Trillion-dollar deficit: Russia is on the brink of a budget crisis

During the past decade, approximately 40 percent of the federal budget of the Russian Federation was based on revenues from oil and gas exports. Colossal profits from the sale of energy products allowed the Kremlin to form a budget surplus and accumulate huge sums in the accounts of the National Welfare Fund (NWF).

In 2022, things turned out badly for Russia.

Due to significant expenditures for the military industry, the army and mobilized, the impact of the recession on the collection of taxes in the country, the outflow of investors and the reduction of income from oil and gas - in the fourth quarter, it turned out that the budget year for the Russian Federation ended with a deficit.

The expenditures of the Putin regime in 2022 exceeded the revenues by 3.3 billion rubles. Record profits from the export of energy products, which amounted to almost 350 billion dollars that year, did not save the Kremlin.

In 2023, things have not improved in the Kremlin. In January alone, the deficit amounted to 1.76 billion rubles, while a deficit of 2.9 billion rubles was established for the entire year.

How and why is the situation with the Russian budget deteriorating?

From surplus to deficit in one year

High oil and gas prices year after year guaranteed consistently high revenues for the Russian federal budget. For example, in 2018, the state budget surplus amounted to 2.7 trillion rubles, which was equal to 2.7 percent of the country's GDP.

The exception was 2020, when the coronavirus was raging around the world. Due to the quarantine and the drop in demand for energy products, the budget deficit in the Russian Federation reached 3.8 percent of GDP.

However, already in 2021, despite the difficult state of the world economy, Russia ended up with a surplus of 515 billion rubles or 0.7 percent of GDP. This result was achieved with the help of energy blackmail for Europe.

The Russian government planned to end 2022 with even more optimistic indicators. Thus, according to the draft of the state budget, GDP was supposed to increase by three percent, and the budget surplus was predicted at 1.32 trillion rubles or one percent of GDP.

The unprovoked aggression against Ukraine made significant corrections. According to the results of 2022, the Russian Ministry of Finance recorded a budget deficit at the level of 3.3 billion rubles. The country's annual financial balance reached -2.3 percent of GDP. Due to the war, Russia had a deficit of almost five billion rubles in its budget.

 

According to KSE Institute estimates, the losses were not compensated by one-time receipts from Gazprom (1.2 trillion rubles of special tax and 600 billion rubles of dividends), nor by the sale of domestic bonds (OFZ), nor by attempts to cover the deficit with expenditures from the National Fund.

According to KSE experts' calculations, the cumulative budget balance in Russia for the first eleven months of 2022 amounted to almost 560 billion rubles. This means that the December deficit reached about 3.9 trillion rubles.

In general, a significant deficit in the last month of the year is not unusual for countries. At the same time, the budget deficit that hit Russia in December is a record for the last 10 years. There was nothing similar even in the year of the corona crisis. This happened due to a sudden increase in costs to almost seven billion rubles.

In January 2023, the deficit also amounted to a record 1.76 billion rubles. The budget of Russia showed this result against the background of a 59 percent increase in expenditures compared to January 2022 and a drop in income by more than a third. At the same time, revenues from oil and gas fell by 46 percent and 28 percent, respectively.

De facto, Russia has already fallen into a budget crisis. The government is trying to use all available opportunities to "patch holes" in the budget, but the fiscal situation in the country is only getting worse

 

Signs of an approaching crisis

Russia is getting deeper into the budget crisis every month. This is evidenced by the increase in the issuance of domestic bonds at the end of the year, the increase in dependence on the FND, and the sale of assets denominated in yuan by the Central Bank.

To finance the deficit, the Russian government used about two trillion rubles from the FND. In January 2023, its volume was 10.4 trillion rubles, or slightly less than eight percent of GDP, while at the end of 2021, the fund held 19.7 trillion rubles.

Also, in order to cover the budget revenue deficit, the Central Bank of the Russian Federation is forced to sell its assets. Recently, the Bank announced that it will sell foreign currency (Chinese yuan) for 54.5 billion rubles by February 6.

Problems with income are also indicated by the active inclusion of domestic debt, starting at the end of October. Thus, on November 16, the Ministry of Finance placed federal loan bonds for a total of 823 billion rubles at three auctions.

In general, in the fourth quarter of 2022, OFZ issuance reached almost 2.8 trillion rubles. At the same time, there is significant demand for bonds with a variable interest rate, which is expected to lead to an increase in debt servicing costs in the medium term.

Findings

In 2022, the Kremlin made efforts to reduce the budget deficit by attracting funds from FND and Gazprom and by selling bonds.

However, against the backdrop of volatile oil and gas revenues, which are falling due to the embargo and the establishment of oil price ceilings, reduced corporate sector revenues and increased war spending, it will be increasingly difficult for Moscow to keep the federal budget's revenue base stable every day.

Coordinated actions of an international coalition of more than 40 countries, which increase the sanctions pressure on Russia almost every month, are an important factor in deepening the budget crisis. According to KSE institute estimates, the Russian budget deficit will increase to six percent of GDP in 2023 due to the imposed sanctions.

The recession and the deterioration of the foreign policy situation are reducing the income of the Putin regime, which is forced to increase spending on war. The growing budget deficit affects Russia's ability to finance combat operations.

Further sanctions measures, including a reduction in the Russian oil price ceiling and additional restrictions on gas and oil exports, will significantly increase pressure on the Kremlin and limit its ability to accumulate revenues. The reduction in financial revenues will ultimately nullify the invasion plans of the Russian Federation.