This idea may solve many problems facing the Russian financial and lending sector, but can it be implemented?
The ministry has proposed transferring to the new fund the mineral (severance) tax; hydrocarbons export duties; the profit tax, which is currently payable to the federal budget in the form of revenues from the sale of oil and gas; and other oil and gas revenues, with the exception of excise taxes and earnings from the investment of the fund's resources.
The Oil and Gas Fund should be split into two parts - a reserve fund, where at least 7-10% of GDP should be transferred, and the savings fund comprising revenues in gained excess of the above 10%.
As of now, the minimum balance of the Stabilization Fund is fixed at 500 billion rubles (almost $19 billion), or 1.6% of GDP. The finance ministry believes that this sum cannot ensure the stability of revenues sufficient for the fulfillment of the government's expense commitments, especially if oil prices plummet.
Therefore, the reserve fund should become a new minimum balance ensuring the fulfillment of federal budget's obligations if oil prices nosedive below $40 per barrel, while the savings fund should accumulate part of oil and gas revenues for future generations.
The ministry believes that the best strategy of saving revenues should stipulate gradual spending of the oil and gas income, up to a specified level, in the form of transfers from the Oil and Gas Fund to the budget. When prospected oil resources become exhausted (by 2046, according to experts), the budget deficit can be financed with investment revenues from the placement of the oil and gas income that is being earned now.
The size of transfers has not been determined yet. According to the ministry, oil and gas revenues should be spent gradually in the amount of 3.6% of GDP. The ministry experts say their current spending is excessive (5.3% of GDP in 2006 and 4.7% in 2007) and fraught with macroeconomic and budgetary risks. In their view, 3.6% of GDP should suffice for the gradual spending of the Oil and Gas Fund on current expenses until 2046, and for 20 more years after the oil resources become exhausted.
The ministry also proposes raising the profitability of investing the new fund's resources, but suggests more conservative variants of investing the reserve fund than those stipulated for the savings fund.
The reserve fund should be invested in foreign government securities, with their scope extended from AAA-rated to A-rated securities (according to Standard & Poor's), as well as in a wider range of foreign currencies. The savings fund should be invested in the equities of multinational companies.
This scenario can make the Russian budgetary system more predictable because it stipulates a long-term mechanism of using oil revenues, which had not been envisaged when the Stabilization Fund was set up. The proposals on setting up the Oil and Gas Fund have been forwarded to the government, but a decision cannot be expected soon.
As of now, the Stabilization Fund, which exceeded 2 trillion rubles ($75.93 billion) as of December 1, 2006, is mostly used to sterilize the money supply so as to prevent a rapid growth of inflation. Experts are still debating ways of using the oil revenues. Some propose leaving part of these revenues for future generations, while others suggest spending them now.
The crucial task is to ensure long-term economic growth, which is why some people say that these revenues should be used to modernize the infrastructure and strategic sectors of the economy, and invested in innovations, rather than in foreign securities and foreign currency.
On the other hand, only two types of income - the severance tax and the oil export duty - are transferred from the oil sector to the Stabilization Fund. All other taxes from the oil sector, as well as all taxes from the gas sector, are used to cover budgetary expenses. Therefore, the finance ministry's proposal for removing oil and gas revenues from the budget will highlight the deep divide between the non-commodities sectors and the oil sector. This may encourage the government to concentrate efforts on the non-commodities sectors' accelerated development.
For all its obvious advantages, the ministry's concept will be difficult to implement, especially in view of the forthcoming presidential election campaign in 2008, when different political forces will try to use the large oil revenues to promise more allocations to social programs in a bid to win over the electorate.
And lastly, the future of the Oil and Gas Fund will largely depend on oil prices in the long term. The finance ministry's concept is based on an oil price of $40-50$ per barrel, but reality may prove completely different, affecting the methods of managing oil revenues. In short, there will be many more debates on ways to spend the Stabilization Fund money.
The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.
