OREANDA-NEWS. January 26, 2010. In remarks at a conference on Friday entitled “Russia and the World: Challenges of the New Decade,” Russian Finance Minister Aleksey Kudrin warned against slackening in the government's spending discipline and expressed hopes that the Russian budget deficit would shrink to 1% of GDP by 2012 (based upon US60 oil prices), reported the press-centre of OTKRITIE Financial Corporation.

Meanwhile, one of Kudrin’s deputies, Ilya Trunin, expressed the view that the export duty exemption for Eastern Siberian oil fields that was recently adopted by the Russian government should result in a reduction of tax revenues of more than RUB120bn (US 4bn) in 2010. Deputy Minister Trunin referred to the export duty exemption as “not optimal and hopefully not lasting long.” 

View: We believe that last week’s remarks by the Finance Minister and his Deputy express the viewpoint of that particular ministry, and do not mean that the government is contemplating a reversal of the tax breaks that have been provided to the Russian oil sector. While we agree that budget expenditures should be always tested against more conservative oil price assumptions, the remarks of the Finance Ministry officials should be taken as neutral for the Russian oil and gas sector at this stage. We believe these comments indicate that the Finance Ministry will strongly oppose additional tax concessions to Russian oil companies in the near future, despite the ongoing debate on the further rationalization of the country’s oil tax system.

Given that in 2007-2009 Russia’s fiscal system exhibited a 25-40% growth in spending,  we believe the task of curtailing budget expenditures will be difficult to achieve. Russia has already entered upon the 2012 election campaign, and government officials have declared maintaining social stability as a top priority. In addition, the state needs to allocate extra funds for modernization and the support of enterprises. That being said, we are concerned that further tax increases could be upheld, as we believe a higher level of redistribution via the budget system is unlikely to stimulate improved economic efficiency.  We expect a fiscal deficit to moderate at a slower pace. Our expectation is that in 2010 fiscal deficit will account for 5.8% of GDP, compared with 6.4% in 2009.