Yves here. Russia’s budget woes in part result from its adherence to Jean-Baptiste Colbert’s principle:
The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.
Since the Russian economy contracted only slightly more than 2% in 2022 and even the IMF projects marginal growth for 2023, this fall in tax revenue is strictly a function of how Russia chooses to tax, since federal receipt have fallen far more than any GDP contraction.
Russia has opted to tax oil and gas companies heavily, making them the long-standing main source of federal revenues in Russia.
Transportation cost for Russian oil is 50-100% higher than for other oil producers + a cap on price. Double squeeze on profit margins and state revenues. No wonder the Russian budget is in deep trouble
Iran’s ‘ghost fleet’ switches into Russian oil https://t.co/r1wGOqk8eb
— Oleksandr Shepotylo 🇺🇦🇬🇧 (@shepotylo) February 7, 2023
Russia's #budget in January 2023:
Revenue: -35.1% compared to Jan 22.
Expenditure: +58.7% compared to Jan 22.
Deficit in January alone: >1% of GDP.
— Janis Kluge (@jakluge) February 6, 2023
Russia also taxes individual incomes and businesses, but rates are low by US standards. Russia is fiscally orthodox and seeks to run a balanced budget. Note that per the Financial Times, receipts from other sources in aggregate fell too:
The drop in oil and gas revenue was accompanied by a 28 per cent fall in other revenue to Rbs931bn, the finance ministry said, ascribing this to a decline in VAT and corporate tax takings
Russia did borrow in 2022 but the government claimed it did not have difficulty in raising funds.
It is not clear whether this January result will lead Russia to rethink its budget approach. Some of the decline is likely due to stockpiling in advance of rate caps and other restrictions being imposed (the oil price cap went into effect January 5 and the cap on petroleum products, on February 5). But the shortfall may be sustained, particularly if Chinese growth is in fits and starts.
Russia has suddenly gone from a weak currency country to a strong one. Even then, Russia is racking up current account surpluses, due both sanctions-produced restrictions on imports versus the prices of many of its exports remaining elevated. So Russia unlike many countries with large budget deficits, Russia is not constrained by a weak currency or lack of foreign exchange reserves. It has the room to net spend more than it seems inclined to (Putin seems allergic to budget deficits of more than 2% to 3%). Note additionally, despite the posture of the hard money times, government spending that increases productive capacity (such as for infrastructure) pays for itself in terms of GDP growth (ex potentially timing issues with when the spending takes place v. when the new resources come on line). None other that Larry Summers pointed out that the GDP impact could be as high as 3 times the spending. particularly since a lot of that spending is going to increase productive capacity, as in arms-making and import substitution. Putin has pointed out that the states collectively run a surplus. So we’ll see what if anything Russia does next. Patriotic savings bonds, anyone?
By Charles Kennedy. Originally published at OilPrice
- Russia’s budget was $24.7 billion (1.76 trillion rubles) into deficit in January.
- Total budget revenues slumped by 35% last month compared to the same month of 2022.
- The low price of Russia’s flagship grade is reducing Russian revenues from oil due to the steep discount at which Urals trades relative to the international benchmark Brent Crude.
Russia’s budget was $24.7 billion (1.76 trillion rubles) into deficit in January, compared to a surplus for January 2022, as state revenues from oil and gas plunged by 46.4% due to the low price of Urals and lower natural gas exports, the Russian Finance Ministry said in preliminary estimates.
Total budget revenues slumped by 35% last month compared to the same month of 2022, while overall budget expenditures jumped by 58.7% year-on-year in January, the ministry’s data showed.
Russia’s non-oil and gas revenues also dropped, by 28.1% year over year, according to preliminary estimates.
The revenue slump last month came from the key export revenues for the Russian state—oil and gas.
The low price of Russia’s flagship grade is reducing Russian revenues from oil due to the steep discount at which Urals trades relative to the international benchmark Brent Crude.
The average price of Urals in January, at $49.48 per barrel, was 1.7 times lower than in January 2022, when it averaged $85.64 per barrel, the Finance Ministry said last week.
The price of Urals has slumped to a discount of nearly $40 per barrel to the price of Brent Crude, which reduces Russia’s budget revenues from oil export taxes. Since the start of the EU embargo on crude oil imports from Russia and the G7 price cap, the per-barrel crude export duty for the Russian state has shrunk due to the plunge in the price of Urals.
Russia is considering taxing its oil firms based on the price of Brent – instead of Urals – to limit the fallout on the Russian budget revenues due to the widening discount of Urals to Brent, Russian daily Kommersant reported last week, quoting sources.
In the budget estimate for January this week, the Finance Ministry confirmed parts of this report, saying that “considering the fact that the relevance of the price of Urals in calculating export prices has diminished, various other approaches are currently being studied to switch to alternative price indicators for tax purposes.”