Abstract
Selected Issues
Evaluating Fiscal Rules?1
A. Introduction
1. A fiscal rule for Russia should shield the budget from volatile oil prices, replenish the reserve fund and save for future generations. An appropriate rule must delink public expenditure from volatile oil prices to reduce fiscal procyclicality and mitigate the effect of oil on the real exchange rate (REER) preserving the competitiveness of the economy. In the short-term, increasing fiscal policy buffers and replenishing the nearly-depleted reserve fund, are a priority to protect against volatile oil prices. In preparation for the period after the depletion of oil reserves, the fiscal target should account for inter-generational equity; i.e. how much current and future generations benefit from resource wealth and consider long-term budget pressures from a rapidly aging population.
2. This paper assesses the authorities’ proposal for a new fiscal rule. The IMF Flexible System of Global Models (FSGM) is used to simulate fiscal and macroeconomic outcomes under three alternative rules—the authorities’ proposal for a new rule; the old rule suspended in 2015; and staff’s proposal that modifies the old rule—and different oil price shocks. The simulation shows that the authorities’ proposed new rule appropriately builds up the nearly depleted reserve fund under a scenario where oil prices are as in staff’s baseline and in the scenario where oil prices are persistently higher than the US$40pb benchmark. However, should oil prices be persistently lower than the US$40pb benchmark, the new rule results in lower savings compared to Staff’s proposed rule. Simulations illustrate that savings can be achieved through a more stringent fiscal target as in Staff’s proposal, a more credible option, instead of an inflexible conservative benchmark that risks the fiscal rule being abandoned should oil prices be persistently below or above the benchmark price. Moreover, both staff and authorities’ proposed rules perform equally well in shielding the economy from volatile oil prices, with no discernible difference among the rules in their impact on growth and the real effective exchange rate. Finally, the simulation validates the reason for abandoning the old rule—maintaining the old rule would have led to the lowest savings and highest spending in the period of high oil prices and to a large fiscal stimulus in the face of persistent low oil prices, quickly depleting reserve buffers and increasing debt.
B. Russia’s Fiscal Rules
Considerations for a Fiscal Rule
3. Fiscal outcomes are better in countries with fiscal rules. Fiscal rules encourage counter-cyclical fiscal policy to mitigate revenue volatility. For example, expenditure growth is de-linked from revenues countries with well-developed fiscal rule frameworks as in Norway and Chile, to a lesser extent in Russia and highly correlated in Venezuela, a country with no fiscal rule (see Figure 1).
Fiscal Rules or Lack Thereof—Central Government Revenue and Expenditure
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
IMF Staff estimates.Fiscal Rules or Lack Thereof—Central Government Revenue and Expenditure
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
IMF Staff estimates.Fiscal Rules or Lack Thereof—Central Government Revenue and Expenditure
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
IMF Staff estimates.4. An important objective for a fiscal rule in Russia is to delink government expenditures from oil prices. The energy sector accounts for around one-fifth of GDP, two-thirds of exports, and around one third of general government revenues. Since energy revenues are so large, fluctuations in oil and gas prices generate fluctuations in budget revenues that are passed onto expenditures, in turn resulting in fluctuations in the REER, inflation, and output volatility. Moreover, in the past, high oil prices led to an appreciated exchange rate resulting in an even less diversified economy over time.
REER and Oil Prices
(2012=100)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
REER and Oil Prices
(2012=100)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
REER and Oil Prices
(2012=100)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
5. An appropriate fiscal target should consider long term fiscal sustainability. Establishing a fiscal target should account for long-term fiscal liabilities, demographic trends and consider intergenerational equity. Russia’s current and projected non-oil primary deficits are larger than the long-term fiscal benchmarks consistent with intergenerational equity (in the range of 3–4.5 percent of GDP, see SIP, 2015). Moreover, Russia has long-term fiscal risks to consider including off-balance sheet liabilities deriving from implicit liabilities to the pension and health systems, transfers to SOEs, the banking sector, and subnational governments.2 An additional consideration in Russia are investment needs, thus long-term sustainability benchmarks could be established based on a modified permanent income hypothesis (MPIH) rule that allows front-loading of capital expenditure or a Fiscal Sustainability Framework that explicitly accounts for the expected impact of higher investment on growth and non-resource revenues. 3
6. Considerations for a fiscal rule should account for the interaction between federal and regional budgets. About 40 percent of consolidated general government spending is executed in regions and extra budgetary funds (EBFs). Consolidated federal transfers (through the budget or federal extra budgetary funds, EBFs) to the regions (including territorial EBFs) represented 3.5 percent of GDP in 2016 (about 65 percent of federal oil and gas revenues). Transfers finance a large share of regional fiscal spending. These earmarked transfers decrease federal spending flexibility, creating challenges for the design and coverage of a fiscal rule.
Russia’s Fiscal Rules: Past and Present
7. Shortcomings in previous frameworks led to procyclical fiscal policies and insufficient savings. In the early 2000s, fiscal policy focused on the overall balance, rather than the non-oil balance, leading to procyclical fiscal policies which amplified the oil price boom and put appreciation pressures on the currency. As part of a reform of the fiscal framework, a formal fiscal rule was introduced in 2008 followed by a second rule in 2013. Despite sound theoretical underpinnings, both rules suffered from unsustainable parametrization and proved untenable in the face of large shocks (Box 1). The first rule was suspended to allow for a fiscal package to stimulate the economy during the global financial crisis. The second rule was abandoned in the face of the dual shock of lower oil prices and sanctions, as it led to an overly generous spending envelope in light of persistently low prices. Furthermore, resources in the oil funds appeared insufficient for supporting expenditiures at levels prescribed by the rule.
8. The authorities’ are proposing a new fiscal rule to shield the budget from oil price fluctuations and replenish the reserve fund. The new fiscal rule, likely to be reinstated in 2019, will target a primary balance calculated at a benchmark oil price. The benchmark oil price is fixed at US$40pb (in real US$ 2016 terms) with a proposed annual adjustment of the oil price benchmark by US CPI inflation—implicitly assuming the relative price of oil with respect to the CPI basket remains constant. The US$40 benchmark price equates to a 50-year fixed (1965–2015) long-term average oil price. For dealing with persistent drops in oil prices, the authorities are considering capping decreases in fiscal buffers whenever they reach a threshold of 5 percent of GDP.
