Russia's budget to go back into surplus

Russia's budget to go back into surplus
Russia's regions are in profit and after a change to the tax code for the way oil taxes are calculated, the Ministry of Finance expects the budget to go back into surplus for the rest of the year. / bne IntelliNews
By bne IntelliNews May 3, 2023

After posting a deep deficit in the first months of this year, Russia’s budget is due to go back into surplus for the rest of the year, Russian Finance Minister Anton Siluanov said on April 28.

Siluanov reported that 72 Russian regions have completed the first quarter of the year with a budget surplus, reports Vedomosti.

“After a period of fairly large budget expenditures at the beginning of the year, we will have a budget surplus until the end of this year, which indicates its sustainability. And in general, the levels of deficits will be near the target values. And the balance of payments continues to be healthy with a certain current account surplus,” he said.

Russia’s federal budget deficit for the first ten days of March exceeded the planned RUB2.9bn for the entire year of 2023, Russian Prime Minister Mikhail Mishustin admitted on March 24. (chart)

"A plunge in exports caused Russia's current account surplus to narrow considerably in the first quarter, as the EU's oil embargo limited Moscow's vital energy revenues. Also, the national budget deficit came to a record-breaking RUB2.4 trillion in the first three months of 2023, suggesting the Kremlin will not be able to meet budget targets for the year unless Russian oil benchmarks return to the soaring levels of 2022," commented Trading Economics.

As bne IntelliNews reported, Russia ended 2022 with 2.3% deficit, more than the planned 2%, after oil and gas revenues crashed in December following the December 5 EU embargo on crude oil imports. Last year the budget had been in surplus for 11 out of 12 months but revenues dropped like a stone just as the state made its large annual social payments, which added to the gap between income and outgoings.

This year started badly too when the monthly deficit hit RUB1.76 trillion deficit in January – more than half of what was planned as a deficit for the whole year. At the same time, oil and gas revenues this year have been hit again by the February 5 embargo by the EU on Russia’s export of oil products.

Previously Siluanov explained that much of the shortfall was due to front loading social and other expenses to January that normally come at the end of the year: last year 22% of all government spending was made in December alone. As a result, monthly government spending this year is expected to fall significantly going forward, although war-related spending is still high and difficult to predict. (chart)

Revenues are also anticipated to rise going forward, as previously oil and gas taxes were calculated using the Urals price for oil as a benchmark. However, as bne IntelliNews has reported the Urals price has become increasingly meaningless, as it is the price for oil sold to Europe and the volume of that trade has fallen dramatically, while the oil sold to customers in Asia is outside the sanctions regime and remains at close to market prices. From April 1 the Ministry of Finance has adopted a new benchmark based on the price of Brent minus a discount – a change that should start to be visible in the budget receipts from this month.

Speaking at a meeting of the Council of Legislators, Siluanov revealed that regions are fulfilling their income plan ahead of schedule, with actual receipts exceeding the forecast by 6%. The investment expenditures of entities have also risen this year by 70%, including through credit support for infrastructure. This year alone, the government will allocate RUB440bn in such budget loans.

Despite the positive performance of the regions, Siluanov reminded attendees that there is still a significant federal budget deficit, but despite the poor start to the year, the Ministry of Finance is sticking to its 2% of GDP target. Other analysts are less optimistic and predict a deficit of between 3% and 5% of GDP.

The deficit for the first three months of the year has already fallen slightly from its March 10 and amounted to RUB2.4 trillion, while the gap between income and expenditure approached RUB6 trillion as of April 26, according to Russia's Electronic Budget portal, reports Vedomosti.

The law on the budget for this year projects revenues of around RUB26 trillion and expenses of RUB29 trillion, resulting in a deficit of RUB3 trillion. However, after significant spending at the beginning of the year, the budget is expected to run with a surplus in the remaining months, according to presidential aide Maxim Oreshkin.

Military spending is done at the federal level, whereas regions survive on their local income and corporate tax take. They have no access to the oil and gas revenue tax, which is taken at federal level. At the end of 2022, a small surplus was recorded in all regions, with 36 regions posting surplus budgets. The largest surplus was recorded in St. Petersburg, amounting to RUB120bn. Of the deficit regions, the highest gap between income and expenditure was recorded in the Moscow Region at RUB66.6bn.

Siluanov attributed the positive dynamics of the regions to the acceleration of advance payments to recipients and the transition to a single tax account (UNT). The remaining liquidity of the subjects is almost RUB4 trillion, which has grown compared to the beginning of the year.