Russia in the spotlight Edition August 2017

The Russian government has an ambitious plan to reduce the country’s budget deficit from 3.7% of GDP in 2016 to around 0.9% in 2019.
To do so, the Ministry of Finance suggests reining in government expenses, which would likely be even reduced in real terms. This could be achieved by using a new budget rule that would limit spending to revenues earned at an oil price of USD 40 per barrel, which should help liberate budget expenditure from oil price volatility. Any excess oil revenues would be transferred to the Reserve Fund. However, deficit financing would also depend less on drawdowns from the Reserve Fund and more on increasing the level of (predominantly domestic) debt. As debt levels in Russia remain among the lowest in the world, this seems to us a reasonable approach. In addition, Russian sovereign bonds are currently attractive to investors given their high real yields and the gradual recovery of the Russian economy.