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Russia to change budget planning, split its oil fund

Russia will split its $104 billion oil fund into two separate entities, one as a reserve in case oil prices fall and a second for government spending on national priorities.

The move announced by President Vladimir Putin will be implemented as Russia switches from calculating its budget according to the price of Urals, it's benchmark blend of crude. Finance Minister Alexei Kudrin called the change in budget planning „revolutionary.” Putin and Kudrin have called for the country to become less reliant on energy exports to avoid economic shocks if commodity prices decline.

Russia defaulted on domestic debt in 1998, causing the ruble and domestic banks to collapse. „We must diversify the economy,” Kudrin said yesterday. „The budgetary policy will become one of the main instruments for diversification.” Russia should split its oil fund, the so-called Stabilization Fund, into the Reserve Fund and the Future Generations Fund to ensure the government can balance its budget independently of fluctuating raw-material prices, Putin said in letter today to the Federation Council. The letter, published on the Kremlin's Web site, outlines budget policy recommendations for 2008-2010.

Russia, the world's biggest oil exporter after Saudi Arabia, stores some of the revenue from oil that's priced above $27 a barrel in the Stabilization Fund. The fund, which rose to 2.7 trillion rubles ($104 billion) at the end of February, was created in January 2004 to help curb inflation and cushion the economy should crude prices fall. The new Future Generations Fund will accumulate oil and gas revenue left over after the federal budget spending and transfers to the Reserve Fund are made, Putin said. The Reserve Fund will be calculated as a percentage of GDP and may represent about 10 to 13.5% of gross domestic product, Kudrin said. It will be invested into „more liquid, stable securities,” he said. The Future Generations Fund will be used to finance Russia's strategic priorities and be invested into „highly rated” corporate bonds, he said. „In the next few months we will define strategic priorities,” Kudrin said. Russia has used its energy wealth to repay its foreign debt and rebuild the country's gold and foreign currency reserves, which rose to a record $315.3 billion in the week ended March 2.

Improvements are still needed in housing, agriculture, health care and education, Putin said in the letter today. Boosting those industries and stemming population decline will remain among Russia's top priorities for budgetary spending between 2008 and 2010, he said. Improving the quality and safety of roads and airports and developing Russia's Far East will also become key goals over the next three years, Putin said. Kudrin told reporters that revenue from oil and gas sales as a part of the federal budget will decline this year to 8.5% of GDP from 11.7% last year. „Such a volatility of this revenue doesn't allow us to depend on” oil and gas „in the long-term,” Kudrin said.

Russia will begin to switch from using a set price of oil in planning its budget in 2008 and will complete the transition by 2011, Kudrin said. The Finance Ministry will submit amendments to the budget code in the next two weeks to make this possible, he said. The transfer of oil and gas revenue into the budget will be set as a percentage of GDP, same as the Reserve Fund, he said. „These are fairly revolutionary changes for budget planning,” Kudrin said. Commenting on the Finance Ministry's earlier proposal to lower the overall tax burden on the economy, Kudrin said decisions about which taxes can be lowered and by how much will be put off until „next spring” in 2008. „We will lower the tax burden, but only after making very serious calculations,” he said. Kudrin also said the decision about increasing the mineral extraction tax on gas will be made as soon as in one month. (Bloomberg)