Russia predicted an explosive growth of public debt: citizens will suffer

The inability, as before, to borrow money on the foreign market is forcing officials to look for new ways to raise funds. As Deputy Finance Minister Irina Okladnikova said, due to rising costs and falling incomes, Russia has fallen into a “hopeless situation”, the only way out of which can be only an increase in public debt. The funds are likely to be replenished on the domestic market, where it is planned to borrow about 8 trillion rubles in the next three years. Such an amount, experts say, will not be fatal for the budget, but an increase in government obligations risks leading to a restriction in the issuance of loans and a decrease in investment in the economy.

At present, the level of Russian public debt is 22.8 trillion rubles, which corresponds to 14.9% of GDP. This is the lowest value for the last 13 years. By world standards, the financial obligations of our country can be considered insignificant: the US debt-to-GDP ratio exceeds 123%, Japan – 264%, China – 295%. In this regard, Russia has the opportunity to increase national borrowing, especially since there is no other way to attract additional funds to the budget, which is currently in deficit. “This is a hopeless situation: our spending is growing – we need to support the economy, the military bloc and four new regions,” Okladnikova said. According to her, in the future, the Ministry of Finance will increase the debt, but will try to “remain within safe boundaries.” The maximum level of public debt is planned to be set at around 20% of GDP. “This is the limit level, which we should not step over in the most pessimistic situation,” the deputy minister specified.

An increase in Russia’s state obligations by another 5.1% of GDP will require at least 7.8 trillion rubles. In the Western market, where in the past our country could easily get the necessary money, now, due to sanctions, it is extremely difficult to get new loans. Where domestic officials are going to find the required funds and how it will turn out to attract regular loans for the economy, MK told MK, a leading expert at the Center for Political Technologies, Nikita Maslennikov.

– Due to what borrowings are officials going to increase Russia’s public debt to 20% of GDP? The Western financial market is closed for our country…

– Naturally, we are talking about raising funds in the domestic market. In fact, the use of domestic financial resources in the current geopolitical situation remains the only option to deal with the budget deficit, which in June amounted to approximately 2.5-2.7% of GDP. Apparently, the economic bloc of the government will issue new treasury bonds (OFZ) with various maturities and distribute these securities among national financial institutions. It is unlikely that the Ministry of Finance is interested in a sharp increase in the debt burden of the state, however, the government urgently needs money and now any possible way to raise funds is suitable. In the first half of the year, the revenues of our treasury amounted to 12.4 trillion rubles, demonstrating a decline of 12% compared to the same period last year. At the same time, spending increased by 19% to almost 15 trillion rubles. However, it is worth noting that the issue of bonds will not be carried out at a time, but in stages over the next financial three-year period – in 2024-2026.

– Is it possible to borrow the required amount in our friendly China or India? These states have recently been Russia’s main business partners, and Moscow’s economic ties with Beijing and New Delhi are getting stronger day by day.

– The opportunity exists, but there is little point in attracting loans from China or India: the growth of energy exports to Asian countries has already filled the Russian federal budget with significant amounts of Chinese yuan and Indian rupees. However, the national currency, that is, the ruble, is in circulation on the territory of our country. It is rubles that the domestic economy needs. After receiving a loan in other funds, it will be necessary to carry out a conversion, which will require a new large-scale ruble issue, which is fraught with inflation acceleration.

– How dangerous is the increase in public debt to 20% of GDP for the Russian economy?

– Usually, any increase in national liabilities leads to a limitation of the financial stability of the state. Meanwhile, in terms of public debt, our country is in 94-95th place in the world. The current borrowing of 14.9% of GDP is the lowest level since 2006. An increase in government obligations to 20% is within the limits of Russia’s financial security. A repeat of the 1998 default is not expected from such a step.

Of course, OFZ issuance and raising money on the domestic market will be accompanied by a variety of macroeconomic regulatory measures. The bonds will be bought by banks, which as a result will have fewer resources to issue corporate and consumer loans. As a result, not only ordinary people will suffer, but also manufacturing enterprises, which will face a shortage of investments for their own development. In order to avoid such a turn of events, the government will have to modernize the tax base, in particular, to make the system of distribution of fiscal benefits and other preferences more efficient.

A number of expenditure items will, of course, have to be cut, which may adversely affect the implementation of some infrastructure projects. Only the social sphere and the defense bloc will not suffer. At the same time, the state will have to conduct a deep analysis and serious work to strengthen business activity and improve the comfort of doing business. The plan of the relevant operations will most likely be presented in the near future – in the middle – end of August. Business should understand in advance what kind of financial situation will develop in the Russian economy in the foreseeable future. Do not forget that in the future the state will have to budget for the costs of servicing the public debt – in 2022, spending for such purposes increased to 5% of all treasury costs. This is more than 1 trillion rubles. It is obvious that in the future the corresponding expenditure item will grow even more, which will affect the revenue side of the budget.

– Can the country’s population somehow suffer from an increase in national obligations?

– The main task of the government, which intends to close the budget holes through borrowing in the domestic market, will be the fight against inflation. At the end of June, consumer prices rose by about 3.5%. Until the end of the year, officials intend to keep inflation in the range of 4.5-6.5%. Although compared to last year’s figures of 12%, the current figure will be relatively small, but even a 5% rise in prices is a serious test for citizens’ wallets, since real incomes of the population are practically not increasing. The growth of public debt against the backdrop of inflationary surges, first of all, will affect the investment activity of the country’s industrial complex, as it will lead to a slowdown in economic development. Ordinary people will feel the consequences of the government’s decision in the form of higher interest rates on loans and reduced access to debt instruments.