Published November ‘13
Russia’s stagnating economic growth will put increasing pressure on its spending commitments, and could raise the risk of tax increases should growth fall below expectations or if oil prices fall below USD85 per barrel.
In the face of a stagnating economy, the Russian government is forecasting that revenues will decline by 3.5% in 2014 and 7% in 2015 from previous projections.
The slower rates of GDP growth forecast by IHS would imply a reduced inflow of tax receipts to the federal and local budgets. At the same time, Russia faces large-scale investment needs to update and expand the country’s infrastructure. Additionally, Putin is pressing the government to deliver on his pre-election pledges for social spending and modernisation of the armed forces. Given the outlook for the economy, this suggests growing fiscal pressures. Currently, the oil and gas sector provides around one-half of all federal budget revenues.
Read the last sentence. Sure Putin can withhold gas exports to Europe, which accounts for 80% of Russian gas exports.
But the regime would be stepping in quicksand by doing so.
The ruble has been falling precipitously since mid-Jan. Russia’s central bank has had to raise rates and will adversely affect economic growth.
Slippage in economic growth and weaker energy prices pose the most significant risks to the 2014-2016 budget projections, which forecast the first annual deficits in nearly 15 years already. In the event of protracted economic weakness in the global economy, particularly in the EU, and softening energy prices, state revenue growth will underperform current projections significantly. A drop in oil prices to under USD85 per barrel and GDP growth lower than 3% are scenarios which we estimate as likely to result in severe revenue shortfall and associated cuts in benefits and social spending, which could in turn lead to increased civil unrest in the form of protests in major urban centres. In such an event, the government will have limited options assuming continued use of cautious monetary and fiscal policies. As a result it may well resort to increased corporate tax rates. - (IHS)
Slippage in economic growth is increasingly likely to happen. Meanwhile, weaker energy prices (or lower revenues if exports from gasprom stop)
Europe may be increasingly confident to call Russia’s bluff??:
If anything these continued threats will only put off purchasers of Russian gas. If your vendor is rude to you, you go to another vendor. If anything this situation makes the U.S. a more appealing option. Note that the America is either the largest or second largest nat gas produer in the world depending on which source and year one cites. I reserve the right to change my mind as I read more research, but for now, over the long-term, I think the deck is stacked against Russia.
Putin would be hard-pressed to escalate the situation.