welfare Fund (it is planned to take from this fund in 2018-2019 another $ 1 trillion).
If in 2016 the volume of the domestic borrowings amounted 300 billion rubles, in the following three years, the Ministry of Finance is going to borrow annually 1.3-1.5 trillion rubles, that is why the national debt by 2019 will be increased up to 13% of GDP [3].

Anyway, the government has no other choice: the revenue base is not growing, the economic growth is around zero, the reserves run out, and no one gave the mandate to the government for the reform in the conditions of the difficult socio-economic situation [3].
With regard to the federal budget of the Russian Federation, the experts of the Working Group on evaluation of fiscal risks [4] determine the following types of the budget risks: the risk of the loss of revenue, the risk of additional costs, the risk of limiting the sources of financing and the risks at the stage of the budget planning related to the planning accuracy, which leads to an underestimation or revaluation of fixed parameters of the budget.
The occurrence of these risks is capable to impact extremely negative on the federal budget and lead to the deficit that requires the use of active measures.

The risk of the loss of income is linked with [4]: 1) the price of oil on the world market; 2) the current exchange rate of the dollar against the ruble; 3) a slowdown in growth; 4) the degree of the tax collection.

The risk of additional costs is associated with: 1) the risks of support of the banking system; 2) the implementation of the implicit obligations in the non-financial sector; 3) the risks of regional budgets.

The financing of risks is associated with: 1) the volume of revenues and expenditures of the volume of the Russian sovereign wealth funds; 2) the borrowings in the foreign and domestic markets; 3) the privatization or sale of assets belonging to the state.

If the volumes of these sources are insufficient, the extreme measures, painful for the economy, are the direct emission of money the Central Bank and the default.

In order to exit this situation, the experts of the Working Group of the assessment of the fiscal risks [4] proposed three tools: 1) long-term budgetary planning; 2) the adoption and use of the modified fiscal rules; 3) improvement of the budgetary forecasting.

Also, they proposed the following types of the adaptation to the budget shocks: 1) a combination diminishment of expenses and / or increasing of the financing of the budget deficit; 2) budget borrowings.

At the same time, according to experts of the Working Group of the assessment of the fiscal risks [4], despite the fact that at the both levels is not possible to increase the borrowings, the shocks of the revenues at the federal level in the main are smoothed out, which is connected with the use of the resources of the Reserve Fund as an additional source of financing, while the procyclical expenditure policy is observed at the regional level, which is linked to the fact that such additional source of funding there does not exist.

The adaptation in the condition of the stable expenses is called “soft” adaptation, while the adaptation in the condition of the shrinking expenses is called “hard” [4]. It is necessary to agree that the problem of prevention of the fiscal risks should be of the great importance at the moment and it is needed to use all available means to solve this problem.

According to the experts of the Working Group for assessment of the fiscal risks [4], in the case of the choice of two options – the pro-cyclical fiscal policy or the accumulation of the fiscal reserves when conditions are favorable for their use in the case of the adverse conditions, the latter is more preferable.

As of November 2016, the Russian Federation passed the stage of the high world oil prices (over $ 100 per barrel) and has accumulated some funds in sovereign wealth funds, the amount of which however turned out to be insufficient to finance the budget expenditures at the stage of the decline in world oil prices and finding them at the level of around $ 40 per barrel.

Currently, the resources of the Reserve Fund of the Russian Federation melt, then it is forecasted to take resources from the National Welfare Fund, the amount of which is also at a relatively low level. Getting loans in foreign and domestic markets in the unfavorable economic conditions is connected with the great difficulties.

It is beneficial to increase their volume during the periods of favorable market conditions and to reduce their volumes in times of unfavorable external economic conditions (it allows to strengthen the counter-cyclical effect of the fiscal policy and reduce the cost of borrowings for the budget in case of internal borrowings and to the use of external markets in order to adapt to the adverse shocks and to gain from the exchange rate revaluation for external borrowing), but not vice versa.

The privatization and the sale of the state-owned assets can only be a temporary measure to cover the short-term cash gaps that can not be used to cover the long-term structural deficits.

One of the methods of reducing the financing risk is the method of diversifying its sources. In our opinion, it is better not spend all the resources of the souvereign wealth funds of Russia to their complete exhaustion. It is necessary to look for the new ways for the better investing of the sovereign wealth funds.

It is also needed to use the version of the budget cuts, and. if possible, to avoid the reduction of that types of costs that may further increase the scale of the economic downturn, as well as the priority of public investment, as well as to consider the option of raising funds from the other funds.

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2. Пустышки в фондах, 11 июля 2016, Дата обращения: 07.11.2016., https://lenta.ru/articles/2016/07/11/budget/
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