9. The authorities’ proposed new fiscal rule is broadly appropriate.4 Though not fully consistent with intergenerational equity, the rule appropriately includes a fiscal anchor, which is a “quasi-structural” primary balance (defined as the primary balance excluding the cyclical component of resource revenues). In addition, the use of a fixed oil-price benchmark appropriately delinks expenditures from externally-driven volatility in commodity prices. Finally, the rule provides a simple framework for saving (drawing down) oil resources when the actual oil price is higher (lower) than the oil price benchmark. The oil price benchmark of US$40, notwithstanding that it is fixed and assuming it can be credibly implemented (i.e. resisting pressures to spend windfall oil revenues if oil prices are significantly higher than US$40) may be prudent. Not only does it increase savings, compared to benchmarks established under previous fiscal rules, it is apt, given the time series properties of oil prices and macro-economic conditions (the economy has adjusted to an oil price of around US$40 pb and the REER is no longer considerably overvalued).
Russia’s Previous Fiscal Frameworks
Russia established an Oil Stabilization Fund (OSF) in 2004, but it was not supported by a full-fledged fiscal rule. In the context of rising oil prices the Fund was established to save windfall oil revenues—export duties and the mineral extraction tax—and shield the budget from oil price fluctuations. Oil revenues above a cut-off price (US$20 pb in 2004–05; US$27pb in 2006–07) would be accumulated in the OSF. OSF balances above US$20 billion would be freely usable. Despite heavy use, the OSF reached US$157 billion at end-2007. Given the lack of a fiscal rule—no targets were set for the fiscal balance, or limits established for new borrowings—the OSF did not prevent fiscal policy from being pro-cyclical. Fiscal policy was loose and the non-oil and gas federal deficit increased from 2.9 percent of GDP in 2002 to 5.1 percent in 2007, and to 6.5 percent in 2008. As part of the reform of the fiscal framework in 2008, the OSF was abolished and two new Funds were created. The Reserve Fund (initial balance of US$25 billion) would be used to smooth public spending against oil price fluctuations; and, the National Welfare Fund (initial balance of US$32 billion) would finance long-term liabilities of the pension system. Oil revenue windfalls would be saved in the RF until it reached 7 percent of GDP; 50 percent of the excess would then accrue to the NWF, and the remaining portion would finance infrastructure and other priority budgetary projects. After more than a decade of record-high oil prices, resources in Russia’s NWF stand at US$73 billion, while the Reserve Fund (RF) is nearly depleted—declining from US$125 billion in early 2008, to US$16 billion as end-2016 (See Figure)
A formal fiscal rule was introduced in 2008 but suspended during the global financial crisis. The rule targeted a long-term non-oil fiscal deficit of 4.7 percent of GDP to be achieved by 2011, beginning at a deficit of 6.6 percent of GDP in 2008. This target was consistent with a POIM approach and kept government spending constant in real terms in the long run, supporting intergenerational equity and fiscal sustainability. The rule was suspended to allow for a fiscal package to stimulate the economy during the global financial crisis. It was abolished in 2012.
A redesigned fiscal rule was implemented in 2013 and abandoned in 2015 following the sharp decrease in oil prices. The previous budget balance rule was replaced by an expenditure rule that was first, more intuitive to explain to the public (low headline deficits had masked urgent needs in sizable budget consolidation) and second the thinking was setting limits on expenditures would be clearer than setting limits on non-oil deficit and thus more sustainable. The rule set a ceiling on federal expenditures equivalent to the sum of oil revenues measured at a benchmark oil price, plus non-oil revenues, plus a net borrowing limit of 1 percent of GDP. The benchmark was set as the minimum of a backward-looking moving average of up to ten years of Urals oil price—a proxy for the long-term price of oil; and (ii) a three-year backward looking average, to protect the budget from excessive deficits in the event of a sustained fall in oil prices. The rule did not ensure a fast-enough adjustment of benchmark oil prices and its continued implementation would have resulted in unwarrantedly large non-oil fiscal deficits. Even the 3-year moving average escape clause resulted in a benchmark price of about US$85pb versus an actual oil price of US$42pb in 2016.
Modifications to Strengthen the Proposed New Rule
10. The oil-price benchmark could adjust to perceived changes in the long-term price of oil. The fixed US$40 pb in the oil rule formula may not prove credible should oil prices be persistently and significantly higher than this benchmark. The choice of a benchmark formula represents a tradeoff between smoothing expenditures and adjusting to changes in oil prices. In principle, fiscal policy should adjust to permanent/persistent oil price shocks and smooth-out short-term fluctuations. Hence, a higher pace of adjustment of the oil-price benchmark is desirable if an oil price shock is permanent or persistent, which is only known ex-poste. One possibility to the make oil-price rule more flexible is to include futures oil prices in the benchmark calculation. The caveat is that future oil prices (in levels) are strongly correlated with observed oil prices and may not give a good indication of the “structural” price of oil (Box 2). Thus, while the benchmark will adjust more rapidly to changing trends they can also result in greater expenditure volatility and possibly pro-cyclical fiscal policy.
11. The fiscal rule could target a surplus, informed by long-term fiscal considerations.5 Rather than targeting a balance, the fiscal anchor should be a surplus that considers inter-generational equity. With the primary balance of zero, non-oil primary deficits are each year around 1 percentage point higher than the long-term fiscal benchmarks consistent with inter-generational equity.6 Saving more through the fiscal target may be a more credible option than through accumulating savings through the reserve fund by assuming an artificially low oil price in the benchmark calculation. Finally, the choice of a primary balance target compared to overall balance is questionable, since should assumptions on interest rates or growth be incorrect, it may set debt on unsustainable path—either to zero or infinity.
