In Russia, revenues are collapsing, expenditures are increasing and the deficit is swelling

The Russian Finance Ministry has released February data from the Federal Budget. Economists watching Russia expected some normalization after January’s deep deficit, but the opposite has happened. In the first two months of 2023, Moscow’s overall revenue fell by 25 percent compared to the same period last year, while spending increased by 52 percent: from 3,790 to 5,744 billion rubles. In just two months the Russian Federation it has already reached about 90 percent of the annual deficit set in the budget law at 2.925 billion rubles.

According to Janis Kluge, an economist at the German Institute for International and Security Affairs, if the January figure should not be considered as representative, as some changes were made in tax rules, the additional deficit recorded in February shows that it was not a one-off phenomenon but of a trend. Which is all the more relevant for what concerns the hydrocarbon sector. On the revenue front, the Russian Finance Ministry itself acknowledges that the problem is the 46 percent drop on an annual basis (i.e. compared to the first two months of 2022) in revenue from natural gas and oil exports. This is due to the drop in Ural crude oil prices and the reduction in gas exports, with oil paying the consequences of the entry into force of the European Union embargo and the G7 price cap, and gas loses export volumes due to the closure of the taps decided by the Kremlin and the European disengagement from Russian imports. This is a contraction from January and February, the last two months of the pre-war period, when global oil and gas prices had not yet soared due to the invasion. This year, however, Russia will have to face the increase in war spending by exporting less hydrocarbons and selling them at much lower prices than last year.

On the expenditure front, in the January-February period, expenses increased by 52 per centin particular for public procurement. The Ministry of Finance explains the high costs with the need to pay the tender contracts in advance, underlining that the expenditure should be reduced in the coming months. “War forces Moscow to pay for weapons in advance,” Kluge explains. “But looking at the overall data, based on today’s data, Russia will have to finance much more spending than anticipated for this year.”

According to the Russian Finance Ministry, the situation will improve slightly in the coming months by adopting a new formula for calculating the tax levy on gas and oil. Starting in April, Moscow will in fact oblige its oil companies to pay taxes not on the basis of the price of the Ural, as has been done so far, but on the much higher price of Brent to which a discount established by the government is applied: a way to forcing Russian exporters to reduce the high discounts they offer to Indians and Chinese, or face a higher tax burden. The Kremlin’s goal is to rebalance revenues after having planned a budget with Ural prices at 70 dollars a barrel, but which is now sold steadily at less than 50 dollars while Russian companies inflate transport and insurance costs to avoid the taxman and accumulate funds abroad.

Moscow also plans to “replenish” the budget by asking for a kind of one-time solidarity contribution to big companies. But discontent is growing, things are not going according to plan. Last week Oleg Deripaska, powerful aluminum oligarch and founder of Rusal, speaking at the Krasnoyarsk Economic Forum said that “Russia could run out of its funds as early as next year”, making a completely opposite speech to the vulgate economy in recovery told by the Kremlin.

As happens with the (increasingly less hidden) power clash between military and paramilitary leaders of the war, the circumvention of sanctions and the transformation of the economy also act on the internal balance of Russia’s power system, with unpredictable outcomes, even for Vladimir Putin.