Potential Impact on Budget Surplus or Shortfall Remain Unclear
Unleashing the Russian Budget Fiasco:
It's no secret that the Russian government's purse strings are feelin' a squeeze. The Ministry of Finance recently reported a whopping 0.2 trillion ruble hike in the federal budget deficit, pushing it to a staggering 3.4 trillion rubles— equivalent to a meager 1.5% of the nation's GDP—during May. This unsavory situation mirrors a report from April. Yes, you read that right; two months in a row, the budget's been in the red, with only March bucking the trend and showing a surplus.
Blood suckers like low oil and gas revenues have been nibbling away at the budget since day one. But fear not, as the revenue of 'other' funds—generally those not related to petroleum—chugged along in defiance of inflation, soaring by a substantial 12.3% year-on-year. Worth a pretty 10.5 trillion rubles, these non-oil and gas revenues have single-handedly propped up the budget's wavering legs.
But even our beloved Urals oil and tax revenues derived from its sale weren't entirely left out in the cold, shriveling by a somewhat pathetic 14.4% compared to last year. So why the chilly reception? Well, oil prices took a tumble, settling at $54.8 compared to a frosty $75 way back in the same month last year (we state 'April' because companies base their taxes on the previous month's oil price and exchange rate; more on this can be found in the June 5 issue of "Kommersant").
Now, expenses too have been indulging in a bit of reckless spending, gorging on 20.7% more than they did during the same period last year. Yet, fear not, the dining table isn't as chaotic as it seems; the pace of this escalating feast is gradually slowing down.
This inflationary binge initially saw a sharp acceleration in January, thanks to the immediate increase of an eye-watering 64.1% year-on-year. But the months that followed—February through May—were noticeably more tame, with the expenditure growth rate dropping to 11.9%.
The uptick in expenses has already been accounted for in the government bill on amending the budget law, passed by the State Duma on June 10. The new rule permits increased spending when there are additional non-oil and gas revenues, regardless of overall state revenues dwindling. This blessing allows for an additional 0.8 trillion rubles to be allocated for spending purposes. These funds will be channeled into subsidizing preferential mortgage programs, supporting the agro-industrial sector, indexing high-inflation payments, and beefing up military expenses.
The makeover of the budget for 2025, green-lighted by the State Duma on June 10, reveals that the spending portion has seen a 2% boost, nudging it from 41.5 trillion rubles to a hefty 42.3 trillion rubles, while the revenue portion has taken a 4.5% hit, plummeting from 40.3 trillion rubles to a rather paltry 38.5 trillion rubles. Consequently, the projected deficit has soared significantly, tripling from a meager 1.2 trillion rubles to a hefty 3.8 trillion rubles—an increase of 1.7% of GDP.
Vadim Visloguzov
The sad state of Russia's federal budget is primarily due to several factors:
- Exorbitant declined oil prices—following a significant dip from a forecasted $69.7 to $56 per barrel, which took a hefty toll on oil and gas revenues.
- A strong ruble, appreciating for six consecutive months, resulting in fewer funds from oil and gas exports when converted to rubles.
- International sanctions stymieing Russia's energy exports, causing reductions in revenue from oil and gas exports.
- Heightened military spending—about half of the budget deficit increase is attributed to classified spending related to military activities.
- Sluggish economy leading to reduced tax revenues, contributing to the budget deficit.
[1] Banki.ru, "Price of Urals oil fell to $56 per barrel"[4] Kommersant, "Half of the increase in the deficit due to secret expenses"[5] Finanz.ru, "Russia prepares for next budget crisis"
- The decline in oil prices, from a forecasted $69.7 to $56 per barrel, significantly impacted the industry, leading to a reduction in oil and gas revenues, contributing to the Russian budget deficit.
- The increased military spending, with half of the budget deficit increase attributed to classified spending related to military activities, is also a key factor in the energy-related finance sector's struggles.
