Factor Analysis of the Russian Budget System Revenues

Abstract

In this paper we analyze factors which influence the dynamics of the Russian budget system revenues using econometric models. In our models we incorporate the following factors: Urals crude oil price, ruble exchange rate, inflation rate and real GDP. For the purpose of distinguishing the impact of these factors on the revenues more clearly we conduct their preliminary orthogonalization that requires defining a prespecified order in which they influence each other. It is determined by exogeneity (or endogeneity) of the factors using a vector autoregression and its impulse-response function. The constructed models are later used for measuring the contribution of each factor to the variation of revenues on all the levels of the budget system. Our analysis shows that dependence of the Russian budget on oil price fluctuations is much stronger than it could be inferred from simply calculating the share of oil and gas revenues. In recent years, the oil and gas sector was providing from 22 to 28% of the expanded government budget revenues, and from 40 to 50% of the federal government budget revenues. However, according to our estimates, the variation of oil and gas revenues explains from 60 to 70% of the total variations of these revenues. These calculations are used in order to evaluate Russia's potential to reduce its budget expenditure variation through introducing a strict budget rule. We demonstrate how Russia's place among the G20 economies can change in terms of stability of the government expenditure dynamics. We also discuss a possible amplification of our analysis.