The Ministry of Finance proposes to impose duties on non-core exports depending on the ruble exchange rate

One of the proposals under discussion by the Ministry of Finance to reduce inflationary pressure and stabilize the ruble exchange rate is the introduction of a broad export duty on part of Russian exports in the fourth quarter of 2023, directly dependent on the ruble exchange rate. If the government, to which the initiative has not yet been officially submitted, agrees with the Ministry of Finance, almost any such export will be subject to a duty of 5.5–7% at an exchange rate above 95 rubles/$ and 3.5–4% at an exchange rate of 80 rubles/$. $. With a stronger exchange rate, it will reset to zero. The measure looks radical and contradictory. The Ministry of Finance does not consider the idea as a fiscal one, while a “shock” restriction on exports while maintaining import dynamics can weaken inflation – but the duty may put additional pressure on the exchange rate.

According to Kommersant, idea of ​​the Ministry of Finance on the introduction of a general economic export duty with broad exceptions was submitted to the tariff and customs subcommittee of the government commission on economic development last week. The Ministry of Finance officially refuses to comment on this issue, neither confirming nor denying this initiative. According to Kommersant, the subcommittee on September 18 had no fundamental objections; now the project has been returned for elaboration to the office of First Deputy Prime Minister Andrei Belousov and to the Ministry of Finance, after which it should be considered by a higher commission. If approved, it must be submitted to a government meeting – customs duties (as opposed to taxes) are introduced precisely by its resolutions. In this case, the chain can be completed quickly – the Ministry of Finance proposes to introduce a duty from October 1 to December 31, 2023. According to Kommersant, the possibility of extending it further exists, but this will depend on the dynamics of the ruble exchange rate: according to Kommersant sources familiar with the discussion of the initiative, the Ministry of Finance does not consider the measure as a fiscal one and did not propose calculations of budget additional revenues, it sees it as a method of customs tariff pressure on trade and payment balances.

The initiative, not related to the budget process, apparently appeared after the last economic meeting of the government with the president, where he proposed taking additional measures to prevent further weakening of the ruble. Let us remind you that, due to the capital movement channel that has been largely blocked since March 2022, the extended government has few options for action that can strengthen the ruble, and the most obvious one – strengthening restrictions on capital movement – is not supported by the Bank of Russia, which was further emphasized yesterday by Deputy Chairman of the Central Bank Alexey Zabotkin . The measures of the Central Bank – raising the key rate and cooling lending, the rapid growth of which causes an increase in inflationary pressure, and partly (through the increase in demand for imports) reduces the exchange rate – cannot but have an impact on the situation, however, the decisions already made will, apparently, not fully work before second quarter of 2024. Restricting exports, by contrast, is an unusual but quick-acting solution, although it is unknown whether or how it will work.

The informational background against which restrictions on non-essential exports are being discussed more or less corresponds to the radicalism of the Ministry of Finance. September’s weekly inflation data (0.13% week-on-week increase from September 12 to 18) shows that the path of future inflation growth continues to shift upward—presumably, much of this effect is explained by exchange rate pass-through to prices. How long this process will continue is unknown, but ahead is the fourth quarter, in which the Central Bank’s increase in the key rate (from September 15 – 13%) will not yet fully affect credit growth, and the general economic recovery will inevitably be superimposed on a significant increase in government spending – they always great at the end of the year. Accordingly, the Ministry of Finance’s idea to limit exports with a tariff can be considered as the tariff equivalent of the Central Bank’s idea to sharply increase the key rate.

But the proposed mechanism is controversial. The fact that the fiscal effect is not included as the main one is obvious from the proposed emergency nature of the duties and their limitations. Export duties look like a variant of a tax on excess profits of exporters, states Igor Varyash, head of the financial research analytical center NIFI: according to his calculations, the weakening of the ruble exchange rate in 2023 increased exporters’ income by about a third. However, for the main exports, which the Ministry of Finance proposes to exempt from temporary export duties (oil and gas, grain, large mechanical engineering, shipbuilding, nuclear industry, targeted exceptions are also expected), taxes on excess income have already been introduced and duties already partially exist. “Duty-tax on excess profits” is also aimed at small and medium-sized exporters. Actually, the very idea of ​​​​emergency export duties for them is similar to the retrospective strengthening of the ruble – the weak national currency increased the efficiency of all export operations throughout 2023, and not just oil companies.

However, the obvious other side of the coin is the impact on the exchange rate. The immediate effect of the restriction on non-essential exports from October 1 is a supply shock in the domestic market. So far its parameters are unknown. In the original version of the Ministry of Finance, it was assumed that duties would apply at a ruble exchange rate above 80 rubles/$ (3%), at an exchange rate above 85 rubles/$ they increase to 3.5%, above 90 – to 4%. A scale from 4% (80 rubles/$) to 7% (above 95 rubles/$) is currently being discussed. But Russian exports, amounting to about $100–120 billion per quarter, will not all be taxed—due to the closed nature of customs statistics, only rough estimates are possible. Apparently, if the White House decides to take drastic action, we are talking about a maximum of 25–30% of the value of exports, for some of which, we note, the volume of duties is not too critical. That is, the price of the issue for the budget is several billion dollars in additional revenues in 2023, and, according to rough estimates, the main payer should be the coal industry, non-ferrous and ferrous metallurgy.

At the same time, effective restriction of non-core exports by duties is quite capable of limiting overall exports – and this, obviously, will lead to a further reduction in the trade balance surplus, on which the ruble exchange rate now directly depends, and along the chain – to a further weakening of the ruble, to an increase in the attractiveness of exports and to a reduction in the efficiency of imports, to additional inflationary pressure and, as a result, to the need to again look for a way to put pressure on the exchange rate. In itself, this effect is not very large, but if the situation in key exports weakens in the coming months, the proposed tariffs will exacerbate the problem rather than solve it.

Another aspect that experts note is the temporary nature of the introduced measure. Thus, this easily allows some exporters to suspend exports for a quarter (it is not known, for example, how ALROSA’s statement this week about suspending diamond exports from the Russian Federation for two months is related to the initiative of the Ministry of Finance), thus the anti-inflationary effect of the measure may be blurred. But the “export overhang” is basically here to stay, and its pro-inflationary potential will work later – prolonging the need to solve the overall problem.

The use of customs policy for macroeconomic stabilization and, in general, is a rather exotic measure: it is very difficult to calculate it (and, apparently, impossible in a few days), as are the potential side effects of such a decision (for example, for low-profit and small exporters, the duty will simply cease to mean anything export and develop in this direction). In this sense, taxes on excess profits are much more “accountable” – but, unlike export duties, they sharply reduce investment. According to NIFI calculations, the measure will not have an impact on investments, and in the tariff parameters proposed by the Ministry of Finance, the state will withdraw up to 25% of excess profits in the fourth quarter of 2023 from some exporters. This money will not be superfluous to reduce the 2023 budget deficit. But it is not at all obvious that what is happening – the weakening of the ruble and increasing inflation – is so catastrophic that it requires restricting exports in an economy whose main problem is now a decrease in export revenues.

Dmitry Butrin, Evgeny Zainullin