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. Last Updated: 07/27/2016

MinFin Drafts $35Bln Cushion


First Deputy Finance Minister Alexei Ulyukayev

When Prime Minister Mikhail Kasyanov tasked the Finance Ministry with designing a stabilization fund to cushion against vacillating oil prices, he didn't tell it to make the money off-limits for use in pursuing tax reform.

First Deputy Finance Minister Alexei Ulyukayev said Tuesday that under his ministry's draft concept, stabilization fund resources could not be used to finance tax reform, as it was difficult to determine exactly how much financing would be needed.

Meanwhile, the Economic Development and Trade Ministry's economic plan for 2003-05, to be presented to the Cabinet on Thursday, calls for a rather different strategy. It proposes to reorient the economy away from oil dependence toward manufacturers by easing the sector's tax burden, and it wants to use the stabilization fund as support for doing so.

The Finance Ministry wants to set aside 1.1 trillion rubles ($34.8 billion) in a lockbox by 2007 to cushion against oil prices falling to $12 per barrel. This would replace the current financial reserve fund as of 2004.

After 2007, the fund's resources could finance the budget deficit, ensure smooth debt repayments and underwrite structural reforms, like military reform.

Barring the need for an emergency withdrawal, money will remain untouchable until the fund matures to 8.7 percent of gross domestic product, or at least 1.1 trillion rubles.

"Until the pillow reaches this volume, the fund will be spent exclusively in unfavorable periods," Ulyukayev was quoted by Prime-Tass as saying.

As long as oil is selling at above $18.50 per barrel, the price at which government budget calculations are pegged, surplus budget money will be deposited to the fund.

The fund is to be a part of the federal budget and managed by the Finance Ministry. A base volume of 8.7 percent of GDP is intended to make the fund able to replenish key parts of the budget in the event of oil prices dropping to $12 per barrel.

The Finance Ministry's draft concept says the fund will receive revenues from export tariffs on oil and oil products. It will also get money collected in mineral resource extraction taxes as long as oil stays above $18.50. The fund will also receive whatever resources are left in the financial reserve as of Jan. 1, 2004. The financial reserve fund's balance last month was at 209 billion rubles ($6.62 billion), Finance Ministry data show.

Once the fund boasts resources equal to 8.7 percent of GDP, any overflow will be unlocked for servicing debts and structural reforms. And the capital itself could be used to refinance the country's foreign debt, Ulyukayev added.

The government will identify the instruments needed to keep the fund liquid and sterilize the money surplus, but options include using foreign currency and foreign government securities.

Russia is expected to pay back $17.3 billion of its foreign debts this year, $14 billion in 2004 and $16.8 billion in 2005. As of last October, the country's total foreign debt stood at $149.7 billion.