Whoever is finance minister next year won't be in for an easy time. Fulfilling the 2003 budget will bring either resounding success or severe defeat. In contrast, the last four years brought guaranteed success for the country's financial authorities. Russia was flooded with easy money and ensuring a primary budget surplus was no trouble. Before 1999, the situation was the opposite, and the 1998 financial crisis was virtually inevitable. This time, there's no telling what will happen.
Russia will have considerable financial resources at its disposal, but it will also face huge debt payments. Any unpleasant surprise could have serious consequences, and much will depend on the skill of the financial authorities, their ability to plan for eventual emergencies and on sheer luck.
The main problem is that Finance Minister Alexei Kudrin's biggest problems arise from President Vladimir Putin's insistence that the government resolve two incompatible tasks in next year's budget. Putin is forced by circumstances to deal with all sorts of seemingly incompatible tasks, but the work on the 2003 budget has made them that much more evident.
The main internal conflict in the 2003 budget is the need to simultaneously lower taxes and increase expenditure. Tax reforms to reduce the tax burden on entrepreneurs are a central part of the market reforms that will speed up growth in Russia. Without reforms like these, more ambitious growth forecasts simply won't be possible. The plan is that 2003 should see the completion of the reforms begun in 1999.
But there won't be any real tax reduction for businesses. According to the draft budget, taxes will be cut by 0.4 percent of GDP. With federal budget revenue expected to be 18.5 percent of GDP, of which tax revenue should account for 14.5 percent, the tax cut looks small indeed. GDP is expected to grow next year, and this means that tax collection should actually increase overall. There's also no forgetting about local taxes, which are equal in total to federal taxes.
The need to increase state spending makes it hard to reduce the tax burden, even though it is a brake on growth. The most pressing task in 2003 will be to make $17.5 billion in foreign debt payments. With Russia's balance of payments and gold reserves in their current state, this is a feasible task, but it will create problems for the budget. Debt payments and servicing will account for 6 percent of GDP next year, compared to an expected 5.5 percent this year. The effort is worth it by the end of 2003, the foreign debt will have shrunk to 123.4 billion rubles, while it was 160 billion rubles several years ago. Taking into account the strengthening of the ruble's real exchange rate, the reduction is even more substantial the state debt will represent 39.6 percent of GDP by the end of 2003, as opposed to more than 140 percent of GDP in 1998.
But the problem is that parliamentary elections in 2003 and presidential elections soon after make it impossible to postpone tackling social issues. Russians have paid a high price for the economic successes of 1999-2001. For a start, there was the four-fold devaluation of the ruble, which abruptly limited imports and created new opportunities for Russian manufacturers. But that same devaluation triggered inflation that saw real wages drop by 30 percent and the average wage fall from $150 to $60 a month in dollar terms.
Wages have risen since then, but still haven't reached 1997 levels. Pensioners have been particularly hard hit, for it is all but impossible to survive on a pension alone. Pensioners form a substantial part of the electorate, however. The war in Chechnya and cutbacks in the Armed Forces make it essential to raise military wages. Wage increases are also a burning issue for public sector employees, especially in health and education.
But the high oil prices that brought money in over 2000-2001 have since declined somewhat, and it's hard to say what exactly will happen on the oil market in the coming future.
A little-noticed recent episode shows how tense the budget situation is. In its initial draft budget, the Finance Ministry planned to raise money by issuing a eurobond worth $1 billion in 2003. But Putin then asked Finance Minister Kudrin to abandon these plans. From an economic point of view, it makes little difference whether the state debt will stand at $123 billion or $124 billion at the end of 2003, but it wouldn't be politically wise to claim that the policy of paying the debt without resorting to foreign borrowing is continuing successfully. In the end a compromise was reached the draft budget submitted to the government on Aug. 8 allows the eurobond placement, but the government is to go ahead with it only if unexpected budget difficulties arise.
The budget approval process has now begun. The government can be expected to get the budget through the Duma without having to make any serious concessions to various lobby groups, but approving the budget is the easy part of the job. The real test will be in executing it.