ECONOMY
Government Leaning On Exporters To Help Shore Up Budget, Support Ruble
October 17, 2023
Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova talks with economic experts about a new export duty, as well as a decree obliging exporters to sell their FX earnings. Will these measures boost the ruble and pad the budget? And how are they related to the upcoming presidential elections in 2024?
It is becoming clearer where the government will get money to pay for the war. At the end of September, a government resolution was adopted introducing export duties of 10% on mineral fertilizers and 4-7% on all other products. The measure is said to be temporary, and the duties will go to zero at an exchange rate of 80 rubles to the dollar. However, no forecast envisages the dollar cheaper than 90 rubles before end-2024.
Replenishing the budget
The duties are being introduced to protect the domestic market, according to the resolution. Indeed, as economist Elena Akhmedova notes in her Telegram channel Tverdye Tsifry (“Hard Numbers”), the measure could boost the ruble by about 4%. Nevertheless, the local currency has reacted weakly so far: after a slight bump on the day the resolution was adopted, it went back to weakening versus other currencies. Perhaps something will change after the new export duties take effect on October 1, though Akhmedova and other experts emphasize that alone they will not strengthen the ruble.
“A weaker dollar against the ruble” is not very advantageous for the Russian government, as it makes the budget situation tougher, points out financier Andrei Movchan, founder of the investment management company Movchan’s Group. “In this case, the duties are a way to fill the budget, and they will be set at a level so that… the ruble does not strengthen too much, otherwise the effect will be neutralized. I do not think that this measure has been fully worked out; most likely it is a test measure, checking the reaction of the export and FX markets. Most likely, as the situation is observed, the parameters of the export duty will be changed; ideally, it should lead to an increase in budget revenues without strengthening the ruble,” explains Movchan.
No one is hiding the fact that extra money will flow into the budget: the explanatory note to the 2024 draft budget puts “nonrepayable receipts from nongovernmental organizations and the sale of foreign assets” at RUB 114.5 billion – and that is only for 2023.
Akhmedova believes that revenues from the export duty will amount to $11 billion in 2024 at the current ruble exchange rate and $8.5 billion if the ruble strengthens to 90-95 to the dollar, as it is expected to by the middle of next year. Not a bad boost to the budget, where defense spending next year is penciled in at 6% of GDP or RUB 10.6 trillion (about $100 billion). “President Putin promised not to raise taxes. But... the budget is very short of money,” economist Sergei Aleksashenko, former deputy chairman of the Central Bank, ironically notes.
Meanwhile, economist Sergei Petrov (name changed by request) sees things differently. “For the 3rd quarter of 2023, RUB 90-140 billion is expected to come from the new export duties. This is only 0.3-0.6% of the federal budget revenues planned for 2023. These duties will not have any significant impact on the budget deficit. But [now] there is a risk of production falling,” he says.
Sure, the budget gets extra money, inflation perhaps slows and the ruble is supported, argues Evgeny Kogan, investment expert and founder of the BitKogan project, in his Telegram channel; however, there are more negatives in the measure than positives. Firstly, relatively small companies could be hit; the introduction of these duties means that they will have no choice but to close their business. Secondly, they might not have the effect of curbing inflation – many companies might, following the example of Alrosa, suspend exports for 2-3 months. Yet in that case the resulting export overhang could come back to bite. Thirdly,
Replenishing the budget
The duties are being introduced to protect the domestic market, according to the resolution. Indeed, as economist Elena Akhmedova notes in her Telegram channel Tverdye Tsifry (“Hard Numbers”), the measure could boost the ruble by about 4%. Nevertheless, the local currency has reacted weakly so far: after a slight bump on the day the resolution was adopted, it went back to weakening versus other currencies. Perhaps something will change after the new export duties take effect on October 1, though Akhmedova and other experts emphasize that alone they will not strengthen the ruble.