12. An additional target on spending could help avoid pro-cyclicality. Including a rule by which primary expenditures do not grow by more than the (estimated) long-term growth rate in real terms would address residual procyclicality inherent in a non-cyclically adjusted primary balance fiscal rule. Though a fixed-oil price benchmark eliminates the main element causing pro-cyclicality in the previous fiscal rules, i.e. volatile oil prices, the rule is not as good as a structural balance rule that would exclude the cyclical component of output beyond oil prices. Excluding the cyclical component of oil revenues by using a benchmark price (assuming this captures the “structural” price of oil) is a good approximation of a structural balance rule, if the if the oil price gap (“structural” price minus actual) is well correlated with the output gap. However, if demand shocks are unrelated to the oil price gap, then the authorities’ primary balance rule would be procyclical.
Determining a Benchmark Oil Price
Forecasting oil prices has become increasingly difficult as prices have become highly volatile. Establishing an oil price benchmark is further complicated by the less than obvious time series properties of oil prices. This complicates the task of separating observed oil price fluctuations into permanent and temporary components. Introducing future oil prices (as predictor of actual future oil prices) though helpful in allowing the budget to adjust to the new oil prices, may not be useful in anchoring long-term benchmark oil prices. Future oil prices (in levels) are strongly correlated with observed oil prices and thus, their gives more weight to current oil prices. If the current oil price is off its long-term equilibrium, the use of oil price futures to anchor the budget benchmark may not be optimal.
A Poor Record of Forecasting Oil Prices
(Crude oil, U.S. dollars per barrel)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimates and market projections. 2015 represents an estimate based on actual data for part of the year and future contracts.Note: The solid line represents actual crude oil average prices for the year. 2015 represents an estimate based on actual data for part of the year and future contracts. The dashed lines are based on market projections for prices (future contracts).A Poor Record of Forecasting Oil Prices
(Crude oil, U.S. dollars per barrel)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimates and market projections. 2015 represents an estimate based on actual data for part of the year and future contracts.Note: The solid line represents actual crude oil average prices for the year. 2015 represents an estimate based on actual data for part of the year and future contracts. The dashed lines are based on market projections for prices (future contracts).A Poor Record of Forecasting Oil Prices
(Crude oil, U.S. dollars per barrel)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimates and market projections. 2015 represents an estimate based on actual data for part of the year and future contracts.Note: The solid line represents actual crude oil average prices for the year. 2015 represents an estimate based on actual data for part of the year and future contracts. The dashed lines are based on market projections for prices (future contracts).The proposed US$40 pb, a 50-year average, is an improvement compared to benchmarks in previous rules. An observation of the series suggests that large changes in the oil prices, whether positive or negative, tend to be persistent (Annex 2). Using 3, 5 and even 10 year averages (as in previous rules) as a proxy for long-term oil prices could result in a persistent overvaluation or undervaluation of the real effective exchange rate as the level of fiscal expenditures is tied to an oil price that is above or below the long-term oil price. Moreover, the shorter the period use to calculate the moving average, the more the benchmark oil price fluctuates—an undesirable property if the authorities’ policy objective is macroeconomic stability.
An independent committee to establish the benchmark price of oil to include in the budget could be considered. An informed panel of experts would likely have a better guess on the persistent component of oil prices using different methodologies than applying a mechanistic formula, or using the current proposal of a fixed benchmark. The committee could put the oil price formula for review periodically or should oil prices move significantly, independently of the Ministry of Finance that could have political economy considerations in changing a benchmark.
13. The design of escape clauses should be strengthened to allow adjustment of the rule to persistently low oil prices. In the absence of an oil price rule that adjusts to persistently lower oil prices, escape clauses that cap withdrawals from the reserve fund are important for dealing with persistent drops in oil prices. Whenever escape clauses are triggered, expenditure should adjust down. This mechanism would be an automatic stabilizer if long term or structural oil prices turn out to be lower than the US$40 pb benchmark. Escape clauses should be complemented with borrowing constraints to insure permanent drops in oil prices are internalized in the budget process.
14. As an alternative, targeting a structural non-oil balance should be considered, once additional data is available. A structural primary non-oil balance (adjusting for the economic and commodity cycle) as a share of potential non-oil GDP, would reduce the pro-cyclicality currently embedded in the proposed rule i.e. a high (low) forecast of nominal GDP growth (especially non-oil GDP) would translate into higher (lower) cap on spending through higher non-oil revenues, regardless of Russia’s economic cycle. Adjusting for the economic cycle is, however, complicated and subject to uncertainty, and cyclically adjusted balances are often revised ex-poste due to revisions to potential GDP. Notwithstanding the difficulties described in estimation, Russia should compile data on non-oil GDP to calculate a non-oil structural fiscal balance. Other sources of potential fluctuations in oil revenues—long-term projections on oil production and revenues— should be monitored. Profits from oil and gas producing companies should be excluded from non-oil revenues and included in oil revenues. The final objective should be to establish a rule that ensures a constant flow of oil revenues to the budget, as in Norway (See Table A1 that summarizes the design of fiscal rules in Chile and Norway).
C. Simulations of Fiscal Rules
15. In this section, we evaluate the authorities proposed fiscal rule against alternative fiscal rules:
The authorities old rule, suspended in 2015 after the sharp fall in oil prices. Under the rule, the oil-price benchmark is set as the minimum of (i) a backward-looking moving average of up to ten years of Urals oil prices; and (ii) a three-year backward looking average. Federal expenditures were capped ex ante at the sum of projected non-oil revenues, oil revenues at a benchmark price (in US$) converted to ruble, and net financing of one percent of GDP.
Staff’s proposed rule that modifies two parameters of the old rule: i) it uses future prices to establish a benchmark oil price—the oil price rule is a 5-year average for the past and 5 years ahead futures prices (instead of the backward moving average)—to allow for a faster adjustment in fiscal policy in response to oil-price developments ii) it increases the target to a surplus of 1 percent of GDP (instead of a deficit of 1 percent of GDP) to generate more savings.
