Russian Economy Struggles as Energy Revenues Plummet and Sanctions Take Effect
In January, Russia's federal budget fell into a deficit of 1.76 trillion roubles ($24.78 billion) due to a decrease in energy revenues and increased spending. This deficit is largely attributed to the sanctions imposed on the country and the expenses of the military campaign in Ukraine, which are both having a detrimental effect on the economy. In 2019, the Russian economy experienced a deficit of 2.3% of its gross domestic product. It is anticipated by the Russian government that this year's budget will show a deficit of 2% of GDP, given an oil price of $70 per barrel. In January, Consensus Economics surveyed banks and analysts and predicted that the deficit would increase to 2.8% of GDP in 2021.
Tax revenue from oil and gas plummeted 46% in January compared to the same month last year. This is due to decreased gas exports and the decreased representativeness of monthly price assessments from the West. Russia typically relies on oil and gas sales for about 45% of its budget revenues, which explains why overall budget revenues dropped by more than a third.
The EU and G7 implemented a price cap of $60 on seaborne Russian oil in December 2022, and the Baltic trio of Estonia, Latvia, and Lithuania, as well as Poland, asked for a review of the oil cap in March. On Friday, EU countries agreed to two price caps which will come into full force later this year following a 55-day transition period. A cap of $100 will apply to “premium” oil products, including diesel, gasoline, and kerosene, while a cap of $45 will be enforced on “discount” products, such as fuel oil, naphtha, and heating oil.
The Russian government is now working on new approaches “to shift to alternative price indicators for tax purposes,” the Finance Ministry said. This is due to the decreased representativeness of Urals quotations as an objective price indicator of export prices for Russian oil.
New sanctions on Russian oil products took effect on Sunday, further clouding the budgetary picture. On Monday, the fuel market barely budged after the new sanctions were enacted. The U.S. and its allies have agreed to cap the sales price of premium Russian petroleum products such as diesel at $100 a barrel and limit low-value ones such as fuel oil to $45 a barrel. Alternative markets for Russian products, such as Turkey, Africa and Latin America, have shown limited interest in taking them.
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1. “Russian Deficit Soars to $25 Billion on War Spending, Oil Embargo” The Wall Street Journal, 2 Feb. 2023, https://www.wsj.com/articles/russian-deficit-soars-to-25-billion-on-war-spending-oil-embargo-11675706249
2. “Putin Faces Mountain of Debt as Ukraine War Puts Economy Back 25 Years” Newsweek, 7 Feb. 2023, https://www.newsweek.com/putin-debt-budget-deficit-economy-2023-1779571
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4. “Russia’s oil revenues plunge as EU’s oil war enters round 2” POLITICO Europe, 6 Feb. 2023, https://www.politico.eu/article/russia-oil-revenue-plunge-european-union-sanctions-war-round-two-ukraine/
5. “New Russian Fuel Sanctions Were Expected to Upend Markets. Why They Didn't.” Barron's, 7 Feb. 2023, https://www.barrons.com/articles/diesel-oil-fuel-russian-sanctions-51675722321
6. “Discount Strategy Has Limits for Russian Products” Energy Intelligence, 2 Feb. 2023, https://www.energyintel.com/00000186-0ed4-d963-a396-aef639c90000
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