Russian Lawmakers Just Passed A Delusional Budget Based On An 'Alternative Economic Reality'

Putin

Getty Images/Robert Cianflone President Vladimir Putin. A draft Russian budget for 2015-2017 passed its first reading in the Duma, the country's parliament, Friday despite the finance minister warning that it was based on an "alternative economic reality."

According to Vedomosti, the independent Russian business daily newspaper, the draft budget is based on forecasts of an average oil price of $100 a barrel over the next three years, Western sanctions being lifted in 2015, and an acceleration of growth from next year. Right now, those assumptions look delusional.

Since the middle of the year, the oil price has been crashing, falling from a high of $115 a barrel in June to below $86 a barrel Monday. Goldman Sachs believes oil will fall to $80 a barrel, with Morgan Stanley giving a 45% probability that it could hold around that level.

This has mainly been due to positive supply shocks with oil production in Libya, Russia, and Iraq all coming in above estimates and the US shale boom continuing to put downward pressure on prices.

Oil price

EIA The collapse in the oil price has put huge pressure on Russia's government finances with oil and gas accounting for half of the country's budget revenues. The falls have compounded the impact of Western economic sanctions over Ukraine, with the IMF forecasting meager GDP growth of 0.2% this year and only 0.5% in 2015 (versus an average of 7% a year from 1998 to 2008).

Russia oil

Morgan Stanley

Fears of its impact on the Russian economy have also caused foreign capital to flee the country. The Russian central bank reports that the country has seen $85 billion worth of capital outflows so far in 2014, forcing it to spend over $15 billion of the country's foreign currency reserves to prop up the Russian ruble in October alone.

Finance minister Anton Siluanov said that although the government could dip into its reserve fund to meet its spending commitments, " reserves are not infinite, and the poor economic situation may be protracted." The Ministry of Finance is set to propose spending cuts of about 10% of the draft budget, with ministry sources briefing that each state program will be considered.

However, the proposals may run into resistance from the Kremlin. Earlier this month, President Vladimir Putin firmly ruled out any cuts to social programs, stating that "we will not have to sacrifice that."

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