It’s not the time yet for a budget-cut decision

The current circumstances require an economic policy taking account of not only economy's structural requirements, but also risks. For example, amid panic in the foreign exchange market, lower interest rates provoke new attacks on the ruble instead of helping resolve the issue of bank lending expansion and liquidity provision. The key interest rate may be lowered to the extent that inflation shows a reverse trend, not under the conditions in the foreign exchange (FX) market. At some point the interest rate was lifted not high enough to ensure that the ruble is protected.
A discussion on economic growth promotion instruments between the Ministry of Economic Development and the Ministry of Finance has a strategic background and is not a guidance for decision-making. The considered budget-cut by extra 10% requires further calculations. It is the ruble-denominated crude oil price not the dollar-denominated one that is important for the budget. Therefore, if the fall of crude oil prices is offset by the ruble's depreciation, then there is no need to cut the budget ruble-denominated spending.

On the other hand, if the ruble gets stronger and the budget runs short of revenues, then budget cuts are required to cope with budget deficit. Indeed, we cannot allow ourselves to "blow off" the entire Reserve Fund within 1.5 years.

It would be a challenge at the moment to measure the entire scale of risks which Russia's economy and budget might be exposed to. The Russian Government should prepare a few plans before the State Duma holds its spring session in April-May, when the budget-cut issue is to be considered. It would be clear by the time in question whether the budget should be cut or not.
The Central Bank of Russia, which is supposed to act expeditiously, is conducting an absolutely correct policy aimed at counteracting further depreciation of the ruble exchange rate and controlling inflation. However, it is a challenge to assess the pass-through effect of ruble's devaluation to inflation, because the USD exchange rate is being non-equilibrium.

In his speech at the Gaidar Forum 2015 Russia's Prime Minister Dmitry Medvedev named the conditions under which banks can obtain state support through coupon-bearing Federal Loan Bonds (OFZ). If we take a look at the history of previous crisis, we will see that the federal government also was ready to provide a big volume of state support to the banking sector, however such support was not implemented in full. Moreover, banks feared that nearly a half of the banking sector would be controlled by the state. Eventually, only 10–15% of the banks took advantage of the state support.

These arrangements are most likely to be a state guarantee, but the guarantee may not necessarily be realized. I think that the same situation will repeat. However, the federal government must provide guarantees of, as worst, being ready to save even one third of the banking sector.

Additionally, the Prime Minister stated that import substitution plans should be adopted by the end of first half of the year. In particular, he proposed to focus on the import substitution in the agricultural sector. In fact, the agricultural sector has long, about five years, been employing import substitution whose results will be seen in the years to come. In respect to other sectors, it depends on the payback period. There is no point to rely on 6-month import substitution unless the high-tech production capacity is sufficient. However, this is not the case, according to the projects in the industries hit by the sanctions. Therefore, the payback period will last at least two-three years.

Sergey Drobyshevsky, Doctor of Economics, Gaidar Institute Director of Research