Russia braced for fresh fiscal squeeze

Russia's annual budget shows that Moscow is finally facing up to the country’s mounting fiscal problems.

Russia's annual budget, currently passing through parliament, shows that the government is finally facing up to the country's "mounting fiscal problems", says Liza Ermolenko of Capital Economics.

As a result "a substantial fiscal squeeze is looming", with "public investment set to bear the brunt" of these cuts. Infrastructure spending could be cut by around 40% in real terms, although unsurprisingly the defence budget will continue to grow.

What's more, these cuts won't be the last that take place. While the government will use its external reserves to finance borrowing and repay debt, these "have already fallen sharply", so "fiscal policy will need to tighten further over the coming years". This will add "to the headwinds already facing Russia's economy".

The outlook won't necessarily be helped by the resurgence of the rouble, which has risen by 15% in April. True, this has "opened the way for the central bank to accelerate interest-rate cuts", says Bloomberg's Vladimir Kuznetsov.

Goldman Sachs is now forecasting that interest rates could fall by a further six percentage points this year, following three percentage points of reductions since January. But the stronger currency is "reducing the government's potential revenue from dollar-denominated oil exports". Overall, a tough year remains likely.

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