Russia’s budget went back into surplus on a month-on-month basis in May (chart), the Ministry of Finance (MinFin) preliminary data posted on June 6 showed, but nevertheless posted a record deficit of RUB3.411 trillion in the January-May period – the highest ever for the period. (chart)
Revenue dropped 19% year on year on a cumulative basis over the first five months compared to a year earlier, to RUB9.818 trillion.
In the same first five months of this year oil and gas revenue plunged 50% to RUB2.853 trillion in the same period, and non-oil and gas revenue grew 9% to RUB6.965 trillion. Budget spending soared 27% to 13.229 trillion.
The five months result was massively down from the surplus of RUB1.6 trillion that the Ministry of Finance (MinFin) reported in the corresponding period of the previous year.
On an m/m basis, budget income from oil and gas sales was RUB570.7bn ($7bn) in May, compared to RUB886bn in May 2022 and RUB647.5bn in April 2023. Proceeds from the profit-based oil tax fell to RUB5.4bn in May from April's RUB185.4bn due to the frequency payment pattern of the tax, Reuters reports.
Overall, Russia's federal budget revenues from oil and gas fell by a over a third (36%) in May from the same month last year and declined by 12% from April.
In May revenues from mineral extraction taxes declined by a quarter from the same period in 2022 to RUB703.6bn, while revenues from exports duties fell by 74% to RUB66.1bn.
Will MinFin hit the 2% deficit target?
The very large deficit the government is running has been taken by many as evidence that the oil sanctions are working; however, the m/m performance where the deficit is shrinking bolsters MinFin's claim that the market is reacting to the shock of sanctions and will rebalance in the second half of this year.
Observers have argued that the oil sanctions on crude oil imposed on December 5 and those on oil products imposed on February 5 have been effective. Oil and gas revenues collapsed in 2022 to leave Russia with a 2.3% deficit, with all the drop in revenues coming in the last month of the year after crude sanctions kicked in. That was followed by another massive RUB1.76 trillion deficit in January just before the oil product sanctions were imposed.
Based on these results, analysts predicted that the official target for the full year’s deficit of RUB2.9 trillion (2% GDP) would probably be missed and end the year at RUB4-6 trillion. However, MinFin has stuck to its guns and maintained its RUB2.9 trillion target, saying that January’s result was due to one-off factors and that oil and gas revenues would recover in the rest of the year.
The trend in the deficit over the five months seem to bear out MinFin’s optimistic forecast, even if the headline result for January-May is at record levels.
The m/m deficit shrank rapidly between January and March, when it was a mere RUB22bn. April was another big blow out when the monthly deficit soared to RUB1 trillion again, but the balance has bounced back in May, which posted a tiny surplus of RB13bn.
If MinFin can maintain a balanced budget for the rest of the year then it could finish with a deficit of around the 2% of GDP mark, although spending demands are erratic and dependent on the progress of the war in Ukraine.
In the last “normal” year in 2021, the budget posted an average surplus of RUB343bn between June to November, except December, which typically sees 22% of the entire year’s spending come in a single month, and that year amounted to a RUB1.9 trillion monthly deficit.
In 2020 the year of the coronavirus pandemic the situation was much more difficult with the budget posting an average deficit of RUB355bn a month between June and November, and an end-of-year bill in December of RUB1.6 trillion.
Last year, the first of the war, the budget performed better than during the coronacrisis but still had an average deficit of RUB172bn per month in June-November. However, while the deficits in the summer during the worst of the initial shock were deep, reaching a maximum of RUB900bn in July, they then recovered rapidly and were back in a modest surplus in October (RUB152bn) and November (RUB202bn) before tanking by a massive negative RUB3.8 trillion in December that year – more than twice as much as a normal year.
The prospects for running a balanced budget for the rest of this year are reasonable. After the start of the war in February 2022, the crude export market rapidly readjusted as Russia successfully redirected all the crude exports that used to go to Europe to Asia within a few months.
The prospects of redirecting all the oil products from west to east after those sanctions were imposed this February are less good as, apart from anything else, Russia’s refined products are now competing with its own crude that has been refined by India and China amongst others. But analysts say that given Russia is prepared to sell its products at discount it should be able to find buyers and that will bring in fresh revenues. However, the process of the oil product market rebalancing is taking longer than it did for the crude exports.
This year’s budget full-year deficit will also be helped by the fact that MinFin for the first time front-loaded a lot of the December payments to this January, which is part of the reason why January’s deficit was so huge.
A repeat of the RUB3.8 trillion deficit in December 2022 for December this year is very unlikely, and it is possible that this year’s December deficit will be less than those in 2020 (RUB1.7 trillion) and 2021 (RUB1.9 trillion), which will also make it easier for MinFin to hit its 2023 deficit target of RUB2.9 trillion.
All will depend on if MinFin can maintain the surpluses, the first of which it earned in May.
Russian Finance Minister Anton Siluanov has also been working hard to find new sources of income. The leading companies have been asked to contribute a one-time payment of RUB200bn and the government has new windfall tax legislation this week. Other taxes, such as the mineral extraction tax, are being amended to take account of the new realities. However, MinFin has ruled out general tax hikes or introducing new ones, which nevertheless remains an option.
Instead, MinFin intends to fund any shortfall by issuing some RUB3.5 trillion of Finance Ministry’s OFZ treasury bills. In addition, there is some RUB6.6bn of funds in the liquid part of the National Welfare Fund (NWF), which can cover the entire deficit without recourse to tax or bonds if needed. Siluanov clearly wants to keep some powder dry in case the war drags on for several more years.
On top of these preparations, the economy has been performing surprisingly well. It put in a solid performance in May, according to the latest RosStat numbers, with several sectors, like agriculture and metallurgy, returning to growth, while real incomes and consumption are also recovering on the back of a tight labour market and rising nominal wages. That will improve tax revenues, especially from VAT, which makes up a third of the government’s tax base by itself.
Finally, rising corporate and state investment, fuelled by increasing corporate borrowing as companies retool as a result of technology sanctions, and the state investing into its war machine, has led the Central Bank of Russia (CBR) to warn there is even a danger of the economy overheating, which also suggests tax receipts could also improve in the rest of this year.
Improving growth prospects
Russian President Vladimir Putin expects the gross domestic product (GDP) to increase by 1-2% in 2023, he said in a messenger to participants of the St Petersburg International Economic Forum (SPIEF) on June 7.
"According to experts, the global economy will continue to slow down in 2023, while Russia’s GDP can increase by 1-2%," his message read.
In April, Minister of Economic Development Maxim Reshetnikov stated that the ministry expects Russia's GDP to rise at 1.2% in 2023 and 3% by 2026, owing primarily to a recovery in consumer demand.
The World Bank forecasts a small decline of 0.2% in the country's GDP for 2023, according to its latest report on Russia's economic outlook released on June 7. However, the bank anticipates a rebound in economic growth in 2024, projecting a growth rate of 1.2%.
The new World Bank’s projection for a GDP decline in 2023 marks a significant improved revision from the bank's previous forecast in January, with the estimate now being 3.1 percentage points higher than previously predicted, as the bank also concedes Russia’s economy is doing much better than expected.
The Organization for Economic Co-operation and Development (OECD) also improved its forecast for the year, but is still predicting a contraction in Russia’s economy of 1.5% from the previous expectations of 2.5%, Prime reported on June 7. The forecast for 2024 was improved to a 0.4% contraction from 0.5%. The OECD also improved its expectation of the global economic growth to 2.7% from 2.6% this year.