Why there is no free lunch for Russia’s government

There appears to be a great deal of confusion about how Russia can use its oil funds to finance its budget deficit, with some arguing that by drawing them down in rubles the government can both finance domestic spending and preserve the value of its foreign exchange reserves. We disagree. While such an operation may have no direct impact on the value of Russia’s FX reserves, there is likely to be an indirect impact that in due course will diminish their value. There is no free fiscal lunch.