The effect of sanctions: Russia's budget deficit may amount to 12.5 trillion rubles

How do sanctions weaken Russia's economy and are there still opportunities to finance the war in Ukraine?
The effect of sanctions is increasingly visible for the Russian Federation. A significant part of export revenues from the sale of oil and gas was lost. Other income items were also reduced.
In the context of excessive war spending, the federal budget deficit is growing. For January-March it was 2.4 trillion rubles - more than 80 percent of the total deficit approved for this year.
The real deficit for this year will be much larger than they expected in Russia. According to KSE Institute estimates, in 2023 the budget deficit of the Russian Federation could grow to 12.5 trillion rubles — or $162 billion — several times more than the amount planned for this year.
The "hole" in the Russian budget is growing.
The invasion of Ukraine and Western sanctions are significantly changing the Kremlin's financial capabilities. According to the results of 2022, the Russian budget deficit reached 3.3 trillion rubles, which is equal to 2.3 percent of GDP.
While before the invasion, a surplus of 1.2% of GDP was planned, mainly due to the expectation of excess profits from oil and gas.
This year is even worse for Moscow from the very beginning. For January-March, the total revenues of the federal budget amounted to about 5.6 billion rubles, while expenditures exceeded eight billion rubles.
Thus, in the last two months alone, a "hole" of 2.4 trillion rubles was created in the Russian budget, and 30 percent of the expenditure part of the state budget was not covered by budget revenues.
The Kremlin expects that this year the federal budget deficit will not exceed 2.9 trillion rubles. However, it is obvious that such expectations are too optimistic.
It is not difficult to calculate that the budget deficit for the first quarter alone was about 82 percent of the budget deficit planned by the Russian government for the entire current year.
Taking into account the effect of the oil embargo and price restrictions on Russian oil and oil derivatives, according to KSE institute estimates, by the end of 2023 the budget deficit of the Russian Federation will be three to four times higher than last year.

If in 2022 it reached 3.3 trillion rubles, then this year it could rise to 12.5 trillion.

The war is costing the Russian Federation dearly

The reason for the growth of the Russian budget deficit is simple - expenditures are increasing, revenues are falling. Thanks to restrictions imposed by an international sanctions coalition of more than 40 countries, revenues fell by 21 percent in January and March compared to the same period last year.
Moscow's oil and gas revenues have been hit hardest. According to the results of the first quarter of 2023, the revenues of the Russian budget from oil and gas fell to 1.6 trillion rubles.
Thanks to the embargo and the established highest prices for oil and oil derivatives, they fell by more than 45 percent compared to the 2.9 trillion rubles received in the first three months of 2022.
The decline in non-oil and gas revenues of the Russian Federation is currently not so noticeable, but it is evident. In the first three months of 2023, they decreased by four percent compared to the previous year and amounted to 4.04 trillion rubles.
Here, it is important to pay attention to the income tax, despite its secondary role in filling budget revenues. In the 1st quarter, revenues from this tax fell by 22 percent on an annual basis, which, although it is not a decisive factor for the ability to finance the war, is an indisputable indicator of the shaky financial condition of Russian companies.

Against the background of a sharp drop in revenues, the Kremlin's expenditures remain extremely high. First of all, it refers to the financing of the military invasion of Ukraine and the reluctance to "cut" spending on social programs.
Specifically, according to the Ministry of Finance of the Russian Federation, public procurement expenditures more than doubled to 2.46 trillion rubles. In general, in the period January-March, compared to the same period last year, Russian expenditures were 34 percent higher.
However, it is worth noting that the Kremlin slowed down its spending in March compared to January-February. This allowed the Russian Ministry of Finance to slightly slow down the pace of deficit growth, although expenditures are still at an inadequately high level. 

With the Kremlin showing no interest in ending the war, the need to finance the war machine will not decrease in the coming months, bringing a budget crisis closer.

The last convulsions

In response to declining oil and gas revenues, the Russian government plans to change the formula for calculating oil taxes, tying them to the price of Brent crude.
According to the estimates of the KSE Institute, the relevant tax innovation will enable an increase in revenues to the budget of the Russian Federation by 600 billion rubles this year. Even if we take into account another 500 billion rubles, which the Russian fiscal system will most likely be able to "squeeze" from large enterprises, the funds will be too small to cover the increased costs.
Because of the deadlock they are in, the Kremlin will continue to support the budget with the funds of the National Welfare Fund. About 53 billion dollars were spent from the FND in 2022, of which 37 billion went to patching budget holes.
At the fundraising rate seen in the fourth quarter of 2022, FND's liquid assets risk being depleted by the end of this year.
The Russian government is also forced to rely on the issuance of domestic bonds. In the fourth quarter of last year, they were issued for 2.8 trillion rubles (~$47 billion).
Since funds are needed to cover the budget deficit, this will continue. However, in the absence of foreign investors and the impossibility of entering international borrowing markets, all domestic debt will be purchased by the Russian banking system.

This will, on the one hand, increase debt servicing costs, and on the other hand, take away all liquid funds for lending to the real sector of the economy.
Given that the Russian Federation has de facto found itself in international isolation, and the so-called partners are in no hurry to provide it with financial assistance, the budget deficit will continue to grow.
Without a change in foreign policy and an end to the war, the Kremlin will very quickly run out of money.