Russia’s finance ministry released estimates for the federal budget deficits that were higher than expected and will require more cash to be drawn down from the reserve fund than planned.

Russia’s budget deficit was 3.3% of GDP, or RUB1.52 trillion ($23.8bn) in the first seven months of 2016 – ahead of the 3% cap that President Vladimir Putin called for at the start of the year. The finance ministry has been covering much of the shortfall by dipping into the reserve fund. The deficit result was still better than the same period last year, when the deficit was 3.7% of GDP.

The finance ministry is still hoping to hit the 3% target or almost RUB2.4 trillion ($37.5bn) this year, with the bulk of the deficit financed mainly by the reserve fund, from which RUB2.15 trillion is expected to be drawn this year (RUB780bn has already been taken in January-July).

Deputy Finance Minister Maxim Oreshkin recently said that reserve fund expenditure could be increased by RUB700bn and reach almost RUB3 trillion if the privatization of Rosneft is suspended – which now looks likely.

At the beginning of this year, the reserve fund topped RUB3.6 trillion ($56.2bn) but may drop to around RUB600bn ($9.4bn) by the year-end, VTB Capital said in a note. On the other hand, with reserve-fund spending higher than expected, it will create more excess liquidity, which will help the finance ministry increase domestic borrowings.

"The finance ministry projects net borrowing at around RUB250bn ($3.9bn) this year, although we believe it may reach RUB500bn. Our budget deficit forecast is RUB2.7 trillion or 3.1% of GDP this year," VTB Capital said.

Oil and gas to blame for shortfall

Oil and gas revenues are running significantly behind plan, with the budget receiving a total of RUB7 trillion in 7M16 or 51% of the full-year target and expenditure reaching RUB8.5 trillion or 52.7% of the full-year target. Oil and gas revenue are substantially behind target having reached just RUB2.5 trillion in the January-July period or 42.2% of the full-year goal, while non-oil and gas revenue reached RUB4.4 trillion or 57.4% of the full-year target.

Thus revenue dropped 10.6% y/y in  in the January-July period as oil and gas revenue decreased 27% y/y due to the oil price slump; non-oil and gas revenue grew 2.9% y/y in the period. The share of oil and gas in the total revenue decreased to 37% in the January-July period from 45% a year ago. Expenditure decreased 4.8% y/y in the January-July period.

The federal budget deficit reached RUB92bn in July, the smallest YTD: revenue reached RUB1.1 trillion in July and dropped 10% m/m due to an 18% m/m slump in non-oil and gas revenue. Expenditure decreased 11% m/m to RUB 1.2 trillion in July.