Russia’s budget back inside the 2% of GDP target after revenues surge in June

Russia’s budget went back into profit in May with a negligible gain, but in June revenues surged to a RUB815bn ($8.7bn) monthly surplus. That has shaved almost RUB1 trillion off the cumulative deficit and taken the overall sum back to RUB2.6 trillion, or under the 2% of GDP target set by the Russian Ministry of Finance for the whole year.

Much uncertainty remains, but it’s starting to look a lot more likely that Russia is on course to hit the Ministry of Finance’s goal of keeping the federal budget deficit to under 2% of GDP by the end of this year. (chart)

The Russian federal budget has put in a series of disastrous results in the last year.

Russia’s federal budget ended last year with a deep deficit of RUB3.3 trillion, or 2.3% of GDP, more than the ministry’s 2% target, although Russian Finance Minister Anton Siluanov said that with technical adjustments the final figure was actually 1.8% of GDP.

And the budget got off to a really bad start this January as well, posting a RUB1.7 trillion deficit – its biggest short fall in over a decade for a January.

The federal budget deficit then went on to hit its full year target of RUB2.9 trillion, or 2% of GDP, after the first ten days of March and since then grew to RUB3.1 trillion in April.

Despite the record large deficits Siluanov stuck to his full year target of RUB2.9 trillion, or 2% of GDP, although since March has suggested there is a chance that the deficit may grow to 2.5% of GDP.

The finance minister has remained confident that his modest target is achievable. Siluanov said one of the reasons for the large deficit in January is that a lot of expenditure that normally comes at the end of the year had been frontloaded to January to smooth out payments. Typically, just over 20% of all government expenditure comes in December alone – but not this year as a result of the frontloading.

He also said various tax and reporting changes had affected the result and pushed the deficit number up artificially. Both these things were one-off changes that would not be repeated.

Nevertheless, the 46% fall in oil and gas revenues was real and accounted for at least half of the shortfall. The fall in income was due to the new oil and oil products sanctions that came into effect on December 5 and February 5.

But Siluanov said that the fall in oil revenues would recover as the year wore on. The sanctions caused a disruption in the delivery of Russian oil to “friendly” markets and once the sanctions were imposed new routes and customers needed to be found – a process that takes several months.

The Finance Minister’s predictions appear to be playing out after the monthly deficit began to recover and put in a very small surplus in May. That surplus has grown from RUB13bn to RUB815bn in June as oil and gas, as well as other revenues, begin to climb again.

In general, the good budget revenue performance in June has shaved just under RUB1 trillion off the deficit, reducing it from an annual cumulative peak of RUB3.4 trillion in May to RUB2.6 trillion in June – inside the 2% of GDP target for the whole year.

The pick-up in revenues has been helped by rising price of oil and the narrowing of the discount between the Russian Urals blend and the benchmark Brent blend. A decision by OPEC last month to voluntarily cut production has lifted the price for a barrel of Brent to around $85 but more importantly the discount on a barrel of Urals has fallen from a high of around $35 on the price of Brent to around $10 now.

After falling as low as $35 per barrel in the depths of the sanctions onslaught in the first quarter of last year, the price of Urals has recovered in recent months to break above the oil price cap sanctions level of $60 in July, but the Western allies have been reluctant to strictly enforce the new rules, afraid of causing a spike in prices. Last week Urals prices rose to some $65 per barrel, but about half of Russia’s crude is still carried by Greek tankers, an EU member, Institute of International Finance (IIF) reports. In addition, Russia has built up a massive “ghost fleet” of tankers that operate entirely outside of the sanctions regime and sell Russian crude to “friendly” countries that are ignoring the oil price cap regime – mostly China and India.

OPEC meets again this week, but it is not expected to cut production again, but with instability building in Libya supplies may be hit again in the coming weeks which could push prices up further.

As leading oil experts Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks, and Christoph Ruehl, Senior Research Scholar at the Centre on Global Energy Policy, Columbia University, and the former chief economist at BP, told bne IntelliNews in a podcast on oil in February, it does appear that the huge January deficit was an aberration, caused by the new sanctions and the subsequent change in delivery routes and customer base, and that the Russia’s budget revenues will continue to pick up over the rest of the year as the market continues to adjust to the new realities.

In previous non-crisis years, Russia’s average monthly oil revenues have run at a level of between RUB250bn and RUB400bn a month depending on oil price dynamics, however, the monthly income has regularly risen as high as RUB1 trillion in a month on oil price spikes. However, in bad years, such as 2015, when the sanctions regime was first introduced, the monthly deficit can fall by RUB1 trillion a month as well.

In 2021, the last normal year before the war started, the average monthly budget income was RUB250bn, rising to RUB400bn per month in 2022. If the results of 2022 for the remaining months of the year were repeated then Russia would end the year with no deficit at all.