* Siluanov says budget deficit may exceed 3 pct next year
* Says oil prices may fall below $40 per barrel
* Says spending cannot increase beyond 2016
By Darya Korsunskaya and Lidia Kelly
MOSCOW, Nov 30 (Reuters) - Adverse oil prices and plans to save a mammoth state bank threaten Russia with an inflated budget deficit next year and leave little fiscal flexibility before the 2018 presidential election, Finance Minister Anton Siluanov said.
With oil windfall revenues drying up rapidly, sanctions making borrowing on Western markets impossible. Meanwhile, foreign investment is shrinking, leaving Russia in line for a tough end of the decade, Siluanov told Reuters in an interview.
“Russia is faced with a difficult choice in the medium term: either to drastically cut social spending, spending on education and healthcare, and at the same time leave tax rates unchanged, or follow a path of greater spending but raise some taxes,” he said.
“This is a difficult public dilemma - and an answer to these questions should be in the programme of the next Russian president.”
President Vladimir Putin, the country’s paramount leader since 2000, has not yet declared whether he will seek another term, but his popularity is at an all-time high after annexing Crimea and engaging in Syria. It is widely expected he will remain Russia’s leader until at least 2024.
The 2016 budget, due for its second reading in parliament this week, envisages a deficit of 3 percent of gross domestic product. However, oil prices are likely to come in at the lower end of the $40-$50-per-barrel range assumed for next year, and possibly lower, making a huge dent in state revenues, Siluanov said.
“(Oil below $40) is possible,” Siluanov said. A slowdown in global economic growth, ouster of Russian producers from oil markets, and Iran’s readiness to supply the world with crude, do not bode well for prices, he said.
Urals URL-E, Russia’s chief crude blend, traded at $42.01 per barrel on Monday.
“You cannot live by the Russian faith in serendipity that suddenly everything will change, that oil prices will rise to the level from two years ago,” Siluanov said.
“They will not. And on the off-chance the situation improves to a certain extent, you still need to solve structural problems, get rid of imbalances.”
At current oil prices, budget revenues will fall short by some 1.2 trillion roubles ($18.29 billion) to 1.5 trillion roubles next year compared with what’s assumed in the budget, he said.
Plans to save state development bank Vnesheconombank, or VEB, which is facing a gaping hole in its balance sheet, may cost the state some $20 billion over the next few years, Siluanov had told Reuters previously.
At the same time, federal spending is set to increase by more than 600 billion roubles next year to 16.1 trillion roubles.
“Next year poses huge risks,” Siluanov said.
The deficit, now planned at 2.4 trillion roubles, will be almost entirely financed from one of Russia’s sovereign wealth funds, the Reserve Fund, which now stands at $65.7 billion roubles. If the budget deficit widens, the stash may dry up.
The ministry is left with few options: try to improve tax collection, push for privatisation of the country’s many state companies, including selling a stake in the oil major Rosneft , or try to tap foreign debt markets.
Plans call for $3 billion in foreign borrowing next year, which would be the first time Russia has tapped international markets in two years. The ministry said earlier that the funds might be raised in Chinese yuan, but Siluanov said Russia would be ready for other markets as well.
But he admitted there was little room for manoeuvre.
A three-year budget envisages the deficit easing to 2 percent in 2017 and 1 percent by 2018, presenting a challenge of how to bring it down and keep spending at bay. Fiscal tightening in pre-election years may be tough to implement.
“The problem of the 2017-2019 budget is that on one side we cannot dramatically reduce our significant social programme spending,” Siluanov said. “On the other hand, we cannot afford a budget deficit of more than 2 percent of GDP.”
Expenditures, now about a fifth of GDP, cannot go on increasing beyond 2016, Siluanov added.
“It’s necessary to draw conclusions, analyse the experience of other countries, learn from the mistakes of the past years,” he said.
“The laws of economics cannot be undone; they are objective. And as much as we would like to increases expenditures - you need resources for that. And if you don’t have them, then it is unacceptable to make unsecured expenditure commitments. It’s self-deception.” ($1 = 65.5925 roubles) (Writing by by Lidia Kelly, editing by Larry King)