On Feb. 5, the most recent package of sanctions against the Russian economy came into force and an embargo on Russian oil products came into effect. Yes, a lot of things remain unsanctioned. Given the situation, one often brings up an example of Rosatom and a string of Russian banks that are not under sanctions. However, even if the said sanctions had affected the respective industries, they would not have made a significant impact. Rosatom’s income is not so crucial for the Russian economy and, above all, the Russian budget.

So what is going on with the Russian budget? Simultaneously with the introduction of the latest sanctions, the statistical data of the Russian budget for January was released, which gave Ukrainians plenty of reasons to rejoice. At first glance, it looks like the Russian budget has morphed into a giant black hole that is going to suck in the Russian economy by the summer.

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The budget deficit in January alone amounted to 1.6 trillion rubles (about $22 billion), which constitutes 60 percent of the planned deficit for the entire year. A sharp increase in income and at the same time an equally sharp drop in income clearly shows that “something went terribly wrong.” And all Russian reserves – the value of the assets in the National Welfare Fund stood at 6 trillion rubles ($81 billion) – might be burned in the budget furnace by the summer.

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From the look of it, even the Kremlin, which traditionally claims that “everything is just fine” and that the economy is growing, was shaken by these numbers. The Russian Ministry of Finance rushed to explain that “there was a misunderstanding” and that “things are not actually that bad.” Although we have to admit that some of their arguments sound quite logical. First, they are claiming that the sharp increase in costs is not a constant problem (we are talking about the fact that in January the Russian budget paid up to 70 percent of the expenses needed for the Russian defense industry – they were fulfilling the “everything for the front, everything for victory” order from the Kremlin) and in February, there will be no large expenses, which means that the deficit is going to be smaller.

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As for the income, it’s equally complicated. A sharp drop (by 46 percent) in oil and gas revenues was recorded; thus, in January 2023, the Russian budget earned two times less from selling oil and gas than in January 2022. This is the result of the sanctions, and it will still be visible in the following months of 2023.

Russia has already lost the European gas market along with its potential income. And the oil Russia was able to reroute to other markets is being sold with a significant discount for “being toxic,” which has led to a drop in income.

It is nearly impossible to redirect gas to other markets, so the only remaining thing is to invent fake stories about how the Norwegians together with American divers blew up the Nord Stream.

Hypothetically, Russia may find an opportunity to increase its sales on the eastern flank by diverting up to 20 billion cubic meters of gas to Uzbekistan and Kazakhstan. But these are all trifles compared to its losses on the European market.

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At the same time, oil and gas revenues collapsed, decreasing by 30 percent. The Ministry of Finance of Russia explained this drop as due to technical factors connected to the reconfiguration of Russia’s tax system – for example, the fact that VAT refunds for businesses happen during the first month of the quarter, which means lower net income from taxes in January. But in February and March, according to them, we will already see a reverse effect.

How bad things really are will be obvious by the end of February, when the technical factors the Russian Ministry of Finance is talking about are no longer relevant – but also when the effect of the latest sanctions limiting the export of Russian oil products will become visible.

So what is the bottom line? Things are not going as badly as we might hope. In any case, we will only be able to tell for sure after receiving the data from February.

Yet things are going far worse than Russian officials would like. After all, there was a reason behind the suggestion that Russian businesses chip in and help out the Russian budget by donating 200 billion rubles ($2.7 billion) – just like that, as a one-time payment. They didn’t even bother with inventing a dedicated tax, and instead and just said “give us some money” outright.

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Governments don’t normally act this way. Especially not a government that has been bending over backwards in its attempts to demonstrate that everything is going well, even hiding the real numbers and sugarcoating the ones it shows.

And then inconsistencies start to pop up – such as when Russian statistical data mentions the growing construction industry while Russian steel workers suddenly claim that the construction sector in Russia has started to purchase less metal.

The economic decline of 2022 was to a lesser extent connected to the increase in domestic investment – and all of it in the context of an unprecedented capital outflow. At the same time, the investments of the private sector (which had a financial cushion and decided to take advantage of the vacuum created as a result of the departure of Western companies and restrictions on Western imports) were growing. However, these investments, paradoxical as they may seem, were made against the background of high reserves and when the sanctions were only starting.

At the beginning of 2023, the situation is drastically different. The planned budget deficit in Russia is unmanageable, as the abovementioned budget was drafted based on the selling price of Russian oil at $70 per barrel and the assumption that Gazprom still dominated the European market instead of burning gas it can’t sell.

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So although Russia keeps shouting that sanctions don’t work – they actually do.

The views expressed in this article are the author’s and not necessarily those of Kyiv Post.

 

 

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