OREANDA-NEWS. September 27, 2010. The government approved the draft federal budget law for 2011, and for 2012-2013, which has to be introduced to the Duma by 1 October. The draft assumes a 3.6% GDP deficit in 2011, followed by 3.1% and 2.9% GDP deficits in 2012 and 2013, respectively, reported the press-centre of OTKRITIE Financial Corporation.

View: While the draft budget suggests a relative tightening of fiscal policy, we realize that in a pre-election year there are risks of increased state spending commitments. Nevertheless, we believe that the deficits will be much lower than the government currently forecasts. Primarily this is a function of the policy of paper deficits that we believe the government has assumed, with part of its spending commitments not being implemented.

Also, the 6.5% inflation forecast for 2011 assumed by the state for budget calculations is much lower than we anticipate (our forecast is 8.4%). This implies higher nominal revenues, while expenditures are fixed in nominal terms, and the risk of further pension indexation is relatively small given that the increase is already planned at 8%. Altogether this leads us to believe that the 2011 federal budget deficit will be minor (0.5% of GDP), with strong potential for a balanced budget already in 2012 (rather than 2015 as the government currently plans). We believe the relatively tight fiscal policy will be supportive of the ruble exchange rate in coming years and favored by investors.