Russia’s budget deficit expanded further to RUB3.424 trillion ($45bn) in January-April, sailing past the target for the full year of RUB2.9 trillion, the Finance Ministry reported on May 10, but the monthly deficits are already moderating.

Revenue shrank by 22% on the year in the period to RUB7.782 trillion, while the crucial oil and gas revenue dropped by half (52%) to RUB2.282 trillion but non-oil and gas revenue was up modestly by 5% to RUB5.5 trillion.

Spending was also up by a quarter (26%) to RUB11.206 trillion, leaving the budget in a larger than planned deficit.

source: Janis Kluge, senior associate, German Institute for International and Security Affairs

Russia’s budget deficit surpassed the government’s entire 2023 target in the first four months of the year as wartime spending and falling energy revenues battered the state’s finances.

As bne IntelliNews reported, Russia’s federal budget deficit for the first ten days of March already exceeded the planned RUB2.9 trillion for the entire year of 2023, Russian Prime Minister Mikhail Mishustin admitted on March 24. At least one-third of state spending was expected to go to defence and security, but the actual spending for the war this year remains a wild card.

However, with forecasts of the full year ranging between the Ministry of Finance’s RUB2.9 trillion by December to RUB12.4 trillion from the Kyiv School of Economics (KSE), even in the most extreme case the government can fund this year’s deficit from its existing resources, without having to raid state-owned companies for cash or increase taxes.

The situation in the Russian economy is under control, Russian presidential spokesman Dmitry Peskov said on May 11.

"We have fairly good macroeconomic indicators," he said commenting on the deficit. "The situation is under control, there is a necessary margin of safety for various parameters," Peskov stressed.

Outlook for the deficit confused

A lot of confusion remains over where the federal budget deficit will end the year. The Ministry of Finance remains optimistic that it is on course to still hit the RUB2.9 trillion target by the end of this year, or 2% of GDP, despite already passing that benchmark. After posting a deep deficit in the first months of this year, Russia’s budget is due to go into surplus from here for the rest of the year, Russian Finance Minister Anton Siluanov said on April 28.

Siluanov points to several mitigating one-off circumstances that caused the deficit to balloon to RUB1.79 trillion in January – the biggest start of the year deficit in almost two decades – and believes oil and gas revenues will recover after the summer.

Siluanov missed last year’s 2% target as well – but not by much. Russia’s total budget deficit posted in December amounted to RUB3.3 trillion ($47bn), or 2.3% of its GDP, making it the second-largest deficit in modern Russian history. Total government spending in 2022 amounted to RUB31.11 trillion, exceeding the pre-war forecast by over a third and the amount spent in 2021 by over a quarter, the Moscow Times reports.

The first of Siluanov’s mitigating circumstances is much of the social spending that usually comes in December, and last year made up 22% of the entire year’s state spending, was front-loaded to January this year to smooth the spending over the rest of the year. This spending accounted for over half (54%) of the surge in spending recorded in January but will not be repeated in subsequent months.

Secondly, a new business tax was introduced in January that did not go well and also reduced revenues unexpectedly.

However, the 49% plummet in oil and gas taxes in January was real and was caused by the EU embargo and the launching of the oil price cap on December 5, followed by a ban on the EU buying oil products on February 5. However, Siluanov is expecting the market to rebalance and those revenues to recover in the rest of this year.

The twin oil-related sanctions continue to take their toll and the contraction in oil and gas revenues in January remained at the same level over the first four months of this year, changing little from January's 49% drop to fall by 54% between January and April compared to the same period a year earlier.

The spread of deficit forecasts amongst independent economists for the full year remains wide. Bloomberg’s Russian macro analysts Alexander Isakov estimates the full-year deficit will be between RUB3 trillion and RUB4 trillion. Other more pessimistic forecasts see the deficit rising to between RUB6 trillion and RUB9 trillion, while Kyiv School of Economics released one of the most extreme forecasts on May 10, estimating the Russian budget would end this year with a RUB12.4 trillion deficit.

Siluanov's prediction that the budget will return to profit soon is also based on new revenue sources the Ministry of Finance is anticipating.

First, the government has been negotiating with Russia's biggest companies and will impose a one-time windfall tax of around RUB200bn to help ease the pain. The state-owned gas giant Gazprom was already forced to pay a one-time windfall tax of just under RUB450bn in November to prevent the budget going into deficit that month.

