Server Information System Useful Links Statistical Database Express-analysis Periodic Publications Special Materials Archive EU VEDI

The problem of the Russian external debt have been on agenda only for a few years. But this problem is the key question now in the context of the financial stability, reaching the economic growth trends and involving Russia into the international financial system. The possible agreements between the international creditors and Russian government should be acceptable for the both side, but under this bargaining procedure the scenario analysis and economic forecast will be the crucial point.

For the external payments possibilities a set of scenarios should be considered which contain as the trends of the external factors (such as world fuel prices, capital inflows, external debt restructuring and cut-off) as the policy variables (fiscal and monetary regulations, exchange rate and capital control).

Three scenarios presented in the report describe the marginal cases. It is evident that the directions of the economic policy and state regulations should be as a composite of the different measures. But all the scenario calculations show, that for Russia will be impossible to serve the external debt in the full extent. The main obstacles are the weak fiscal and monetary policies, social and political instability, low savings and investments, banking crises, financial markets depression. Moreover, some exogenous variable's trends using in the model simulations are extremely optimistic, i. e. suggested smooth and constant economic growth.

The economic growth planning by the government can simplify the problem of the external debt service. But there is a distance between the plan and fact data, especially the great in the emerging economies. The key point should be the constantly providing monitoring of the economic conditions and short- and medium-term forecast. Such activity allows to provide reasonable positions of the both side and create the adequate decisions.

First of all, we should define the exogenous variable of the model. It is quite natural that such policy variables seem to be indefinite in the medium and long run. The list of such variables looks like:

• the world market prices for the fuel and relatives goods (gas, coal etc.) rather than ferrous and non-ferrous metals;
• the capacity of the fuel goods production in the long-run;
• the aggregate world market price of the imported goods;
• the capital outflows from Russia, which amount depends on the foreign market regulations, political climate and etc.;
• the Central Bank policy of the foreign currency intervention, which results can be gross international reserves growth or fall;
• consolidated budget expenditures. Such parameter is the policy variable and depends on as the central government possibility to realized social and economic policy as a cut expenditures to accumulate resources for the external payments.

Special topic is the external loans inflows (mainly from the international financial organization), which are changed the schedule of the external payments. So, the main task for the model description is to defined the gap between the payments which should be done and the disposable resources. Such gap is the result of the exogenous and policy variables rather than the conditions of the national economy.

For the exports the main exogenous variable are the trend in the world prices for the certain commodities, the aggregate output and domestic constant prices for the exportable goods, which can be shift in real terms by the voluntary decisions (such as lobby activity, cartel decisions and etc.). So, we assume, that in the basic run the real domestic producers prices will be stable and follow by the monetary policy (so called the natural fluctuations), the world fuel prices will be converged to $22 per barrel for oil and other prices will be oriented for the oil equilibrium level.

Table 1. The Long Term Assessments of the Fuel Production

	1998	1999	2000 (forecast)	2005 (forecast)	2010 (forecast)
Oil Production, mln. ton	294	295	298	320	335
Natural Gas Production, bln. m3	591	563	580	625	660
Gasoline, mln. ton	25.9	26.5	27	28.3	30
Diesel Fuel, mln. ton	45.1	46.8	48	50.5	53
Oil Fuel, mln. ton	55.2	52.2	55	58	61.4
Coal, mln. ton	232	249	250	262	263
Source: EU "Vedi", Institute of Economic Forecast RAS

Table 2. Average Contract Prices For the Russian Exported Goods

	1998	1999	2000 (forecast)	2005 (forecast)
Oil, $ per barrel	10	14.6	22	20
Gasoline, $ per ton	125	122	145	125
Diesel Fuel, $ per ton	96	117	170	125
Fuel Oil, $ per ton	46	62	85	70
Natural Gaz, $ per thnd. m3	77	70	85	75
Coal, $ per ton	25	17	25	17
Aluminum, $ per ton	1296	1191	1580	1500
Copper, $ per ton	1784	1557	1750	1750
Nickel, $ per ton	5451	5706	10255	7000
Source: EU "Vedi", Goskomstat RF, Reuters, Bloomberg

The area of the scenarios is defined by the possible changes in the policy variables. Such changes can be held by the fiscal policy adjustments, monetary policy adjustments, changes in the world market price trends and the scenario with no adjustment.