16. The IMF Flexible System of Global Models (FSGM) is used to illustrate fiscal and macroeconomic outcomes under alternative rules and different oil price shocks. First we conduct a counterfactual simulation between 2010–16, the time interval includes a period of high oil prices and the large negative oil price shock of 2014/15. The counterfactual has the advantage of accurately depicting the state of the economic cycle and the evolution of oil prices. In a second simulation, we assess rules under both temporary and persistent positive and negative oil supply shocks. Rules are assessed on their ability to build savings and their broader impact on the economy i.e. their effect on the real effective exchange rate and growth.
17. The impact of adjustment under a fiscal rule on the economy is determined by several assumptions in the model simulation (Annex I). As a first step, we calculate the non-resource primary deficits that would have prevailed had each of the three fiscal rules been in place. The fiscal adjustment needed to comply with the rule is measured by change in the non-oil primary deficit. We assume it is met by an equal cut to government transfers and government consumption.7 Financing for the deviation of the fiscal path under the fiscal rules from the baseline is provided in the first instance by holdings in the reserve fund, with any residual financed by domestic borrowing. Consolidation does not have a large negative impact on growth it is achieved through cuts to transfers and government consumption, rather than investment which has a large fiscal multiplier.8 In addition, monetary policy is supportive, whereby lower policy rates result in a more depreciated exchange rate—thus higher exports and GDP growth—offsetting any short term negative impact of consolidation on growth. Lower policy rates result from the expectation that debt will be lower in the future. Agents expect a credible debt reduction that leaves room for a future cut in distortionary government spending resulting in lower long term rates. There is a small negative impact of fiscal consolidation on potential output through the accumulation of capital, as real investment drops in the short run as a reaction to lower government consumption and the associated weaker demand outlook.
The Counterfactual
18. In a counterfactual simulation, we illustrate the economy would have been on sounder footing had fiscal rules been consistently implemented (Panel 1). The table shows the key parameter, the non-oil primary deficit under the counterfactual. All rules would have made fiscal policy more countercyclical—lower non-resource primary deficits in the first part of the sample (when oil prices are high) allowing for a looser fiscal stance after 2014 (when oil prices are low) (See table). Savings would be higher, with lower overall deficit and debt to GDP ratios. Russia would have more assets than liabilities under all fiscal rules, 16 percent on average, compared to actual liabilities of 4 percent at end-2014. Consolidations early in the sample, in tandem with a supportive monetary policy (policy rates are lower under the expectation of lower future debt) result in a more depreciated exchange rate and hence higher growth, offsetting any negative impact of consolidations on growth.9 Hence growth and inflation dynamics are not compromised and remain close to actual under all fiscal rule scenarios (Figure 2).
Procyclical Fiscal Policies and Insufficient Savings
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: Institutional Investor; national authorities; Sovereign Wealth Center; Sovereign Wealth Fund Institute; IMF staff reports and IMF staff estimates.Procyclical Fiscal Policies and Insufficient Savings
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: Institutional Investor; national authorities; Sovereign Wealth Center; Sovereign Wealth Fund Institute; IMF staff reports and IMF staff estimates.Procyclical Fiscal Policies and Insufficient Savings
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: Institutional Investor; national authorities; Sovereign Wealth Center; Sovereign Wealth Fund Institute; IMF staff reports and IMF staff estimates.| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||
|---|---|---|---|---|---|---|---|---|
| Projected non-resource primary deficits | ||||||||
| 1. Old rule | 7.4 | 6.6 | 7.3 | 7.5 | 8.8 | 12.3 | 11.4 | |
| 2. New rule (benchmark@40) | 3.8 | 3.5 | 3.7 | 3.6 | 4.0 | 5.6 | 5.3 | |
| 3. Proposed rule | 7.1 | 6.8 | 6.3 | 5.7 | 6.1 | 7.3 | 5.0 | |
| Baseline | 11.2 | 8.4 | 9.4 | 9.3 | 9.5 | 9.0 | 8.9 | |
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||
|---|---|---|---|---|---|---|---|---|
| Projected non-resource primary deficits | ||||||||
| 1. Old rule | 7.4 | 6.6 | 7.3 | 7.5 | 8.8 | 12.3 | 11.4 | |
| 2. New rule (benchmark@40) | 3.8 | 3.5 | 3.7 | 3.6 | 4.0 | 5.6 | 5.3 | |
| 3. Proposed rule | 7.1 | 6.8 | 6.3 | 5.7 | 6.1 | 7.3 | 5.0 | |
| Baseline | 11.2 | 8.4 | 9.4 | 9.3 | 9.5 | 9.0 | 8.9 | |
19. Comparing across rules, the simulation validates the reason for abandoning the old rule. Not only did the old rule result in the lowest savings and the highest spending (oil revenues at a benchmark price of US$79, almost equal to spot plus non-oil revenues) during high oil prices but it also results in the least competitive economy. Higher spending results in higher inflation which is moderated by raising short-term policy rates which puts upward pressure on the exchange rate. Furthermore, it would have led to a massive fiscal stimulus in the face of persistent drops in oil prices. This would have quickly depleted buffers, running down the RF to 3 percent of GDP and ratcheting up gross debt to 15 percent of GDP by end-2016, leaving the economy no better off than actual outcomes, despite much higher initial buffers from savings when oil prices were high.
Counter Factual: Deviations from Actual Outcomes
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimatesCounter Factual: Deviations from Actual Outcomes
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimatesCounter Factual: Deviations from Actual Outcomes
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates20. The authorities’ proposed new rule would have built more buffers, but staff’s rule is more countercyclical. The simulation illustrates the tradeoff between countercyclicality and building buffers when designing fiscal rules. The new rule saves the most in the reserve fund through a conservative US$40 pb benchmark oil price (average actual oil prices are US$83 pb) and compared to an average benchmark of US$76 pb under the proposed rule. The proposed rule also results in substantial savings but rather through a more stringent fiscal target. The proposed rule, however allows a more countercyclical response to the large negative shock to oil prices. Output losses (in growth and levels) across the rules are similar and the differences in the debt trajectory derive from the extent of adjustment rather than growth differentials across rules. A caveat of the exercise is that we assume no reaction in Russia’s country risk premium.
