Russia’s budget deficit could reach 7.5 percent of GDP in 2010, stretched by state aid for banks, but economic growth should return after this year’s recession, Finance Minister Alexei Kudrin said recently. Russia has kept spending high to help the economy out of its first recession in a decade, while tax revenues are falling, in part due to lower prices for the country’s oil exports. Authorities had hoped to cap the 2010 deficit at five percent of GDP, but the Kremlin’s top economic aide Arkady Dvorkovich has stated that the shortfall would likely top six percent, albeit narrowing from the eight percent gap expected this year.

“We are now evaluating the approximate scale of the deficit. The estimate is somewhere between 6.5 and 7.5 percent of GDP,” RIA quoted Kudrin as saying on a visit to the Siberian city of Ulan-Ude.

Earlier, he said the bulk of the state’s 460 billion roubles ($14.62 billion) planned bank recapitalisation through the issue of special Treasury bonds will be carried out next year, with only 150 billion roubles issued in 2009.

Previously the issuance of the OFZ bonds – which Russia’s bigger banks will be able to use as collateral to secure financing from the central bank – had been expected to be fairly evenly split between the two years.

“The quality of the assets will show through only gradually on banks’ balance sheets, so the main problems will become apparent next year,” said Ekaterina Sidorova, analyst at Troika.

“Secondly they are probably running out of time to issue so much this year as there are certain procedures to be followed.”

Looking for extra funds
Russia’s government thinks the economy could contract by as much as 8.5 percent this year. Kudrin forecast one percent growth in 2010 as investment picks up, but was cautious about future prospects.

“I shall say that in the next few years economic growth will not return to pre-crisis level of six to eight percent,” he said.
The IMF is a little more upbeat on Russia than domestic officials, forecasting recently a contraction of 6.5 percent this year and growth of 1.5 percent in 2010.

Russia’s banks need more capital to compensate for the growing number of bad loans, just when the government is relying on them to kick start the economy with affordable loans. But for the budget, the issuance of the OFZ bonds means extra spending to the tune of 0.7 percent of GDP next year.

That – along with Russia’s pledge to donate $7.5 billion, around 0.3 percent of GDP, to a rescue fund for five ex-Soviet states – explains the increase in the deficit from the original plan, Kudrin said.

Meanwhile, a Finance Ministry proposal to get extra cash by raising the mineral extraction tax on natural gas has not been approved by the government.

“Looks like they won’t be able to take from Gazprom as Kudrin wanted,” a government source told reporters. “They were asked to think some more.”

Instead Russia could raise excise duty on alcohol, tobacco and petrol, Vedomosti business daily said. President Dmitry Medvedev recently urged Russians to kick the alcohol habit.