Russian budget experiencing problems due to cheap Oil
2023.01.16 12:47
Russian budget experiencing problems due to cheap Oil
By Tiffany Smith
Budrigannews.com – According to analysts, Russia’s efforts to close its budget gap by selling foreign currency reserves could create a vicious cycle that raises the rouble and further reduces the Kremlin’s vital export revenues.
For the first time in nearly a year, Russia’s finance ministry and central bank announced last week that they would sell 54.5 billion roubles worth of yuan, or $793 million, from the National Welfare Fund. The sales will begin on January 13 and last three weeks.
In the face of increasingly severe Western sanctions on Russian energy sales, Russia has been utilizing the rainy day fund, which stood at $186.5 billion as of December 1, to finance its expanding budget deficit and stabilize the economy.
The Kremlin’s domestic spending has significantly increased to cover the rapidly rising costs of the Ukraine war, which is now in its 11th month, and is funded by export taxes from hydrocarbon sales.
However, due to the fact that revenues from oil and gas exports are largely based on global benchmark prices that are traded in dollars, analysts predict that sales of foreign currency will push the Russian rouble higher, resulting in a further decrease in Russia’s income in roubles.
That could set off a cycle of lower export revenues, necessitating more sales of foreign currency and resulting in an even stronger rouble, which would exacerbate the budget deficit.
According to Vasily Karpunin, an analyst at BCS Express, there is a possibility that Russia’s revenue from energy exports will decrease even further in February and March following the start of the next phase of the G7’s price cap on petroleum products on February 5.
According to estimates made by CentroCreditBank economist Evgeny Suvorov, the revenue gap could be 2-3 times larger than the 54.5 billion rouble shortfall that occurred in January.
In a recent research note, Rosbank analysts wrote, “This will require an increase in foreign currency sales, and through exchange rate dynamics (strengthening of the rouble), that may further worsen actual oil and gas revenues.”
Since the plan was announced, the rouble has increased by more than 4% against the US dollar, reaching around 68 per dollar on Monday.
One of Russia’s worst performances since President Vladimir Putin took office over two decades ago was in 2022, when the country ran a deficit of 3.3 trillion roubles, which is equivalent to 2.3% of GDP.
In December, Russia’s finance minister Anton Siluanov said that the price cap on oil could make Russia’s budget deficit bigger than the current plan of 2% of GDP in 2023. Foreign currency interventions appear likely to prevent a weaker rouble, something that government officials have also publicly stated they would like.
Alfa Bank analysts stated that the finance ministry’s decision to resume FX sales while the Kremlin is also attempting to weaken the rouble was “puzzling.”
Despite the fact that Russia’s primary blend is currently trading at approximately $50 per barrel, the Urals blend price used in Russia’s budget for this year is approximately $70.10 per barrel.
Anton Tabakh, Chief Economist of RA Expert, stated, “The budget hole will inflate if the relatively low prices for Urals last for a long time and the rouble remains relatively strong.”
According to estimates made by Sberbank, a state-owned bank, the government would have to sell 100 billion roubles worth of foreign currency holdings each month to make up the shortfall if the average price of Russia’s Urals blend was $55 per barrel and the rouble remained around 67 against the US dollar.
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