This week Glencore and the Qatar Investment Authority announced the purchase of a 19.5 percent stake in Rosneft at a price of USD11.3bn in a move that is a positive step for the Russian government’s drive to raise funds from asset privatisation.
Privatisation and increasing the state-owned enterprise dividend payout ratio to 50 percent are one of the routes the government is looking to exploit to fund the budget deficit. Russia’s fiscal buffers, although starting from a strong base, are weakening as its sovereign wealth funds are gradually being depleted: projections are that in 2017 the Reserve fund will be tapped for RUB 1.151tn but it will then be exhausted. The National Welfare Fund will provide RUB 659.6bn in 2017 rising to RUB1.14bn in 2018 and then easing to RUB 136.8bn.
Factoring in the Rosneft privatisation the Russian budget deficit is forecast at 3.7% of GDP for 2016 narrowing to 3.2% in 2017, 2.2% in 2018 and 1.2% in 2019. This projection is conservative in that it uses an oil price of USD40/bbl which is well below the current Brent price of ~USD54/bbl. Obviously, the oil production cut deal with OPEC, if adhered to and barring a significant ramp up of US shale production, is positive.
But given the history of non-compliance with OPEC production cuts the Russians it seems are not being complacent. The government still has relatively conservative target of only USD7bn of funding from the Eurobond market which given low government debt levels could be increased, although with sanctions perhaps the Russians are cautious about becoming overly reliant on this. Indeed we note reports that Russia is looking to diversify its funding base and looking to issue a renminbi denominated bond in 1H 2017: reports suggest an initial tranche of ~USD1bn in value of varying maturities. Russia and China have declared an interest in increasing financial co-operation in a joint statement following a meeting between Dmitry Medvedev and Li Keqiang in November and supported such a bond issuance program.
Other alternative funding avenues remain: Russian tax rates are low with a corporate tax rate of 20 percent and income tax of only 13 percent although this is unlikely to be a first port of call given economic weakness and the 2018 Presidential Election. The budget has included some expenditure cuts and is expected to fall from RUB 16.2tn (18.7% of GDP) in 2017 to RUB 16tn (16.2% of GDP) in 2019. Military spending is one area that has been targeted for cuts; forecasts show it falling from 3.3% of GDP to 2.8% in 2019.
Russia’s positive NFA position (11.5 percent of GDP in 2011) has enabled it to weather the economic sanctions. However, with Donald Trump elected and Francois Fillon a serious contender for the French Presidency in 2017 there is certainly scope for improving international relations. This was also evident in Vladimir Putin’s state of the nation address on 1 December which adopted a more conciliatory tone stating ‘Unlike some of our colleagues abroad, who consider Russia an adversary, we do not seek and never have sought enemies. We need friends. But we will not allow our interests to be infringed upon or ignored.’
But a deepening of the relationship with China seems inevitable with Vladimir Putin stating ‘Russia is proactive in its Eastern policy not because of any momentary considerations we may have, not because of the cooling in relations with the United States or the European Union, but for the reason that it serves Russia’s long-term interests and is consistent with the global development trends. …….Today, China is about to become the world’s largest economy, so it is very important that every year adds new large-scale projects in various areas, including trade, investment, energy and high technology, to our mutually beneficial cooperation.’