Russia’s federal budget deficit for the first ten days of March has already exceeded the planned RUB2.9bn for the entire year of 2023, Russian Prime Minister Mikhail Mishustin admitted on March 24. (chart)
As bne IntelliNews reported, Russia ended 2022 with 2.3% deficit, more than the planned 2%, after oil and gas revenues crashed in December following the December 5 EU embargo on crude oil imports. The budget had been in surplus for 11 out of 12 months but revenues dropped like a stone just as the state made its large annual social payments, which added to the gap between income and outgoings.
This year started badly too when the monthly deficit hit RUB1.76 trillion deficit – more than half of what was planned as a deficit for the whole year. Russian Finance Minister Anton Siluanov explained at the time that much of those social spending costs have been moved to January to front-load the spending, rather than save it up for the end of the year, and certain tax reporting rules have been changed that also had a material impact on the deficit results. At the same time, oil and gas revenues were hit again by the February 5 embargo by the EU on Russia’s export of oil products.
In February, revenues began to pick up again as spending fell significantly, but the deficit continued to widen and now has already hit the target for the full year of RUB2.9 trillion, or 2% of GDP. Expenses in February were not as big as those as in January, and the March figures suggest that expenditures for the month should not exceed RUB2 trillion if nothing changes, reports The Bell.
Following the announcement of the January results economist changed their forecasts and said Russia was on course for at least a RUB3.3 trillion deficit, in the optimistic scenario, and more extreme versions predicted up to RUB6 trillion, or even RUB9 trillion if the January trends persisted, which is not widely expected to happen. The Bell reports that the consensus amongst economists is that the budget deficit will exceed the plan by 1.5-2 times by the end of the year, amounting to about RUB4.5 trillion.
Mishustin repeated earlier explanations that the deficit is due to the government advancing its spending, with a significant portion of costs being postponed to the beginning of the year. Mishustin says the budget deficit is expected to gradually align with budget parameters.
As of March 22, the budget deficit had risen even further to RUB3.8 trillion, according to the Electronic Budget portal, The Bell reports. However, it may not be accurate to extrapolate data for the whole of March based on three weeks of data, given that expenses and budget revenues are unevenly distributed within the month.
On a month-on-month basis the deficit was down RUB1,76 trillion in January, but that reduced to another fall of an additional RUB821bn in February. There was an additional fall of RUB319bn in the first ten days of March, according to the latest results, and extrapolating that suggests the addition will be RUB957bn for the full month, or slightly worse than the result in February. (chart)
It was already clear that the budget would face problems with filling, particularly in the face of restrictions on oil and gas exports and military spending. However, analysts are concerned that these problems could be more serious than expected. The January figures showed that budget revenues for the first month of 2023 fell by 25% y/y, while spending increased by 59%, but Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks, argued in a bne IntelliNews podcast that the January results were a one-off and the true situation with the deficit will not be clear until about April.
There are several new moving parts driving the current deficit: first is that the budget has traditionally used the Urals crude price as the benchmark for taxing oil companies. However, as bne IntelliNews has reported, the Urals price is becoming increasingly meaningless, as this is the price calculated for oil sent from Russia’s Primorsk port in the Gulf of Finland to European ports and very little oil is sold on that route now. Most of it has been redirected to customers in Asia, who are paying an average of $74 a barrel according to a recent study – a lot more than the discount of over 50% that the Urals price implies.
A second factor is that since the February 5 embargo on products came into force, Russia has sent tankers with its products out over the world to find new customers, but as it takes two months for those tankers to travel to ports in Africa and Asia and back, it will take until April for the new flows of cash from those deals to appear in the budget.
A third factor is that for Russian oil companies it is more profitable to export oil at low Urals prices and refine them elsewhere such as at their EU-based refineries, sell the products on to the European market at normal prices, and book the profits at their EU subsidiaries, as all that reduces their tax bill in Russia.
Russian Finance Minister Anton Siluanov has said that the Ministry of Finance (MinFin) is well aware of this change in the market and the ministry has already abandoned the Urals price for calculating taxes due, but it will take several months for the new system to be put in place. According to the latest reports, MinFin is proposing to simply use the Brent price minus a discount formula to calculate what taxes are due that will see revenues jump when this new rule comes into force in April. By how much remains to be seen.
In mid-March, Indian authorities published data showing that the discount was not as large as previously thought, with India buying Russian oil at an average of $79.8 per barrel in January, while the average exchange price of Brent was $84. Taxes for oil companies continued to be calculated based on the price of $50 per barrel of Urals for now, with the difference supposed to be deposited into foreign accounts of Russian oil company structures. Bloomberg reports that Russia has accumulated $80bn (about RUB6 trillion) of shadow reserves abroad in a year. This suggests that the situation with real incomes may not be as dire as the budget statistics suggest.
Despite this, economists believe that the budget deficit at the end of the year will not meet the plan, as promised by Mishustin. The median budget deficit for 2023, according to the Central Bank's latest macro forecast, is expected to be 3% of GDP, or around RUB4.5 trillion, which is one and a half times higher than the plan.