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. Last Updated: 07/27/2016

Cabinet Approves 'Tough' Budget

After a quick discussion Tuesday, the government approved "tough" budget guidelines through 2005 that will keep the country in surplus despite major tax cuts, Finance Minister Alexei Kudrin, who drafted the plan, told reporters Tuesday.

"All my proposals and the proposals prepared by all the ministries were backed. There were practically no questions," said Kudrin, who is also a deputy prime minister.

"[The 2004] budget is sufficiently complicated, but there is a main difference [to the last one] -- spending will stay at a sufficient level in real terms but will not grow."

The Cabinet is due to discuss the details of the 2004 budget on June 5.

Kudrin said the next two budgets will run a surplus if oil prices average above $20 per barrel for Urals crude. "Before we used to say that it is expedient to plan at $18.50 per barrel, but so far we cannot do this."

He said the government is expecting prices to average $22 per barrel next year, adding 94 billion rubles (about $3 billion) to the stabilization fund, which is expected to hold some $10 billion by 2005 and around $15 billion by 2006. He added that the International Monetary Fund's own forecast is for oil prices to average between $23.5 to $23.9 next year, "which is very close to our estimate for Urals at $22 per barrel."

Kudrin said this year's surplus is expected to be 1.4 percent of GDP, or more than $6 billion. The surplus target for 2004 is 0.6 percent of GDP and for 2005 0.9 percent of GDP.

Kudrin named defense, education, health care, culture, science and the judicial system as areas that will receive additional funding.

To help meet debt payments, the government plans to borrow abroad, issuing $2.2 billion in eurobonds next year and $4 billion in 2005.

Other sources of revenue that will be used to reduce the debt over the next two years include privatizations, which should bring in close to $1.5 billion, and domestic bond issues, which should bring in around $4 billion to $5 billion.

Analysts said the parameters are realistic, but once again everything depends on oil.

"The problem is that all forecasts on oil prices are highly conditional, it could be $15 or $25, but any forecast has the right to exist," said Alexei Moiseyev, an economist at Renaissance Capital.

However, the head of the Economic Expert Group, Yevsei Gurvich, said continuing to decrease revenues without lowering spending could become threatening.

Starting next year, the sales tax will be eliminated and value-added tax will be cut to 18 percent from 20 percent. The following year the social tax on employers will be cut to 26 percent from 35.6 percent.

"The tax burden is decreasing but [the government] did not manage to bring down spending. Therefore, the budget is now no longer balanced at an average oil price of $18.50," Gurvich said.

"Most likely the 2004 budget will not cause big problems because the oil price will be over $20 per barrel. But then we will either have to cut spending or increase revenues by expanding the tax base. The policy that is being offered now is not stable in the long term," he said.