How the Ministry of Finance can reduce the use of the NWF to finance budget expenditures

The government may consider reducing the use of the National Wealth Fund (NWF) to finance the budget deficit in 2023-2024. This is stated in the message of the Ministry of Finance. The ministry recalls that the budget rule, during the transition period, provides for the use of the NWF to finance additional expenses, but not more than 2.9 trillion rubles. this year and $1.3 trillion next. This approach was intended to help ensure economic and financial stability, the agency’s release emphasizes.

“Taking into account the assessment of the situation in the economy and the financial system, the government may consider reducing the use of NWF funds to finance additional federal budget expenditures in the transition period of 2023-2024,” the Ministry of Finance said in a statement.

As Vedomosti previously wrote, the ministry may refuse to buy foreign currency for excess profits from the sale of energy resources, as prescribed by the budget rule, and direct them directly to finance expenses in order to save the funds already accumulated in the NWF. However, the Ministry of Finance, in fact, refuted this idea, announcing plans to purchase foreign currency in August.

Since the beginning of the year, the department has not yet recorded additional oil and gas revenues, that is, revenues in excess of the base, in fact, the target level, which is set for the year in the amount of 8 trillion rubles. This amount, taking into account seasonality, is distributed by months.

In July, the price of Urals for the first time exceeded the conditional balancing price for Russian oil under the budget rule and amounted to $64.37 per barrel. However, this month, revenues deviated from the base level down by 32.7 billion rubles, the Ministry of Finance said. And already in August, the department expects receipts in excess of the standard level in the amount of 73.2 billion. The volume of projected purchases could be 40.5 billion.

“[исходя из разницы между недополученными в августе и дополнительными доходами в июле и ] the total amount of funds allocated for the purchase of foreign currency and gold is 40.5 billion rubles. Operations will be carried out from August 7, 2023 to September 6, 2023,” the Finance Ministry said.

But taking into account the fact that the Central Bank began selling foreign currency from the NWF from August 1, “mirroring” investments in infrastructure projects from the fund’s resources, the total balance of operations will be positive in any case. The Bank of Russia in August will sell yuan in the amount of 52.9 billion rubles. Thus, the amount of “net” interventions will be plus 12 billion rubles.

One gets the impression that the Ministry of Finance, by reducing the use of NWF funds, meant that it was considering the possibility of directing oil and gas windfall profits directly to cover the deficit, which would reduce spending on the resources already accumulated in the fund, believes Alexander Isakov, Russia economist at Bloomberg Economics. That is, those funds that, although they go to budget expenditures, are not mirrored by currency sales, he explained.

According to the modified fiscal rule, purchases or sales of currency from the NWF are carried out only within the deviation of oil and gas revenues from the base level. However, the amount of deficit financing at the expense of the fund’s resources is now, in fact, not related to how significantly the actual amount of proceeds from the sale of oil and gas deviated from the norm. The NWF can be spent to cover budget expenditures, regardless of oil and gas revenues, the main thing is to comply with the limit of 2.9 trillion rubles. The fund’s spending “into a common pool” is not accompanied by the Bank of Russia selling foreign currency.

Apparently, we are talking about plans to reduce the use of such non-mirrored spending by the NWF by directing excess profits directly to spending, Isakov added.

There is not enough information in the press release of the Ministry of Finance to draw unambiguous conclusions about how exactly the department is going to slow down the spending of the NWF, said Grigory Zhirnov, an economist and author of the Helicopter Macro Telegram channel. The most probable, indeed, seems to be the version of the direct use of excess profits to cover the deficit, he agreed. However, there are at least two other options. First, the authorities may decide to simply cut general spending and thus slow down the depletion of the NWF. Secondly, we can talk about plans to direct non-oil and gas revenues, which are expected to significantly exceed the indicators originally planned in the budget law, not to increase the total volume of budget expenditures, but to cover already existing expenses, he explained.

As Finance Minister Anton Siluanov said earlier, revenues not from the sale of energy resources will be significantly higher than expected. According to the budget rule, the amount of budget expenditures depends on the sum of the following indicators: non-oil and gas revenues, basic oil and gas revenues, the marginal structural deficit (2.9 trillion rubles in 2023) and the so-called “spending under the line”, for example, interest payments on services debt. However, based on the current, in fact, frozen concept of the rule, budget expenditures may ultimately be higher.

Although the Ministry of Finance announced plans to purchase foreign currency for windfall profits in August, immediately following this announcement, the department published a release on plans to reduce the use of NWF funds to partially finance budget expenditures in 2023-2024, Dmitry Loko-Invest Investment Director drew attention Field. “Words about reducing withdrawals from the National Welfare Fund may just indirectly confirm yesterday’s rumors / plans not to buy foreign currency for additional oil and gas rubles, but to finance expenses,” he said in his Telegram channel Polevoy.

In any case, the preservation of net sales of the currency until September 6 will slightly support the ruble, but the volumes are insignificant in order to offset the influence of other, more significant factors on the part of financial flows, he believes.

Whether a decision will be made to suspend purchases or not is an open question. The dynamics of the ruble here will remain an important factor for making a decision,” the economist noted.

Conceptually, the scope and directions of deviations from the already changed budget rule are such that it would probably be better to abandon it altogether, citing complex internal and external conditions and the need for “manual” adjustments of the system, rather than trying to endlessly violate its rather simple and uncomplicated rules. positions to suit various tactical interests, including the support of the course, Polevoy writes.