Evolution of Net Debt
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Evolution of Net Debt
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Evolution of Net Debt
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Simulation under Oil Price Shocks
21. In a second simulation, we illustrate how alternative rules will perform under shocks to oil prices. The scenarios assume, positive and negative shocks to oil prices (temporary and persistent) are a result of changes in the supply of non-Russian oil producers (table). The simulations are calculated as deviations from the baseline projections for Russia included in the 2017 staff report. Under the baseline scenario, spending is frozen per the authorities’ medium-term budget plan and revenues are calculated at baseline oil prices. Implementation of the fiscal rules starts in 2018. As in the counterfactual we calculate three fiscal rule adjustment scenarios on projected non-resource primary deficits under the baseline oil prices and four shocks to oil prices (Table).
| Oil Price Scenarios | |||||
|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Baseline | 55.4 | 55.2 | 55.5 | 56.1 | 59.3 |
| Persistent Low Oil | 30.0 | 38.7 | 40.3 | 42.8 | 46.8 |
| Temporary Low Oil | 30.0 | 42.9 | 48.5 | 56.6 | 57.6 |
| Persistent High Oil | 80.0 | 71.8 | 71.8 | 70.6 | 72.9 |
| Temporary High Oil | 80.0 | 67.5 | 62.3 | 55.5 | 60.8 |
| Oil Price Scenarios | |||||
|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Baseline | 55.4 | 55.2 | 55.5 | 56.1 | 59.3 |
| Persistent Low Oil | 30.0 | 38.7 | 40.3 | 42.8 | 46.8 |
| Temporary Low Oil | 30.0 | 42.9 | 48.5 | 56.6 | 57.6 |
| Persistent High Oil | 80.0 | 71.8 | 71.8 | 70.6 | 72.9 |
| Temporary High Oil | 80.0 | 67.5 | 62.3 | 55.5 | 60.8 |
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||
|---|---|---|---|---|---|---|---|---|
| Projected non-resource primary deficits (Baseline) | ||||||||
| 1. Old rule | 5.6 | 5.5 | 5.8 | 5.6 | 5.5 | 5.4 | 5.4 | |
| 2. New rule (benchmark@40) | 4.7 | 4.7 | 4.6 | 4.5 | 4.5 | 4.4 | 4.4 | |
| 3. Proposed rule | 4.2 | 4.1 | 4.0 | 4.0 | 4.1 | 4.1 | 4.1 | |
| Baseline | 6.5 | 5.6 | 4.8 | 4.8 | 4.9 | 4.6 | 4.6 | |
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||
|---|---|---|---|---|---|---|---|---|
| Projected non-resource primary deficits (Baseline) | ||||||||
| 1. Old rule | 5.6 | 5.5 | 5.8 | 5.6 | 5.5 | 5.4 | 5.4 | |
| 2. New rule (benchmark@40) | 4.7 | 4.7 | 4.6 | 4.5 | 4.5 | 4.4 | 4.4 | |
| 3. Proposed rule | 4.2 | 4.1 | 4.0 | 4.0 | 4.1 | 4.1 | 4.1 | |
| Baseline | 6.5 | 5.6 | 4.8 | 4.8 | 4.9 | 4.6 | 4.6 | |
22. Staff’s proposed rule is preferred given the shocks that are considered (Figure 4).
Under persistently high oil prices, the new rule results in the highest savings—net debt falls to zero, compared to 8 percentage points under the proposed rule. Should high oil prices prove to be temporary, however, the proposed rule begins to have higher overall savings. This is because although there is less savings generated by the oil-price rule, there is also less debt generated (the proposed rule targets a surplus, rather than a primary balance as in the new rule). When oil prices are high, the impact on the broader economy is similar under the new and proposed rules (Panel 3 and 4). Compared to the baseline, neither rule has a large negative impact on growth and both rules result in better outcomes on potential GDP. Inflation is contained and policy rates are low resulting in a more depreciated exchange rate, increased competitiveness and an improved current account.
The persistent low price oil scenario illustrates the dangers of the authorities’ new rule of getting the benchmark price wrong. Although the shock is persistent, the new rule doesn’t adjust, spending at a benchmark price of US$40 despite permanently lower prices. This results in a rapid depletion of the RF and increasing debt dynamics with debt ratios that are around 2 percentage points higher every year throughout the projection horizon. The proposed rule adjusts quickest to the new reality of low oil prices, with net debt decreasing to 8 percent. However, should the negative shock be transitory, the proposed rule is tight and forces adjustment, when ex-post it was not necessary. Nonetheless, the impact of a tighter fiscal policy under the proposed rule to a temporary shock does not result in a significantly lower growth path compared to the new rule as looser monetary policy and the accompanied depreciated exchange rate offset the drag from a tighter fiscal policy (Panel 5 and 6).