But the Gazprom payment didn't prevent the budget deficit ballooning to RUB3.9 trillion for the full year with almost all the losses coming in December alone.

However, the major change to the Ministry of Finance’s revenues will be a recalibrating of how oil and gas taxes are calculated. Until this year oil and gas taxes have been calculating the price of Russia’s Urals blend as a benchmark.

That is the price of the blend that is delivered to Europe from Russia’s ports in the Gulf of Finland and sourced in Siberia. But as tension with the West rose those exports collapsed, making the price of the Urals blend increasingly meaningless as the volumes of oil travelling that route fell to next to nothing.

 

Since April 1 the Ministry of Finance has introduced a new benchmark using the price of Brent minus a variable discount that depends on how big the gap between the Urals price and Brent has become, which will hike tax rates for oil companies. Energy economists say once the new rules have kicked in, the Ministry of Finance’s oil and gas revenues should start recovering to previous years' levels in the second half of this year and put the budget back into profit.

On top of the change in tax rules, economists are expecting the sales of oil products to improve following the start of the oil products embargo introduced in February. Cut off from the nearby European markets, Russian oil products producers have been forced to look further afield for new buyers in the Global South. Whereas the trip from the Gulf of Finland to the port in Rotterdam only takes a fortnight at most, the Asian and African markets are two months steaming away. That means the revenues from the change in destination will not start to normalise until sometime in May.

And there have been reports that while the oil product production and exports have remained steady since the embargos, millions of barrels of products are being stored in tankers at sea as the oil refineries hunt for new customers to buy them. It will probably be a few months more until it becomes clearer how successful they have been in finding such customers.

Monthly deficit moderating

In the meantime, the rebalancing of the deficit is already visible in the monthly deficit results, which rapidly moderated between January and March as the deficit reduced from -RUB1.79 trillion to -RUB319bn respectively. (chart)

April’s result saw the deficit increase again somewhat to RUB524bn, according to bne IntelliNews calculations, but still only a third of the January result.

The Ministry of Finance stopped releasing monthly deficit figures last year, but Reuters separately calculated April’s deficit at RUB1 trillion ($13bn).

While painful, bne IntelliNews calculation for the April’s result is in line with the March result and also on a par with the first months of the coronavirus lockdown imposed in 2020, which saw the budget run deficits on the order of RUB550bn for three months in row without causing the government undue stress. Moreover, the deficit in 2022 was less than the full-year deficit of RUB4.4 trillion in the pandemic year of 2020.

The government has just under RUB6.6 trillion in the liquid part of the National Welfare Fund (NWF) and is planning to issue some RUB3.5 trillion in Ministry of Finance OFZ treasury bills this year, giving the ministry a RUB10.5 trillion cushion before it has to resort to more creative measures like tapping the biggest companies for more cash or hiking taxes.

Even if the monthly deficit remains at -RUB500bn for the rest of the year that would amount to a deficit of RUB7.5 trillion, which the ministry can comfortably finance from its existing resources. And if there is a modest deficit for another two months before the budget goes back into balance for the second half of this year, as Siluanov predicts, then Russia will end the year with a deficit of some RUB4 trillion, or 3.6% of GDP.

The government should be able to comfortably finance all but the most extreme deficit forecast from KSE, which at RUB12.4 trillion would be the equivalent of 11.1% of GDP, but it could just fund even that out of its existing reserves and planned bond issues, although Ministry of Finance would be left with nothing in reserve for 2024 in that case.

Russia’s tax take will also be improved by the strengthening of the Russian economy. The growth for this year have been already been improved with the CBR now predicting there will be between 0.5% and 2% growth in 2023. 

Russia’s GDP contraction amounted to 2.3% in Q1 2023, according to the Central Bank’s estimation, whereas in the second quarter of this year the Bank of Russia predicts economic growth of a robust 4.2%, according to the report on the regulator’s monetary policy released on May 11.

The Central Bank also noted that a higher level of consumer and investment activity in January-March of this year, as well as unemployment remaining close to minimum levels, permit upgrading the outlook on GDP growth rates in 2023 to 0.5-2% (up from minus 1% to 1% projected previously). In 2024, the economy will continue recovering, returning to the level of Q4 2021 as early as by the end of 2024, the Bank of Russia believes. By 2025 GDP growth rate is expected to stabilise at the range of 1.5-2.5%.