Russia slashes budget, won't default

Russia ruled out any default on its foreign debts next year as it unexpectedly slashed its projected 2003 budget surplus by two-thirds because of a slowdown in growth and extra spending.

A senior Finance Ministry source quoted by the Interfax news agency said last week that the budget surplus in 2003 was now forecast at 0.6 percent of GDP, down from the previous estimate of 1.8 percent.

The revised figures are included in the draft 2003 budget which will be presented to the government on Aug. 15, the official added, speaking on condition of anonymity.

While financial analysts dismissed any fundamental budget problems for Russia, Finance Minister Alexei Kudrin sought to reassure the population about the nation's ability to repay its foreign borrowings next year.

"I am prepared today to say: there will be no default (on foreign debts).

"We will not have any devaluation which would affect citizens' savings and force them to change their money into dollars or euros," Interfax quoted him as saying.

With debt repayments reaching a peak this year and in 2003, when Russia intends to repay $17 billion in foreign debt, including a $10 billion principal payment, public finances are under extra scrutiny.

Russia's foreign debt stood at $128.3 billion on April 1.

According to economists, the recent move by the administration of President Vladimir Putin to boost state wages and pensions is leading to a rise in spending, while tax receipts have been depressed by the slowing economy.

"The government has made a decision to increase their expenditure obligations by raising state wages and pensions," said Roland Nash, chief economist at Renaissance Capital.

"On a more fundamental basis, there has been a bit of a slowdown in economic growth which has put a squeeze on company profits," he added.

According to the latest government calculations, revenues in 2003 will total 2.4 trillion rubles (78 billion euros).

Expenditures are forecast at 2.33 trillion rubles, which will produce a budget surplus of 72.1 billion rubles, according to the Finance Ministry source.

In 2000 the Russian economy notched up its best growth rate, with gross domestic product rising by 8.3 percent due to high oil prices and the benefits of a weak ruble.

But in 2001, growth slowed to 5 percent, and the latest estimates forecast that the Russian economy will grow by 3.8 percent this year.

This year, the sharp slide in global oil prices provoked by the Sept. 11 terrorist attacks affected government revenues, which in Russia are 40 percent earned from oil and natural gas exports.

Oil prices have now recovered to $25 a barrel but the government was recently deprived of about $800 million it had hoped to net from the sale of a 5.9-percent stake in number one oil producer LUKoil.

Turmoil on the international stock markets forced Russia last week to postpone the sale and the Russian government is now expected to dig into a special reserve fund of budget surplus money to plug the hole in state coffers.

Nonetheless, unless there is a renewed collapse in oil prices, Russia will remain in budgetary balance and able to service its debts, according to the Renaissance Capital economist.

"If oil prices fall to $15, we would re-evaluate our view, but given the current situation, there is no cause for concern," he said.