Why the government plans to lower the cut-off price in the budget rule

Alexey Belogoryev, Research and Development Director of the Institute for Energy and Finance, commented to the Vedomosti newspaper about the budget rule and the reasons for lowering the cut-off price in 2017-2029.

The budget rule not only helps protect budget revenues from the volatility of global oil prices but also helps manage inflation by absorbing the excessive inflow of foreign currency earnings into the economy, Alexey Belogoryev notes. Thus, this fiscal mechanism directly affects the interests of both the Ministry of Finance and the Bank of Russia, he notes.

The cutoff price is the projected equilibrium price of Urals, taking into account numerous risks, Belogoryev reminds.

In his opinion, a cutoff price of $50 per barrel indicates moderately conservative forecast expectations on the part of the government. Reducing the base price in the budget rule to this level means that the government considers the current rise in oil prices to be temporary. After the crisis in the Persian Gulf ends, oil prices will drop sharply, and discounts on Russian oil grades will rise again, the expert notes. At the same time, it is assumed that the real cost of Russian oil will exceed $50 per barrel, which will make it possible to replenish the National Wealth Fund.

At the same time, an increase in the volume of currency purchases to replenish the National Wealth Fund will contribute to the weakening of the ruble. According to Belogoryev, the weakening of the Russian national currency could fuel inflation and nullify the anti‑inflationary effect of the budget rule.