Budget and Taxes: The Second Lever Besides the Rate

The key rate is not the only mechanism that moves the Russian market. The budget works alongside it: the state decides how much to collect in taxes, how much to spend, how much to borrow on the debt market and what to do with oil and gas revenue. These decisions reach prices more slowly than a rate decision does, but they are targeted: they change the revenue of specific industries, the net profit of exporters, the yield on long OFZ and the amount the investor is left with after tax. The rate sets the price of money for everyone at once; the budget redistributes money between sectors, and between the state and the private owner of an asset.

Who holds the lever

Monetary policy is run by the Bank of Russia, whose instrument is the price of money. Fiscal policy is shaped by the government and the Ministry of Finance, and it is fixed in the budget law, which is adopted every year together with the planning period. This gives the first practical difference: a rate decision is announced on a date known in advance and takes effect almost immediately, whereas a budget decision passes through the law, spending limits and contracting, and arrives in company accounts with a lag that cannot be estimated from the calendar of meetings. That is why a budget impulse often shows up in the data later than it began.

How the budget reaches prices

The spending channel. Government procurement is revenue for contractors. Construction, transport infrastructure, mechanical engineering, the defence sector and, in part, IT receive money from the budget and turn it into orders for several years ahead. What to look at here is not the press release but the accounts: whether the order book has changed, whether working capital has grown, what has happened to margins. All of this can be seen in the issuer reports section.

The tax channel. Levies taken through profit tax, the mineral extraction tax, export duties and one-off charges reduce net profit. And under most Russian payout policies the dividend is calculated from net profit, so a tax change cuts directly into the base of the future payout. For a shareholder of an exporter, a tax decision is therefore comparable in importance to a change in the commodity price. The nearest announced payouts are in the dividend calendar: {{dividend_calendar|limit=5}}

The debt channel. The gap between spending and revenue is covered by borrowing. When the budget deficit widens, the Ministry of Finance increases the supply of OFZ at auctions, and the market has to absorb that volume. The long end of the curve responds with higher yields, and the yield on a long risk-free bond is the discount rate at which everything else is valued, equities included. Hence the mechanical link: the budget deficit, through the yield curve, weighs on valuation multiples, including ones such as 3,77 for {{instrument:SBER}}.

The currency channel. The fiscal rule cuts off oil and gas revenue above the set cut-off price and channels it into foreign-currency operations, and does the reverse when the price slumps. In this way a fiscal decision becomes a factor in the exchange rate, and the exchange rate becomes a factor in the exporter's revenue and the importer's costs. The mechanics are explained in the article on the fiscal rule.

The personal tax channel. For the investor, the final result is calculated after personal income tax. The size of the investment deduction and the procedure for applying it are a matter of law, not of the market: 13%. The holding period of the account is part of the structure here, and an early exit costs more than just the deduction, which is the subject of a separate article.

Why the two levers sometimes cancel each other out

The budget and the rate are not obliged to pull in one direction. Higher spending adds demand to the economy; if supply does not keep up with it, prices accelerate, and the regulator has to hold the rate higher and for longer than it would under a restrained budget. For a portfolio this means an unpleasant combination: the sectors receiving budget money grow in revenue, while the valuation of the whole market is compressed at the same time by a high risk-free yield. The opposite configuration, fiscal consolidation, gives the regulator room to cut the rate and reprices long-dated debt upwards before anything else.

What exactly to watch

• The budget law and the borrowing programme: how much the state intends to borrow and for what maturities.
• Monthly data on budget execution: spending at the start of the year often runs ahead of schedule, and that is already a fiscal impulse.
• The results of OFZ auctions: demand, the premium to the secondary market, the share of floating-coupon bonds.
• Tax initiatives broken down by industry, which appear in the news flow earlier than in the accounts.
• The composition of your own portfolio in terms of its risk budget: how many of its securities have revenue that depends on government procurement, and how many have profit that depends on the export tax.

The definitions that came up above are collected in the glossary.