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Russia’s Deputy Finance Minister: Let's not cheer about current oil prices

Russian ruble has also become less dependent on short-term oil market fluctuations

MOSCOW, September 14. /TASS/. Russian Finance Ministry’s stress scenario is based on the oil price of $30 per barrel in the nearest future, Russia’s Deputy Finance Minister Maksim Oreshkin said Wednesday.

"There will be no good news for the oil market in case negative global economic forecasts fulfill as the demand dynamics forecasts will be reconsidered once again. The stress scenario we have to get prepared to is around $30 per barrel for the nearest several years," he said.

"One should not cheer about current oil prices. As soon as we see correction on other markets it will also affect the oil market, particularly taking into account the fact that fundamentally the crude market is still facing many challenges," Oreshkin said on Wednesday.

Oil prices slightly rose after Russia and Saudi Arabia singed a joint statement aimed at stabilizing the crude market on the sidelines of the G20 Summit on September 5.

At the same time, Russia is more prepared to negatives on crude markets than other developing countries, according to  Maksim Oreshkin.

"The negative implications on commodity markets will affect Russia, it is risky for Russia, but compared with the bulk of developing countries we’re best of all prepared to this risk as (Russia’s - TASS) macroeconomic policy has been aimed at adjusting, at bringing it in line with global fundamentals over the past couple of years," he said. 

Oreshkin considers the end of recovery growth in the United States and the unstable situation in China as important trends. "The Chinese growth pattern is unstable as gigantic structural imbalances have been accumulated. A second wave of capital outflow is emerging there," he said, adding that "a simultaneous rise of rates and a collapse of the realty bubble" may put a serious pressure on the country’s economy.

According to the minister, the economic policy has to take into account all scenarios in order to be ready to respond to any challenges. "Given this logic, we base the budget on (oil) price of $40 per barrel as we realize that the budget based on $40 per barrel may adjust to the stress scenario of $30 per barrel," he said.

The Ministry plans to create the background for preventing the type of crisis that has been in place in recent years in the nearest future, and for doing this it is necessary to undercut the influence of the commodity markets’ dynamics on the dynamics of inflation, GDP, real disposable incomes, Oreshkin added.

As was reported earlier, the Finance Ministry plans to introduce a new budget rule, which determines the maximum level of budget expenditures on the basis of oil prices for reducing dependence of Russia’s economy on volatile commodity markets.

The ruble’s exchange rate is stable now as it has become less dependent on short-term oil market fluctuations, Oreshkin assured: 

"The (ruble’s) exchange rate is stable and has even got less dependent on short-term fluctuations of the oil market. The exchange rate is more defined by mid-term expectations of market participants versus oil dynamics." 

Russian banking sector

Speaking about surplus liquidity in the banking sector the minister noted that it is not negative, but the liquidity situation dynamics should be predictable in the long term: 

"There is nothing wrong in the fact that there is no surplus liquidity. It is important, of course, that the liquidity position in the medium and long term remains stable and predictable, that the conditions do not change as fast as they have been changing in the last couple of years. Against the backdrop of rapid changes in the liquidity situation, perception of monetary policy becomes complicated". 

Russian inflation 

Inflation in Russia will total 5.7% at the end of this year, Maksim Oreshkin has announced:

"Currently the level of inflation is already below 7% while we expect it to go down to the level of 5.7% by the end of this year, which will be a historic low."

Also, he said, there are fewer doubts that the Central Bank’s inflation target of 4% is attainable in 2017: "Economic agents have less and less doubts that the (inflation) target of the Bank of Russia of 4% is attainable next year while inflationary expectations subside."

In July, Finance Ministry forecasted 2016 inflation at 5.5-6%. According to the Central Bank, inflation dynamics has been in line with the regulator’s annual forecast of 5-6% over past months. However, it says, risks of outreaching the 4% inflation target by end-2017, still persist.

Budget and monetary policy

Russia is facing a hidden easing of monetary policy through reduction of deposit operation rates, Maksim Oreshkin explained:

"The monetary environment is being latently eased in Russia through changes in the situation with liquidity in the banking sector. Amid relatively stable key rate of the Bank of Russia deposit operation rates have fallen sharply while the corporate and retail lending have become more active".

As far as the budget goes, Russia’s Finance Ministry is planning to pass the process of budget adjustment and shift to a new budget rule in the nearest future:

"As for the budget it’s still being adjusted and is softer compared with that was happening in the economy. We have the opportunity of using reserves for this," he said, adding that "the plan is to finish the adjustment process and shift to a new budget rule within the three-year budget, which the government will submit to the State Duma in a month." 

According to Oreshkin, the strategy of budget adjustment that Russia has been pursuing, "proved to be correct."

"If we take a look at other countries, Brazil’s unemployment is nearing 12%, Kazakhstan’s inflation exceeds 17%, only Saudi Arabia keeps stable. Russia started the process of budget adjustment from oil price balancing the budget of over $110 per barrel while now we are around $80 per barrel mark. A question arises whether we need to pursue this adjustment and whether we have to further lower the oil price balancing the budget and what we should focus on," he said.

"We are including a fairly serious increase in net borrowings in the three-year budget. On the one hand we will follow the trajectory of reducing the deficit, on the other - gradually increasing the volume of borrowing in the domestic market, thus seriously reducing and phasing out use of sovereign wealth funds to cover the deficit," Oreshkin noted speaking about the worrying increase in borrowings.

According to him, Russia’s borrowing will grow as inflation expectations will decline, there will be more clarity as to what will happen with fiscal policy and how "the deficit tragectory" will develop.

Net domestic borrowing in 2016 is planned at 500 bln rubles ($7.7 bln), gross borrowings - at the level of 1.002 trillion rubles ($15.4 bln). It was planned to repay 702 bln rubles ($10.79 bln).