By Vladimir Osakovsky, Head of Strategy and Research for UniCredit Securities.
Russia might start to use its second sovereign wealth fund – Wellbeing Fund ($89.9bn as of 1 July 2009) to finance the federal budget deficit in 2010.
To finance a roughly 3,000bn roubles ($98bn) federal budget deficit in 2009, the Finance Ministry is actively using the Reserve Fund ($ 94.5bn as of 1 July 2009, down from $137bn in 1 January 2009), which was created specifically for this purpose. Given spending plans and the dire outlook for federal budget revenues, this fund looks to be completely depleted by mid-2010E, leaving a gap of some 700bn-1,200bn roubles ($23bn-38bn) to finance from other sources.
Previously, the government was mulling plans to extend its domestic and external borrowing program in 2010E to finance the deficit. Thus, the government announced its plans to borrow some $10bn (325bnroubles ) abroad in addition to 1,000bn roubles ($32bn) in domestic borrowing in 2010E.
However, Vedomosti reported that these plans were abandoned due to a risk of crowding out private investment and the high financial and political costs of external borrowing. This leaves the National Wellbeing fund as the last remaining source of deficit financing.
We note that without borrowing program, the 3,000bn roubles federal budget deficit in 2009 and 2,700bn roubles in 2010 could drain all of the government’s fiscal reserves by 2011. If this happens, we would regard it as negative for the ruble, as it suggests the continued expansion of monetary base through the conversion of fiscal reserves.
We also note that the existence of massive fiscal reserves is an important reason for Russia’s investment grade sovereign rating. Therefore, plans to spend down those reserves might trigger adverse rating actions by major rating agencies.
On the other hand, the lack of a domestic borrowing program also supports our expectations of continued decline in interest rates in Russia, which should offer support to investment and overall economy.
Plans to abandon the public borrowing program is a negative long-term development for the rouble and potentially for sovereign ratings, in our opinion. However, we would not expect an immediate market reaction given that no firm decision has yet been taken.