Price pause: The Ministry of Finance will suspend purchases and sales of foreign currency according to the budget rule

The Ministry of Finance will suspend operations under the budget rule in March. This is due to the intention to change the cut-off price for oil. Izvestia investigated how this would affect the dynamics of the ruble and liquidity in the domestic foreign exchange market, as well as how adjusting the cut-off price could affect the stability of the federal budget in the medium term.

Basic prices

The Russian Ministry of Finance adheres to a responsible and balanced budget policy, one of the mechanisms of which is the "budget rule".

"The government of the Russian Federation is currently working on proposals to clarify the parameter of the base oil price, aimed at strengthening the stability of the federal budget, strengthening the macroeconomic and financial stability of the country," the ministry said.

Photo: IZVESTIA/Sergey Lantyukhov

The suspension of foreign exchange transactions under the budget rule in March will affect the ruble exchange rate and the liquidity situation in the domestic market primarily through external factors, Ksenia Bondarenko, PhD in Economics, associate Professor at the Department of World Economics at the Faculty of World Economics and Politics at the National Research University Higher School of Economics, told Izvestia. The cost of oil and the volume of its exports remain of key importance.

"If quotes remain high and supplies to foreign markets increase — which now looks like the baseline scenario against the backdrop of the tense geopolitical situation in the Middle East — export earnings may increase over time," she said. — This is due to the fact that in many contracts the price of raw materials is taken into account with a time lag of several months. In such a situation, the Russian currency can receive additional support in the medium term.

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According to her, changing the parameter of the so-called cut-off price can significantly affect the stability of public finances over the next few years. A decrease in this level actually means a stricter configuration of the budget rule and, consequently, a decrease in the use of funds from the National Welfare Fund.

Currently, the benchmark is set at about $ 59 per barrel of Urals crude oil, but the possibility of adjusting it towards a range of about $ 50-55 is being discussed; the strategic plans include a mark of $ 55 by the end of the decade.

Photo: Global Look Press/Sergey Elagin

"On the one hand, a lower threshold will allow for faster accumulation of reserves, but at the same time it may limit the amount of resources that could be directed to support individual sectors of the economy," the expert believes. — At the same time, the role of oil and gas revenues in financing budget expenditures will gradually decrease, since part of the additional revenues will go to the NWF.

After the renewal of the budget rule, more significant volumes of currency transactions are possible, she noted. It is likely that the deferred transactions will be gradually compensated, as has already happened before. In particular, in 2024, the Bank of Russia performed not only current operations within the framework of the mechanism, but also carried out the so-called mirroring of those operations that were postponed from the end of the previous year. A similar approach can be applied this time.

Vibration protection

The suspension of operations under the budget rule is a measure directly related to rising oil prices and the need to keep the ruble from sharp fluctuations, Maxim Chirkov, associate professor at the Department of Economic Policy and Economic Measurements at the State University of Management, told Izvestia. The key benchmark here is the cut-off price of $59 per barrel: Russian Urals oil exceeded this level, which triggered a change in the mechanism of operations.

While maintaining the standard regime of the budget rule, an increase in oil prices would mean active purchases of foreign currency. This would create additional pressure on the ruble and could lead to its more noticeable weakening. Therefore, the rejection of such purchases at high oil prices is intended to stabilize the foreign exchange market and make the weakening of the ruble, which is already observed, less abrupt and more manageable.

Photo: IZVESTIA/Eduard Kornienko

Such actions do not carry significant risks for the federal budget. Its stability is assessed as high, and an adjustment to the cut-off price or a temporary suspension of operations is unlikely to significantly affect future volumes of purchases or sales of the currency. The decisions of the Ministry of Finance are primarily aimed at smoothing the effects of external shocks on the exchange rate.

It is assumed that additional measures are possible, since the conflict in the Middle East is unlikely to be resolved in the near future, which means that oil prices may remain above previously expected levels. At the same time, this situation looks more favorable for the budget: it is adjusted based on the oil price of 59 dollars per barrel, and higher current prices have a positive impact on it and do not undermine, but rather strengthen its stability.

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The volume of foreign currency sales in the market will decrease by about 11.9 billion rubles, said Alexander Abramov, head of the Laboratory for the analysis of institutions and financial markets at the Presidential Academy. At the same time, the Bank of Russia is likely to continue selling currency for about 4.6 billion rubles, carrying out operations planned according to the previous parameters of the budget rule.

A reduction in government currency sales can increase pressure on the ruble and cause its moderate weakening. It is assumed that fluctuations may amount to several rubles per dollar, but the final dynamics will be determined by the general situation in the financial markets.

Photo: Global Look Press/Victor Lisitsyn

According to him, the cut-off threshold may be lowered from $ 59 to about the range of $ 45-50 per barrel. In this case, the Ministry of Finance will pursue a more cautious budget policy, which may slightly restrain economic growth, but at the same time help reduce inflationary pressures. If inflation slows steadily, the Bank of Russia will have more grounds for an accelerated reduction in the key rate.

"In addition, a lower cut—off price will reduce the Ministry of Finance's obligations to sell foreign currency in a situation where the actual cost of oil falls below the established level," the expert said. — In general, such changes may create prerequisites for a weaker ruble exchange rate.

The industries related to the sale of crude oil, gas, LNG, as well as semi-finished and finished petroleum products produced in Russia and exported to friendly countries will benefit the most, Andrei Zhukovsky, a leading researcher at the Institute of Regional Economics and Inter-Budgetary Relations at the Financial University under the Government of the Russian Federation, told Izvestia. Additionally, a revival of logistics in the BAM and Transsib routes is predicted, as well as an increase in the utilization of the port infrastructure of the Northern Sea Route and the ports of Murmansk, St. Petersburg and Kaliningrad.