The Russian federal budget deficit for January and February 2023 was almost RUB2.6 trillion, according to the Ministry of Finance, down by half from the record RUB1.76 trillion reported in January, but already 88% of the budget planned for the whole year.

The deficit was attributed to reduced oil and gas revenues and increased spending. January had a RUB1.76 trillion deficit, a record since 1998, while February saw a deficit of RUB0.8 trillion.

Budget revenues decreased by 25% year on year to RUB3.2 trillion, with oil and gas revenues dropping by 46%.

The two-month spending surged by 52% to RUB5.7 trillion. The budget is already at 88% of the deficit of RUB2.9 trillion planned for the whole year, or 2% of GDP, which is less than the 2.3% deficit or RUB3.3 trillion in 2022. The size of the current deficit has led to concerns about how the state will cover the budget shortfall this year.

VTB Capital analysts on the "Solid Numbers" telegram channel predict a total deficit of 3% of GDP by the end of the year of at least RUB5 trillion.

The Ministry of Finance (MinFin) planned 2% GDP deficit for 2023 has been called an overly optimistic forecast, with a senior economist at the Institute for Emerging Economies of the Bank of Finland suggesting the deficit could reach 4-5% of GDP.

The reduction in the deficit for February, after a record deficit in January, is attributed to a sharp drop in government spending after the extremely large outlays in the first month of the year.

In general, expenses for the first two months amounted to 9% of the annual plan, and this is close to the seasonal norm (7%), according to Alexander Isakov, head of Russia and CIS macroeconomics at Bloomberg.

But in order to meet the planned RUB29.1 trillion of spending in the remaining ten months it will be necessary to spend an average of RUB415bn less than last year, and such a reduction in spending is unlikely, analysts say.

“The spending plan has already grown by RUB0.5 trillion, according to current data, and will grow by another RUB0.5 trillion due to last year’s “leading expenses” in December,” writes Solid Numbers.

On this basis, VTB Capital predicts a total deficit of 3% of GDP at the end of the year.

Isakov's calculations in February gave a projected deficit of RUB6.9 trillion by the end of the year, or about 4.5% of GDP.

The reduction in oil and gas revenues is attributed to a decline in Urals oil prices and a reduction in gas exports. According to the International Energy Agency (IEA), Russia's revenues from oil and gas exports slid by almost 40% in January. At the same time, production and exports are at their highest levels since the beginning of the war. According to the IEA, as well as the Finnish Institute for Emerging Economies, this indicates the effectiveness of oil sanctions.

In February, the budget received RUB521bn from the sale of oil and gas. The mineral extraction tax from gas increased due to one-time payments by Gazprom.

In April, due to the quarterly payment of AIT, oil and gas revenues will increase markedly. But at the current level of income for the year, they will not exceed RUB6 trillion, while the planned level of oil and gas revenues was supposed to be RUB8 trillion, according to MMI analysts. According to the Ministry of Finance, in March the budget will receive less than RUB132.1bn in oil and gas revenues.

The Russian authorities have several ways to fill the budget deficit, including the sale of reserves from the National Wealth Fund (NWF), which held RUB6.6 trillion as of January.

The authorities intend to partially make up for the budget deficit through additional taxes on businesses.

First, the government demanded that large companies make a one-time payment of RUB200–250bn to the budget. And this is on top of the recalculation of taxes for 2022 launched in December, which could cost the entire economy another RUB1.8 trillion.

Secondly, the authorities plan to solve the problem of lost revenues from oil and gas in the near future by changing the rules for calculating the mineral extraction tax.

Russia's reserves in yuan, gold and euros are enough to cover a budget deficit of 3% of GDP over the next three years, according to Bloomberg Economics.

The Ministry of Finance sold yuan in January amid falling oil and gas revenues, and continued to do so in February and March. However, by summer sales may decline or even be replaced by purchases. In February, the Ministry of Finance sold 12 tonnes of gold from the NWF, with sales together with the Chinese yuan amounting to RUB131.7bn. Despite this, a reduction in spending to meet the planned RUB29.1 trillion for the remaining 10 months is unlikely.