Evolution of Net Debt: Oil Shock Scenarios
(In Percent of GDP)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimatesEvolution of Net Debt: Oil Shock Scenarios
(In Percent of GDP)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimatesEvolution of Net Debt: Oil Shock Scenarios
(In Percent of GDP)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Sources: IMF staff estimatesAppendix I. Tables and Figures
Parameters of Russian Fiscal Rule: Experience of Chile and Norway
Parameters of Russian Fiscal Rule: Experience of Chile and Norway
| Chile | Norway | |
|---|---|---|
| Benchmark Price | Panel of independent experts establish long term price of copper for the budget. No guidelines published to choose price. This price fluctuates less than current prices, to whih it adjusts with a lag. | The use of a benchmark oil price in the budget is completely excluded. Norway’s Government Pension Fund Global (GPFG) increases by oil revenues and decrease by the transfers from the GPFG (capped at 4 percent of the value of the fund) back to the budget. |
| Fiscal Target | The target is the structural balance of the federal budget. | The target sets the structural non-oil deficit to be equal to structural oil revenues, calculated to be equal to the annual value of the GPFG. |
| Cyclical Adjustment | The rule requires computation of cyclically adjusted aggregates. Output Gap assessed through a structural methodology (production function approach corrected for utilization of factors); long-term growth and output gaps are calculated for the non-copper GDP | The rule requires accounting for business cycle of non-oil GDP. Objective is to ensure appropriate capacity utilization and low unemployment. Forecasts are made three times a year and fed into the budget process. Models used emphasize need to maintain long-term profitability of tradable sector. |
| Intergenerational Equity | No references to intergenerational equity. Target surplus to address specific explicit and contingent liabilities (Central Bank quasi-fiscal deficit and contingent pension liabilities). No provision ensuring the budget receiving transfers from fiscal buffers after mineral resources are exhausted. | Best practice in terms of intergenerational equity. Transfers from the GPFG are targeted to be about equivalent to the permanent return from the underlying GPFS assets ensuring transfers to the budget even after oil resources are exhausted. |
| Sustainability of the Rule in view of contingent fiscal events | Earlier vintages established a 1 percent structural surplus to repay CBCH quasi-fiscal deficit and basic pension benefits. Target defined with no reference to any present value calculation. | Extractions from GPFS appear higher than warranted given expected pension and health costs, and have continuously increased as percentage of non-oil GDP, appreciating the RER and compromising competitiveness. |
| Long-term Debt Sustainability | The rule first targeted a structural balance of 1 percent of GDP. It was later reduced to 0.5 percent of GDP and then to zero. The positive structural primary balance ensures long-term debt sustainability. | The adoption of the rule in 2001 resulted in the accumulation of fiscal assets equivalent to 200 percent of mainland (non-oil) GDP. Despite issues related with contingent pension and health future off-balance sheet liabilities, Norway’s rule ensures long-term debt sustainability. |
| Escape Clauses | The rule allows changes in the structural overall balance in exceptional circumstances. The structural surplus was decreased twice during the global financial crisis in order to stimulate the economy. It has been kept at zero thereafter. | The rule allows increasing/decreasing transfers to the budget from the GPFS to help stabilize the economy. The MoF appointed a commission to analyze the workings of the FR during 2002–15 to make recommendations to improve the rule. |
| Exchange Rate | Chile uses a projection for the current exchange rate to express copper-related revenues in Chilean pesos. | Norway uses a projection for the current exchange rate to express oil-related revenues in Norwegian Krone. |
Parameters of Russian Fiscal Rule: Experience of Chile and Norway
| Chile | Norway | |
|---|---|---|
| Benchmark Price | Panel of independent experts establish long term price of copper for the budget. No guidelines published to choose price. This price fluctuates less than current prices, to whih it adjusts with a lag. | The use of a benchmark oil price in the budget is completely excluded. Norway’s Government Pension Fund Global (GPFG) increases by oil revenues and decrease by the transfers from the GPFG (capped at 4 percent of the value of the fund) back to the budget. |
| Fiscal Target | The target is the structural balance of the federal budget. | The target sets the structural non-oil deficit to be equal to structural oil revenues, calculated to be equal to the annual value of the GPFG. |
| Cyclical Adjustment | The rule requires computation of cyclically adjusted aggregates. Output Gap assessed through a structural methodology (production function approach corrected for utilization of factors); long-term growth and output gaps are calculated for the non-copper GDP | The rule requires accounting for business cycle of non-oil GDP. Objective is to ensure appropriate capacity utilization and low unemployment. Forecasts are made three times a year and fed into the budget process. Models used emphasize need to maintain long-term profitability of tradable sector. |
| Intergenerational Equity | No references to intergenerational equity. Target surplus to address specific explicit and contingent liabilities (Central Bank quasi-fiscal deficit and contingent pension liabilities). No provision ensuring the budget receiving transfers from fiscal buffers after mineral resources are exhausted. | Best practice in terms of intergenerational equity. Transfers from the GPFG are targeted to be about equivalent to the permanent return from the underlying GPFS assets ensuring transfers to the budget even after oil resources are exhausted. |
| Sustainability of the Rule in view of contingent fiscal events | Earlier vintages established a 1 percent structural surplus to repay CBCH quasi-fiscal deficit and basic pension benefits. Target defined with no reference to any present value calculation. | Extractions from GPFS appear higher than warranted given expected pension and health costs, and have continuously increased as percentage of non-oil GDP, appreciating the RER and compromising competitiveness. |
| Long-term Debt Sustainability | The rule first targeted a structural balance of 1 percent of GDP. It was later reduced to 0.5 percent of GDP and then to zero. The positive structural primary balance ensures long-term debt sustainability. | The adoption of the rule in 2001 resulted in the accumulation of fiscal assets equivalent to 200 percent of mainland (non-oil) GDP. Despite issues related with contingent pension and health future off-balance sheet liabilities, Norway’s rule ensures long-term debt sustainability. |
| Escape Clauses | The rule allows changes in the structural overall balance in exceptional circumstances. The structural surplus was decreased twice during the global financial crisis in order to stimulate the economy. It has been kept at zero thereafter. | The rule allows increasing/decreasing transfers to the budget from the GPFS to help stabilize the economy. The MoF appointed a commission to analyze the workings of the FR during 2002–15 to make recommendations to improve the rule. |
| Exchange Rate | Chile uses a projection for the current exchange rate to express copper-related revenues in Chilean pesos. | Norway uses a projection for the current exchange rate to express oil-related revenues in Norwegian Krone. |
Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different from Actual Outcomes (Baseline)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.
Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Baseline Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.
Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Persistently Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.
Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Transitory Higher Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different Fiscal Rules Under Persistently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Persistently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Persistently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.
Russia: Different Fiscal Rules Under Peristently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Peristently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Peristently Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.
Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimtes.
Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Russia: Different Fiscal Rules Under Transitory Lower Oil Prices
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff estimates.Annex I. FSGM for Russia
Simulations of the economy under the various fiscal rules are calibrated using the IMF’s Flexible System of Global Models (FSGM). The model is an annual, multi-economy, forward-looking, model combining both micro-founded and reduced-form formulations of economic sectors (see Andrle and others 2015). Countries are distinguished from one another by their unique parameterizations. Each economy in the model is structurally identical (except for commodities), but with different steady-state ratios and behavioral parameters. Russia’s parameters are strongly determined by the fact that its economy is dominated by oil. Characteristics of the model, including assumptions on specific parameters for Russia are outlined.