“A weaker dollar against the ruble” is not very advantageous for the Russian government, as it makes the budget situation tougher, points out financier Andrei Movchan, founder of the investment management company Movchan’s Group. “In this case, the duties are a way to fill the budget, and they will be set at a level so that… the ruble does not strengthen too much, otherwise the effect will be neutralized. I do not think that this measure has been fully worked out; most likely it is a test measure, checking the reaction of the export and FX markets. Most likely, as the situation is observed, the parameters of the export duty will be changed; ideally, it should lead to an increase in budget revenues without strengthening the ruble,” explains Movchan.
No one is hiding the fact that extra money will flow into the budget: the explanatory note to the 2024 draft budget puts “nonrepayable receipts from nongovernmental organizations and the sale of foreign assets” at RUB 114.5 billion – and that is only for 2023.
Akhmedova believes that revenues from the export duty will amount to $11 billion in 2024 at the current ruble exchange rate and $8.5 billion if the ruble strengthens to 90-95 to the dollar, as it is expected to by the middle of next year. Not a bad boost to the budget, where defense spending next year is penciled in at 6% of GDP or RUB 10.6 trillion (about $100 billion). “President Putin promised not to raise taxes. But... the budget is very short of money,” economist Sergei Aleksashenko, former deputy chairman of the Central Bank, ironically notes.
Meanwhile, economist Sergei Petrov (name changed by request) sees things differently. “For the 3rd quarter of 2023, RUB 90-140 billion is expected to come from the new export duties. This is only 0.3-0.6% of the federal budget revenues planned for 2023. These duties will not have any significant impact on the budget deficit. But [now] there is a risk of production falling,” he says.
Sure, the budget gets extra money, inflation perhaps slows and the ruble is supported, argues Evgeny Kogan, investment expert and founder of the BitKogan project, in his Telegram channel; however, there are more negatives in the measure than positives. Firstly, relatively small companies could be hit; the introduction of these duties means that they will have no choice but to close their business. Secondly, they might not have the effect of curbing inflation – many companies might, following the example of Alrosa, suspend exports for 2-3 months. Yet in that case the resulting export overhang could come back to bite. Thirdly,
“Restrictions on exports mean a decrease in export revenues. And that is one of the main problems with the Russian economy today.”
Russian billionaire Vladimir Lisin. He is the chairman and majority shareholder of NLMK (Novolipetsk Steel), one of Russia's largest steel companies and a major exporter. Source: Wiki Commons
Finally, against this backdrop, overall exports might also decline, resulting in a further dwindling of the trade surplus and accordingly a continuation of ruble depreciation. “The initiative looks at best contradictory. At worst – dangerous. Damage could be done to entire sectors,” Kogan sums up.
The real effects of a duty tied to the exchange rate are not obvious, Petrov agrees: “perhaps it will have some inflation-moderating effect, but perhaps there will be a decrease in exports (and production volumes).”
Business has already calculated that the tax burden on fertilizer producers will double, from 20% to 40%, and when taking into account the previously introduced tax on windfall profits from previous years, it will be 55%. Kogan gives the example of coal miners: they are already dumping today, but it is more profitable for them now to simply halt exports.
The factor of the presidential elections
It is definitely not about strengthening the ruble, believes economist Nikolai Kulbaka: “now, the most important task [of the regime] is to look good during the presidential elections in Russia next year. Therefore, the economy is being spruced up in every way possible.” The introduction of these duties means that the state is seriously concerned about padding the budget, explains Kulbaka.
“The logic here is something like this. Supposedly, a business selling goods for export pencils in a dollar exchange rate of about 80 rubles. When the exchange rate goes higher, exporters begin to make more money. And now the state is planning to tax this additional profit. In reality, businesses engaged in exports are being subjected to additional taxes,” says Kulbaka.
In his view, most ordinary Russians will not protest against such a decision. “Money will flow into the budget, and the budget deficit will decrease. The fact that export sectors will lose their future is not of interest to the government at this stage. The classic ‘I’ll deal with that tomorrow.’ The main thing now is to close this year successfully. Later, the situation might change dramatically, and completely different problems might have to be addressed, but that will come tomorrow,” the economist sums up.