Scenario 1. No Adjustment

This is the basic scenario, under which all the past trends seem to be held. This variant suggests the tax rates, international reserves and other parameters unchanged and all other scenarios' calculations will be compare with these results.

Some exogenous variable, such as high world fuel prices increase the export revenues. We expect that without fiscal changes the capital outflows will proportionally increase and investment activity will growth insignificantly (not more than 3-4%).

We consider in this scenario some changes in taxation of the exportable goods, which have been done in the first half of 2000. For example, export tariffs on the crude oil and nickel were increased and on the natural gas introduced. We also suggested moderate growth of output of the fuel products and non-ferrous metals.

Scenario 2. Fiscal Policy Adjustments

Such scenario suggested the changes in taxation and seems to the most probable. The upward world price trend increase the efficiency of the Russian exports. The extra profit of the oil, oil products and natural gas exporters exceed $2 bln. per month. The results can be the investment boom or large capital outflows. Taking into consideration the Russian reality the capital outflows are the most probable. So the certain fiscal adjustments are necessary to prevent the growth of the capital outflows and to increase budget revenues.

World price fluctuation should be captured by the federal government through the excises and export tariffs. Formally, the central government should keep the export efficiency near 1 to maximize their budget revenues. The obstacles for such policy realization can be lobby's activity of the fuel-exporters and demand for the investment in fuel-energy sectors. Note that past year experience shows, that the export revenues growth is the main source of the capital outflows, not for the investment activity. It is evident, that tough capital control should be introduced.

Table 3. The Results of the Non-Adjustments Scenario Calculations

	1998	1999	2000 (forecast)	2001 (forecast)	2002 (forecast)	2003 (forecast)	2004 (forecast)	2005 (forecast)
ER average, RUB/USD	10.08	24.58	28.63	34.38	37.98	43.09	44.02	46.15
Exports, $ bln	90.1	82.15	98.93	92.94	93.85	94.62	95.43	96.22
Imports, $ bln.	76.5	51.15	59.18	58.21	60.46	60.15	65.28	65.97
BoT, $bln.	13.6	31	39.75	34.73	33.39	34.47	30.14	30.25
GDP, bln. RUB	2479	4560.93	6211.63	7198.97	8098.21	8561.26	9345.21	10009.57
Consolidated Budget Revenues, % GDP	25.24	26.35	26.49	25.62	25.6	25.64	25.71	25.75
Domestic Revenues, % GDP	21.98	21.16	19	19.21	19.15	18.67	18.89	18.99
Export Revenues, % GDP	1.1	2.35	4.76	3.63	3.62	3.94	3.74	3.72
Import Revenues, % GDP	2.16	2.84	2.73	2.78	2.84	3.03	3.08	3.04
Non-interest Expenditures, % GDP	25	22	22	22	22	22	22	22
Primary Proficit, % GDP	-0.7	3.3	4.49	3.62	3.6	3.64	3.71	3.75
External Debt Payments, $ bln.			12.25	12.73	13.39	17.47	11.14	13.25
External Debt Payments, % GDP			5.64	6.08	6.28	8.79	5.25	6.11
GAP, % GDP			1.15	2.46	2.68	5.15	1.54	2.36
GAP, $ bln.			2.51	5.16	5.71	10.24	3.28	5.11
Notes. The GAP shows the difference between primary proficit of the Russian consolidated budget and external debt service payments.
Source: EU "Vedi" calculations.

The important point is the distribution of the budget revenues and expenditures between the federal budget and local budgets. The importance of such problem proofs by the distribution of the good collecting taxes and some expenditures between budget. All the external debt service burdens are on the federal budget and in such context the distribution of the tax revenues (especially from the exports and imports) is important.

Chart 1: Volume of Exports, $bln

Source: EU "Vedi" calculations

Chart 2: The Budget Revenues from the Exports, $ bln

Source: EU "Vedi" calculations

Scenario 3. Monetary Adjustments

One of the main current challenge for the monetary authorities is the demand-pull inflation. The growing export revenues increase the aggregate demand and stimulate the inflation. The key monetary policy trade-off is the choice between the real ruble rate appreciation and the international reserves increase. The real ruble rate appreciation will lead to the import growth and worsening the balance of trade. At the same time the stable ruble rate can be used as an effective anti-inflationary measure.