Consumption and investment are micro-founded. Consumption is given by overlapping-generations households that can save and smooth consumption, and liquidity-constrained households that must consume all their current income every period. Firms’ investment is determined by a Tobin’s Q model. Firms are net borrowers. Risk premia rise when the output gap is negative during periods of excess capacity, and fall when the output gap is positive, during booms (capturing the effect of falling/rising real debt burdens).
Trade is given by reduced-form equations. A function of a competitiveness indicator and domestic or foreign demand. The competitiveness indicator improves one-for-one with domestic prices—there is no local-market pricing. For Russia, most (90 percent) exports are oil and gas, so competitiveness changes play a small role in the model. Exports of oil respond largely to Russian production decisions.
Potential output is endogenous. It is modeled by a Cobb-Douglas production function with exogenous total factor productivity (TFP), and endogenous capital and labor. For Russia, Potential output moves one-for-one with the long-run average production of oil (but not cyclical swings in oil production).
Consumer price and wage inflation are modeled by reduced form Phillips’ curves. They include weights on a lag and lead of inflation and the output gap. Consumer price inflation also has a weight on the real effective exchange rate and second-round effects from food and oil prices. As energy prices in Russia do not respond to global oil price developments, there is no feed-through from oil price changes to CPI inflation.
Monetary policy is governed by an interest rate reaction function. It is an inflation-forecast-based rule working to achieve a long-run inflation target through a risk-adjusted uncovered interest rate parity.
The model includes three commodities—oil, metals, and food. This allows to distinguish between headline and core consumer price inflation. The demand for commodities is driven by the world demand and is relatively price inelastic in the short run due to limited substitutability of the commodity classes considered. The supply of commodities is price inelastic in the short run. Countries can trade in commodities, and households consume food and oil explicitly, allowing for the distinction between headline and core CPI inflation. All have global real prices determined by a global output gap (only a short-run effect), the overall level of global demand, and global production of the commodity in question. Commodities can function as a moderator of business cycle fluctuations. In times of excess aggregate demand, the upward pressure on commodities prices from sluggish adjustment in commodity supply relative to demand will put some downward pressure on demand. Similarly, if there is excess supply, falling commodities prices will ameliorate the deterioration.
Oil plays a dominant role in the calibration of Russia’s model. Oil price fluctuations affect government revenues, but have little effect on household wealth as households have no direct ownership stake in the oil sector. Oil prices also have little effect on households’ and firms’ decisions, as oil prices are held fixed domestically.
Annex II. Russia’s Proposed Oil Price Benchmark
The authorities new budget rule will use a benchmark oil price that is the average of the last 50 years (in 2015 terms) and that they will adjust such a price (on a yearly basis), by the variation of the US CPI (i.e., what implies assuming a constant relative price between oil and the US consumption basket going forward). This annex analyzes some of the implications of moving to such an oil rule for the Russian federal budget.
We look at oil prices for the period 1923–2016 (in US$ nominal terms) and express them in 2015 US$ terms using the US CPI.
We look at the implications of using different benchmarks for the oil price, based on moving averages (in 2015 US$ terms) of different lengths (i.e., 3, 10, 20, 25, 30, 40 and 50-year MAs).
We extend the analysis into the next few years, using future oil prices (as of July 27, 2016) through 2021, and assume that US CPI inflation will gradually converge to 2 percent per year (from the current 1 percent), by end 2019.
Some Observations:
The 50-year average (1966–2015) oil price in real terms (for the US imported oil basket) is US$42.6 in 2015 terms. It includes a period (1966–1972) of stable and relatively low oil prices in real terms (Chart 1). This is in the order of magnitude that the authorities plan to use.
Using oil price benchmarks based on shorter-length moving averages (e.g., a 3-year MA), result in more “realistic” oil prices, but potentially in strong pro-cyclicality in periods of sustained increases or decreases of oil prices. At the same time, the use of short-length MAs does not generally result in extended periods in which observed oil prices are either far above or below benchmark prices. Define “far” to represent years in which observed oil prices (in real terms) were either higher (or lower) than the benchmark by +/- 25 percent. Using such criterion during 1972–2015, the longest period in which oil prices were “far” higher than the 3-year MA was 1.5 years. Conversely, the longest period in which observed oil prices were “far” lower than the 3-year MA was 2 years. The average period in which observed oil prices were either far above/below the 3-year MA was only 0.2 years (See Panel 1. and Table 1).
Oil price benchmarks based in longer-length moving averages (e.g., a 50-year MA, as proposed by the authorities), would result in far less pro-cyclical government spending than shorter-length MAs. However, the use of long length MAs result in the observed oil prices to be “far” from benchmark oil prices for long periods of time. Defining “far” as above, observed oil prices were “far” above or below the 50-year MA during, an average, of 2.5 years in 1972–2015. The longest period in which observed oil prices was higher than the 50-year MA was about 12 years. However, the longest period in which observed oil prices were far lower than the 50-year MA was only 1.5 years; (See Panel 1. and Table 1). This asymmetry is due to the fact that the 50-year moving average oil price included throughout the period a long spell (before 1973) of low and stable oil prices in real terms. Even through 2015, the 50-year moving average still includes a period (1966–1972) of low and stable real oil prices (of about US$13/barrel in 2015 terms). Fixing the benchmark real oil price going forward at the 50-year average through 2015 should then be a relatively “safe” choice, not only due to its freezing at a relatively low level, but also due to the fact that the relative price of oil has increased during the last few decades (see more on this below).1 Using a prudent oil price benchmark will likely result in avoiding long periods in which the government has to place debt to compensate for a negative difference between observed and benchmark oil prices. However, a rule in which observed oil prices may be higher than the budget benchmark for relatively long periods of time will require strong political will to stick to such rule while government net assets increase.