“If a decline in domestic prices materializes,” predicts Petrov, “the practice [of export duties] will swiftly be extended to all product groups. It is possible that different manufacturers will react differently, which might entail fine-tuning, including on a business-by-business basis.”
It is also alarming how the new duties were introduced – the very next day after rumors about them appeared.
The real effects of a duty tied to the exchange rate are not obvious, Petrov agrees: “perhaps it will have some inflation-moderating effect, but perhaps there will be a decrease in exports (and production volumes).”
Business has already calculated that the tax burden on fertilizer producers will double, from 20% to 40%, and when taking into account the previously introduced tax on windfall profits from previous years, it will be 55%. Kogan gives the example of coal miners: they are already dumping today, but it is more profitable for them now to simply halt exports.
The factor of the presidential elections
It is definitely not about strengthening the ruble, believes economist Nikolai Kulbaka: “now, the most important task [of the regime] is to look good during the presidential elections in Russia next year. Therefore, the economy is being spruced up in every way possible.” The introduction of these duties means that the state is seriously concerned about padding the budget, explains Kulbaka.
“The logic here is something like this. Supposedly, a business selling goods for export pencils in a dollar exchange rate of about 80 rubles. When the exchange rate goes higher, exporters begin to make more money. And now the state is planning to tax this additional profit. In reality, businesses engaged in exports are being subjected to additional taxes,” says Kulbaka.
In his view, most ordinary Russians will not protest against such a decision. “Money will flow into the budget, and the budget deficit will decrease. The fact that export sectors will lose their future is not of interest to the government at this stage. The classic ‘I’ll deal with that tomorrow.’ The main thing now is to close this year successfully. Later, the situation might change dramatically, and completely different problems might have to be addressed, but that will come tomorrow,” the economist sums up.
“If a decline in domestic prices materializes,” predicts Petrov, “the practice [of export duties] will swiftly be extended to all product groups. It is possible that different manufacturers will react differently, which might entail fine-tuning, including on a business-by-business basis.”
It is also alarming how the new duties were introduced – the very next day after rumors about them appeared.
“No one discussed the idea of new duties with business, contrary to the usual practice – for example, discussions on the windfall profits tax lasted six months.”
Uralkali is one of the world’s biggest potash fertilizer producers and exporters. Source: Wiki Commons
All this looks more like a “special operation,” and there are suspicions that this way of interacting with business (and the public) will become common practice. The reason being that now is not the time for discussions – the fatherland is in danger. Or rather, the resources the Kremlin needs to wage a protracted war are in danger. At the same time, a tangible decline in living standards cannot be allowed – at least until the presidential elections.
But will the new duties save the budget, which has in fact turned into a war budget? Or will the authorities “ask someone else to share?”
Hunting for FX
They have already asked. On Thursday, October 12, at the end of the evening session on the Moscow Exchange, the ruble began to rapidly strengthen. Why did the Russian currency, which had not found support before, suddenly soar? It’s simple: the government announced that President Putin had signed a decree obliging exporters to sell their FX earnings. The actual decree with details was promised to be presented in a day. However, in a statement, Putin’s press secretary said that the decree was “for official use,” meaning secret. Nevertheless, some details were revealed the next day: exporters will have to transfer at least 80% of their FX earnings to accounts in Russia within 60 days from the date of receipt. They will have to sell 90% of the funds transferred in Russia within two weeks from the date of transfer, with the caveat that no less than 50% of FX earnings on each export contract must be sold within 30 days from the date of receipt.
Exporters already sell 80-90% of their FX earnings, Petrov notes. “The fact is that exporters’ margins are now low, the remaining 10-20% of the currency is in fact their profit. Meanwhile, there is reason not to return this money to Russia: international payments are now difficult, the money can be frozen at any time. So, exporters pay importers’ payments with this currency, [in return] receiving rubles from the importers in their Russian accounts. As a result, importers, especially small ones, might suffer,” explains Petrov.