Contrary, the foreign currency purchases on the open market allow to keep real ruble rate at least unchanged. The Central Banks' purchases of the foreign currency lead to the proportionally monetary base growth, which push the inflation rates. Taking into consideration the liquid structure of the money supply M2 (cash in circulation M0 is about 33-38% from total M2) and low deposit savings, the monetary base growth define the extra demand on foreign currency and finally prove the inflationary-devaluationary spiral.

The monetary adjustment effects will be insignificant under the current Russian financial sphere conditions. Low saving rates, poor banking system, high investments risks define high inflationary expectations and push all the additional savings abroad or into the foreign currency.

One of the possible way to accumulate the positive balance of trade is to issue domestic bonds in foreign currency. Such procedure will help to avoid money supply expansion, keep inflation rates relatively small. In addition such measure will contribute to the Russian banking system and financial markets recovering. The special task under such scenario will be the domestic debt management (see Appendix).

Chart 3: Central Bank of RF Foreign Currency Interventions, $bln

Source: EU "Vedi" calculations

Chart 4: The Producer Price Index (pd), % per annum, annual average

Source: EU "Vedi" calculations

Table 4. Long-term Energy Exports Production Forecast

$ bln.	1998	1999	2000 (forecast)	2001 (forecast)	2002 (forecast)	2003 (forecast)	2004 (forecast)	2005 (forecast)
TOTAL EXPORTS	87.1	83.38	98.93	92.94	93.85	94.62	95.43	96.22
Total Exports of Goods	74.2	74.3	89.43	83.44	84.35	85.12	85.93	86.72
Export Revenues from Fuel-Energy Sector	30.5	33.62	46.82	41.83	42.43	43.04	43.66	44.29
Crude Oil	10.22	14.53	22.84	20.9	21.21	21.53	21.85	22.18
Gasoline	0.35	0.23	0.29	0.25	0.25	0.25	0.25	0.26
Diesel Fuel	2.36	2.63	4.07	2.92	2.95	2.98	3.01	3.04
Oil Fuel	1	1.38	1.4	1.68	1.7	1.71	1.73	1.75
Coal	0.6	0.47	0.48	0.47	0.48	0.48	0.49	0.49
Natural Gas	15.97	14.38	17.74	15.61	15.85	16.08	16.32	16.57
Non-ferrous Metals	5.81	5.91	8.76	7.76	7.92	8.08	8.26	8.43
Machinery	8.19	7.85	7.85	7.85	8	8	8	8
Others	29.7	26.92	26	26	26	26	26	26
Services	12.9	9.08	9.5	9.5	9.5	9.5	9.5	9.5
Budget Revenues from Export	6.46	8.67	10.33	9.12	9.26	9.39	9.53	9.68
Including:
Excises	5.16	7.03	3.02	2.7	2.74	2.78	2.82	2.86
Tariffs	1.19	1.52	7.15	6.27	6.37	6.46	6.56	6.65
Duties	0.11	0.12	0.17	0.15	0.15	0.15	0.16	0.16
Notes. The exports of the "others goods" and services linerized in the medium-term. Export of the machinery also linerized, because the significant part of such export depends on political and voluntary decisions (for example, military exports) and does not fit the relations between real volume and relative price ratios.
Source: EU "Vedi" calculations.

Scenario Results

Three listed above scenarios present the marginal cases. It is evident that the directions of the economic policy and state regulations should be as a composite of the different measures. But the basic scenario calculations show the main threats, which including:

• the gap between external debt payments and the maximum volume of the primary deficit;
• the poor effect of the monetary adjustments on the macroeconomic situation without banking reform and domestic financial market recovery

In general, there is impossible for the Russian government to reach primary proficit which will cover the amount of the external debt payments. There are three basic approaches which can allow Russia to serve its external debt:

• further restructuring of the external debt;
• partly financing through the new external loans;
• provide the external debt payments through the domestic bonds issue.

The declaration of the some representative from the Russian government, that Russia will need no foreign loans and will be able to serve external debt itself seem to be emotional and strongly politicized. The calculations show, that even under the economic growth and high fuel price level the government can not provide debt payment on the level of 5-9% GDP. As a policy choice the basic decision will be the combination of the further debt restructuring agreements, accept the new foreign loans and domestic bonds issuing.

NB: Full survey is possible to order by E-mail: vedev@vedi.ru

---

Up to list

Copyright © 1999 VEDI