Interestingly, using oil price benchmarks of intermediate length (e.g. 10-year MA –like in the previous fiscal rule, or 15-year MA), overlooks the fact that during the period 1972–2015 oil prices remained persistently low (after being high), or persistently high (after being low) for relatively long periods of time. Therefore, oil price benchmarks based on intermediate-length MAs result in relatively long periods in which observed oil prices are either “far” above, or “far” below the MA-benchmark (See Panel 2.).2 In particular, for periods in which the benchmark is above observed oil prices for a long period of time, may result in debt increases that exceed those that the market is willing to provide.
As hinted above, the relative price of oil with respect to the US consumption basket during the period 1972–2015 increased by about 2.3 percent per year. Moreover, oil price futures (as of July 27, 2016), imply an average annual increase in such relative price of about 1.3 percent per year through 2021. Therefore, the authorities’ proposal to “freeze” the oil price at the 50-year moving average in real terms at end-2015 also results in a “saving” bias.
Chart 1: Historical Oil Prices
(2015 US$ terms)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Chart 1: Historical Oil Prices
(2015 US$ terms)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Chart 1: Historical Oil Prices
(2015 US$ terms)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Difference between Observed and Benchmark oil prices
(in years; 1972–2015)
Difference between Observed and Benchmark oil prices
(in years; 1972–2015)
| All Episodes | Price above Benchmark | Price below Benchmark | ||||
|---|---|---|---|---|---|---|
| 3-year | 50-year | 3-year | 50-year | 3-year | 50-year | |
| average | 0.21 | 2.43 | 0.08 | 2.43 | 0.08 | 0.03 |
| maximum | 2.08 | 12.17 | 1.50 | 12.17 | 1.50 | 1.50 |
Difference between Observed and Benchmark oil prices
(in years; 1972–2015)
| All Episodes | Price above Benchmark | Price below Benchmark | ||||
|---|---|---|---|---|---|---|
| 3-year | 50-year | 3-year | 50-year | 3-year | 50-year | |
| average | 0.21 | 2.43 | 0.08 | 2.43 | 0.08 | 0.03 |
| maximum | 2.08 | 12.17 | 1.50 | 12.17 | 1.50 | 1.50 |
Oil Price Benchmarks of Different Lenghts
(Figures in US$ of 2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Oil Price Benchmarks of Different Lenghts
(Figures in US$ of 2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Oil Price Benchmarks of Different Lenghts
(Figures in US$ of 2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Longest length where difference of Observed and Benchmark Oil prices is Large
(In years. Oil price Benchmarks are MA of different lengths. "Large" defined as 25 percent or more during 1972–2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff calculationsLongest length where difference of Observed and Benchmark Oil prices is Large
(In years. Oil price Benchmarks are MA of different lengths. "Large" defined as 25 percent or more during 1972–2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff calculationsLongest length where difference of Observed and Benchmark Oil prices is Large
(In years. Oil price Benchmarks are MA of different lengths. "Large" defined as 25 percent or more during 1972–2015)
Citation: IMF Staff Country Reports 2017, 198; 10.5089/9781484308202.002.A002
Source: IMF staff calculationsPrepared by Gabriel Di Bella, Oksana Dynnikova, Zoltan Jakab and Annette Kyobe.
The net present value of the increase in pension costs is estimated at 98 percent of GDP, and healthcare costs at 37 percent of GDP. This represents the cost of the expected increase in pension spending as a share of GDP from its current level, which is driven largely by expected increases in life expectancy, relatively early retirement ages for women and men, and continued low fertility rates, see
Modified PIH deviates from PIH by allowing a scaling up of investment over the medium term, but followed by a scaling down of spending after the “scaling up” period to preserve net financial wealth at the PIH level. It does not consider the growth impact associated with additional investments. Unlike the FSF which aims to stabilize net resource wealth (over the longer term) at a level lower than the PIH, or MPIH, while allowing scaling up of expenditures—lower financial wealth will be compensated by higher non-resource revenues, see
The authorities proposal is incomplete and subject to change. We evaluate elements of the intended fiscal ruel outlined in budget guidelines for 2017–19, with the cavtear that aspects of the final rule may change.
Using the intertemporal budget constraint criterion for fiscal sustainability under normal dynamic efficiency conditions (r-g>0, which should be the case in any well-defined steady state) the government’s intertemporal budget constraint demands that existing debt be equal to the NPV of future surpluses (that is existing government debt must be backed by future surpluses). The NPV of zero being zero, the proposed rule violates any well-defined intertemporal budget constraint, see
Recently federal government spending cuts have been in the form of a nominal freeze of total spending. Previous rules did not define how spending would be cut across different expenditure categories. Other laws, however, prevent discretionary changes in categories of social spending and include a list of protected items i.e. wages, payment of court rulings, transfers to support poor regions’ budgets, debt service, contributions to international organizations, and some other intra-budgetary transfers.
The conventional assumption that capital spending has a higher fiscal multiplier than current spending may not hold in Russia. Current spending includes education and health spending, important for human capital accumulation, while public capital spending includes military spending, an item that might have a lower impact on growth than investment in infrastructure.
In Russia, the main channel through which the budget negatively affects growth in the long term is by providing persistence to unwarrantedly appreciated or depreciated ruble and the associated volatility in real domestic interest rates.
Adopting a benchmark based in the 50-year MA (instead of “freezing” the relative price of oil going forward, as proposed by the authorities), would result in an increase in the oil price benchmark in the coming years, as the 1966–1972 period is substituted for more recent periods of higher real oil prices. For example, the 50-year moving average oil price through 2021 (using oil price futures through 2021) would be around US$46/barrel in 2015 terms, compared with US$42.6/barrel in 2015 terms in the rule proposed by the authorities.
There is an ample literature that analyzes whether oil prices are I(0) or I(1) with non-conclusive results. From a practical point of view, however, it is clear from Chart 1 that shocks to oil prices appear to be persistent, or in other words, if prices are mean reversing to trend, they do it slowly.