He is among the many experts who doubt that the boost to the ruble will last a long time, adding that, “not to mention, a return to the practices of the 90s in itself is bad for the financial system.”
It remains unclear which companies the new decree will affect. What is known is that it is 43 groups of companies related to the fuel and energy sector, ferrous and non-ferrous metallurgy, chemicals, forestry and grain farming. Of course, it is possible that the authorities are afraid of slapping sanctions on all these companies, though the first thing that comes to mind is that in the hallways of the government and the Presidential Administration, individual companies are now scratching and clawing so as not to end up on the final list of companies obliged to sell their FX earnings.
But the outcome of this lobbying hardly matters.
But will the new duties save the budget, which has in fact turned into a war budget? Or will the authorities “ask someone else to share?”
Hunting for FX
They have already asked. On Thursday, October 12, at the end of the evening session on the Moscow Exchange, the ruble began to rapidly strengthen. Why did the Russian currency, which had not found support before, suddenly soar? It’s simple: the government announced that President Putin had signed a decree obliging exporters to sell their FX earnings. The actual decree with details was promised to be presented in a day. However, in a statement, Putin’s press secretary said that the decree was “for official use,” meaning secret. Nevertheless, some details were revealed the next day: exporters will have to transfer at least 80% of their FX earnings to accounts in Russia within 60 days from the date of receipt. They will have to sell 90% of the funds transferred in Russia within two weeks from the date of transfer, with the caveat that no less than 50% of FX earnings on each export contract must be sold within 30 days from the date of receipt.
Exporters already sell 80-90% of their FX earnings, Petrov notes. “The fact is that exporters’ margins are now low, the remaining 10-20% of the currency is in fact their profit. Meanwhile, there is reason not to return this money to Russia: international payments are now difficult, the money can be frozen at any time. So, exporters pay importers’ payments with this currency, [in return] receiving rubles from the importers in their Russian accounts. As a result, importers, especially small ones, might suffer,” explains Petrov.
He is among the many experts who doubt that the boost to the ruble will last a long time, adding that, “not to mention, a return to the practices of the 90s in itself is bad for the financial system.”
It remains unclear which companies the new decree will affect. What is known is that it is 43 groups of companies related to the fuel and energy sector, ferrous and non-ferrous metallurgy, chemicals, forestry and grain farming. Of course, it is possible that the authorities are afraid of slapping sanctions on all these companies, though the first thing that comes to mind is that in the hallways of the government and the Presidential Administration, individual companies are now scratching and clawing so as not to end up on the final list of companies obliged to sell their FX earnings.
But the outcome of this lobbying hardly matters.
“The measure was introduced for six months – just in time for the presidential elections. The electorate must see that the president is fighting for their well-being. It does not matter if the ruble falls again after the elections – if the exchange rate does not altogether split into an official one, accessible to a few, and a ‘shadow’ one.”
“It is possible that after the 2024 elections, the authorities’ efforts to contain inflation using exotic methods will come to an end,” Petrov hopes. They will probably come for more money, Kulbaka disagrees: “the worse the situation at the front, the greater the need for money. But it is difficult to predict the dynamics of those needs, since it is not clear how the conflict will play out.”
Meanwhile, Kogan notes, “this situation implies a high degree of uncertainty for business. How do you forecast your income and expenses? Without that, not a single serious company will make investments, since there is already no confidence in the future.” But it seems that the authorities are no longer thinking about the long term – as the Russian proverb says, “just get through the night, and hold out for the day.”
Meanwhile, Kogan notes, “this situation implies a high degree of uncertainty for business. How do you forecast your income and expenses? Without that, not a single serious company will make investments, since there is already no confidence in the future.” But it seems that the authorities are no longer thinking about the long term – as the Russian proverb says, “just get through the night, and hold out for the day.”
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