about 3 percent (equal to the US long-term real rate plus a hundred basis points for Russia-specific country risk under “normal” conditions). This is added to a long-term US inflation projection of 2.4 percent to arrive at a safe nominal rate of 5.5 percent. But the income stream being discounted is not a safe stream, as the two alternative sets of assumptions already indicate; they are shrouded in substantial uncertainty<sup>6</sup> . To account for their riskiness, we add a 3 percent risk premium to the basic safe real rate. Obviously, this puts a limit on the “measured uncertainty” called risk but it appears a reasonable assumption that would cover the possible level of risk under most conditions in Russia based on past experience.

Under our oil price assumptions, this calculation shows **_Russia’s oil and gas wealth at a total of about US$3 trillion (2009), or 215 percent of projected 2009 GDP._** The permanent income equivalent of this amount is the constant real annual amount that has the same discounted value, this time using the safe real rate for discounting as it is by assumption a safe stream.

This sustainable **_permanent income equivalent comes out at 79.3 billion in constant 2009 US dollars, or 4.3 percent of GDP in 2009_** (See table 3). Given the stocks, extraction rates and other main assumptions, this is the amount that can be safely consumed each year out of Russia’s oil revenues without running into sustainability problems while sharing out the oil wealth fairly over all current and future generations.

**Table 3. Permanent Income Approach to Oil wealth**

|**Net wealth**|**Net oil wealth to 2009**|**Annuity 1/**|
|---|---|---|
|**US$ 2009 trillion**|**GDP (%)**|**US$ 2009 billion**|
|3|215|60.1|

Source: World Bank staff estimates Assumption: Real Safe rate of interest =3%, Risk premium=3%, Foreign inflation=2.4% Note: All simulations are illustrative at this point. In addition to the assumptions on oil prices and exploitable oil reserves, the results depend on the profile of the extraction, the pace of investments, and financial and operational decisions of the operators that may change the path of revenue that the government receipts from oil operations.

1 This annuity can be interpreted as the sustainable level of annual spending.

**_The Permanent Income (PI) amount is what can be safely spent on an annual basis indefinitively, thus allowing future generations to share in equal absolute annual amounts_** (not per capita or as share of their income). The measures of permanent income (PI) should be compared to the actual non-oil primary fiscal deficit ( _nopd_ ), as the nopd represents the net claim on non-oil resources, to be covered by the PI amount transferred from the Oil Fund.

# **C. A look to Russia’s fiscal future: From the short- to medium- to long-term**

**_A comparison between PI and actual non-oil fiscal balance shows that Russia has remained below its sustainable, permanent income (PI) spending limits in all recent years except in 2008 and 2009, largely as a result of global economic slowdown_** . The global crisis has resulted in a massive change in medium term growth trajectory of Russia’s economy that was anticipated before the crisis (Figure 16). Just before the global

> 6 See  S. van Wijnbergen (2008), “The Permanent Income Approach in Practice: A Policy guide to Fiscal Sustainability for oil rich countries” for a detailed discussion of these issues.

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