The Russian budget started January in its deepest deficit in years, according to the result released by the Ministry of Finance (MinFin) on January 6.
The figures published by the Ministry of Finance on the execution of the federal budget in January 2023 look catastrophic: the deficit for the month amounted to RUB1.76 trillion ($24.8bn) – the deepest January deficit since 1998, reports The Bell.
The poor fiscal performance in January stains the otherwise upbeat opening of the year for the Russian economy, with strong manufacturing PMI reading and upbeat growth outlook revisions.
The January deficit follows on from a similar monthly collapse in revenues in December that caused the federal budget to end 2022 with a 2.3% deficit for the whole year. In both cases the fall in revenues has been blamed on collapsing oil and gas revenues associated with the introduction of the EU’s oil embargo and oil price cap scheme.
In January the budget revenues collapsed, but at the same time budget spending increased more than one and half times. Officials said that the spending was war related and due to prepayments made for investments for the coming year. They said that they wanted to smooth out expenditures that are normally made in December at the end of the year that negatively affect the full year spending.
The size of the deficit means that Russia’s deficit for the full year in 2023 is likely to significantly widen. The CBR estimated in its latest macroeconomic forecast that the economy will slow this year with a 1-4% contraction, while MinFin estimates the deficit for the full year would come in at around 3% of GDP or RUB2.9 trillion. However, experts say the January result means the full-year deficit could more than double to RUB6-8 trillion.
The revenues of the Russian federal budget in January 2022 amounted to RUB1.356 trillion, which is 35% lower than in January 2022, according to MinFin. Spending was more than twice as much at RUB3.117 trillion, 59% higher than January 2022. Thus the monthly budget deficit amounted to RUB1.76 trillion.
The biggest fall in revenues was from oil and gas which was down by half (48%) compared to the same month a year earlier. Non-oil and gas revenues also fell by more than a quarter (28%), reports Bloomberg.
The mushrooming of the discount on Russia’s Urals blend of oil vs the benchmark Brent has seen the cost of Urals fall to $49.48 per barrel recently, which is 41% cheaper than Brent. Russian Urals blend oil in January traded with an almost $30 per barrel discount in January at $49.5 versus the $77.8 per barrel average Brent blend price.
MinFin said changes to payments in 2022 accounts for much of the change, including the accelerated procedure for VAT refunds introduced in April 2022; the peak in the reimbursement volume falls on the first month of the quarter accounting for the jump in expenditures.
Two officials told The Bell that another big change in tax accounting was the transition to a single tax account (UNS) that came into force on January 1, 2023.
Bloomberg Economics economist for Russia Alexander Isakov said the collapse in the oil and gas revenues in January was predictable, and a result of the oil sanctions that came into force in December and February, but that revenues were likely to recover in the latter part of the year as the market responded to changes in oil export routes forced on Russia.
“The decline in the budget’s oil revenue is expected, but the 30% drop in domestic consumption linked-taxes is ominous,” Alex Isakov of Bloomberg Economics commented. “We expect oil revenue to continue to under-perform throughout the year, bringing the deficit to 1.5% of GDP above government projections.”
Oil and gas revenues in 2023 will reach RUB7 trillion instead of the planned RUB8 trillion, according to Isakov, while expenses will rise this year to RUB31 trillion instead of planned RUB26.1 trillion. The result will be the annual budget deficit will more than double from the planned RUB2.9 trillion to as much as RUB6.9 trillion.
The Solid Numbers telegram channel, created by VTB Capital analysts, say that the January result is probably an aberration and that the result cannot be extrapolated for the full year. A similar phenomenon was observed at the start of the war when oil revenues collapsed due to self-sanctioning by oil traders in the first months, only to recover as new routes and customers were found. VTB Capital analysts expect revenues to recover in the coming months and expenditures to fall again.
“However, the plan of the Ministry of Finance for a deficit of RUB3 trillion, most likely, will not be able to be fulfilled,” the authors of the channel write as cited by The Bell.
The VTB Capital analysts also say that if high spending continues at the rate of RUB32-33 trillion a month then even if revenues do not fall from the planned RUB8 trillion for oil and gas and RUB17 trillion for non-oil then the deficit could blow out to RUB7-8 trillion this year.
Currently the budget for 2023 has been drawn up with the same deficit as in 2022, a deficit of 2% of GDP, and an average annual price of Urals of $70.1 per barrel.
“It is likely that anonymous officials are not lying and a significant part of the January failure is due to "paper" reasons. But even with this assumption, the budget earns less than the plan, and spends much more than the plan. A deficit of RUB6-8 trillion for the budget is far from fatal, but this is a very large figure – 1.5-2 times more than it was during COVID in 2020, or exactly the same as the liquid part of the National Welfare Fund now,” The Bell said in a comment.