What happened to the revenues

The total budget revenues have fallen by 35% compared to last January, reaching 1.3 trillion rubles (€16.6 billion). Oil and gas revenues have dropped by 46% to 426 billion rubles (€5.4 billion). The Russian Ministry of Finance suggests that this is due to the falling prices for Russia’s flagship Urals crude and the decline in gas exports. Gas supply has nearly halved over the year, while the price of Urals dropped by about 30% due to Western sanctions, standing at about $50 per barrel, Novaya-Europe previously reported.

The non-oil and gas revenues also fell: by 28%. The decrease in other revenues was due to the introduction of an accelerated tax reimbursement process in April of the previous year.

Another possible explanation was provided by two federal officials who wished to remain anonymous to Faridaily, a blog by Russian journalist Farida Rustamova. According to them, an additional factor for the decrease in revenues was that some companies had paid more taxes than they were due in previous periods. This happened due to Russia’s Federal Tax Service switching to a united accounting system for payments.

In total, the revenues fell by 733 billion rubles (€9.4 billion) compared to last January. The 1.1-trillion-ruble (59%) rise in expenditures greatly contributed to the budget deficit.

What they spent a trillion on

According to Novaya-Europe’s source in the government’s economic unit, the sharp rise in expenditures in January is tied to the fact that the government has allocated “a lion’s share” of the funding planned for the first quarter to the military-industrial sphere. There may be four or five more instalments of this kind over the course of the year. This could mean that there are “enough funds for a couple years of war”, the source suggests.

This hypothesis is supported by the Finance Ministry’s press release, in which it explains the rise in expenditures by the “expeditious conclusion of contracts and advance financing for certain contracted costs”. The ministry does not specify the nature of the costs in question. According to the press release, this will help ensure a more gradual cash administration of federal budget expenditures over the course of 2023.

Another possible explanation was offered by the Hard Numbers Telegram channel (it was previously tied to VTB Capital investment banking company, but after the war started and Western sanctions were introduced, its administrators announced that they were no longer connected to the bank and renamed the channel). The channel’s analysts suggest that about 0.9 trillion rubles (€11.5 billion) of January expenditures have been carried over from last year. The 2022 budget expenditures were planned at around 32 trillion rubles (€408 billion), while the Finance Ministry only spent 31.1 trillion (€396.5 billion), which led to a one-time rise in expenditures in January 2023.

What will happen by the end of 2023

All in all, single budget losses for January are estimated at about 1.4 trillion rubles (€17.9 billion). Another 0.4 trillion (€5.1 billion) are sustainable losses caused by the current price levels and export volumes, Alex Isakov, Russia and CEE Economist for Bloomberg Economics, told Novaya-Europe.

Dmitry Polevoy, Investment Director at Loko-Invest, also assured Novaya-Europe that a deficit this high in January is an exception, and that it will not continue to grow at this rate over the coming months.

Over the year, non-oil and gas revenues will recover and reach the planned 17 trillion rubles (€216.8 billion), Isakov predicts. “The tax dynamics rarely diverge from the tax base for long. A simple benchmark for the VAT base is retail turnover. In nominal terms, retail turnover is on the rise, although it is lower than the price increase. This means that VAT will likely turn around over the coming months. Besides, a drop in VAT in the first month of the quarter is a typical scenario for last year. It is related to the simplified return procedure,” he explained.

Oil and gas revenues will be significantly lower than the estimates: 6.5-7 trillion instead (€83-89 billion) of 8,9 trillion (€113 billion). The deficit will reach 5-6.5 trillion rubles (€64-83 billion), he suggests. All this is under the condition that the expenditures will be near the planned figure of about 29.5 trillion rubles (€376.5 billion), the expert added.

According to Novaya-Europe estimates, due to mobilisation, only the salaries and compensation payments for death or injury will require 2.2-3.2 trillion rubles (€28-41 billion) from the Russian budget. These expenditures are not accounted for in the budget approved before the mobilisation was declared.

Will reserve funds be enough?

The Russian Ministry of Finance covers the budget deficit by using the Russian National Wealth Fund (NWF) and growing the domestic debt on federal loan bonds. As of 1 February, the liquid part of the fund available for financing the deficit stood at 6.3 trillion rubles (€80.4 billion). Last year, its value in rubles dropped by 37%.

According to Polevoy, in 2023, the finance ministry can spend about half of that sum: approximately 2-3 trillion rubles (€25.6-38.4 billion). The ministry will be able to stay within this figure if it loans 1 trillion more rubles (€12.8 billion) than planned.

Isakov estimates that this year, 2.9 trillion rubles (€37 billion) will be spent from the National Wealth Fund, and 1.3 trillion (€16.6 billion) more will likely be spent in 2024. Such a scenario is possible if Russian crude costs around $50 per barrel, and if the plans for funding expenditures and projects from the NWF are not expanded, he wrote on his Telegram channel. In this case, the NWF liquid assets may run out by late 2024 or early 2025, the economist says.