A Leaner, Meaner Budget Year

 

 

What’s good for Humvee drivers isn’t so good for the Russian economy. Thus indicates a Jan. 21 Duma report, which notes that due largely to falling oil prices, the Russian government has had to completely redraw its fiscal-year-2009 budget. It appears that the large budget surpluses Russia enjoyed in 2008 have morphed into huge projected deficits for 2009 and years thereafter, and that, like it or not, Russia has entered “the new epoch of the budget gap.”

 

Last year was a good year for overall for the Russian government, as its total 7.56 trillion rubles in expenditures ran well within the margins of its 9.26 trillion rubles of revenues. Fiscal-year 2009 was expected to be a good year, too. But some developments in the last few months—namely, economic recessions across the globe—changed that picture in a few dramatic ways:

 

1)      The price of oil fell from $95 per barrel in 2008 to $41 per barrel in 2009.

2)      Russia’s inflation rate rose from 8.5% in 2008 to 13% in 2009.

3)      Whereas 25.4 rubles equaled a dollar in 2008, 35.1 rubles equal a  

      dollar in 2009. 

 

What do these three shifts mean for Russian fiscal prospects? They mean that as things stand, Russia is looking at a 2009 budget shortfall somewhere between 1.5 trillion and 4.5 trillion rubles.

 

Russia’s Ministry of Finance sees the price of oil dropping even further, to $32 per barrel. If that happens, the ministry projects, then a forecast for a total 2009 budget shortfall above 4 trillion rubles would be “closest to reality.”

 

That is a scary number, considering that it’s almost one-half the projected 2009 expenditures (which stood last count at 9 trillion). But it may not be far off base. For the first time since 1983, according to Oil Market Report, demand for oil worldwide is actually set to contract this year—whereas the world consumed 85.8 million barrels a day in 2008, it will only consume 85.3 million barrels a day in 2009. And seeing as production topped off last year at 86.2 million a day, it becomes obvious that there isn’t much room for reaping any new profits.

 

It’s hard to imagine this being a permanent change. With world population still growing and the economies of China, India, and Brazil building new industries at rapid clips, it is inevitable that prices will at some point shoot up again. But that may not happen for some time, and certainly not before the present worldwide economic crunch draws to a close. In the meanwhile, it’s rough terrain up ahead for economies that are heavy on oil production, and Russia’s economy is no exception.

 

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