Weekly 17 January 2023

$15bln hole

Falling oil prices threaten to blow a $15bln hole in Russia’s finances

A little over a month since they were imposed, Europe’s embargo on Russian oil and a price cap imposed by the G7 are having an impact. The price of Russian benchmark Urals crude plummeted in December and at a 40% discount to the global standard, Brent. That discrepancy threatens to put a hole of about $15 billion in Russia’s budget.

  • The average price for Urals crude was $50.5 per barrel in December — down 24% month-on-month. The traditional discount for Russian oil, compared with Brent crude, was usually about $3, but by the end of last year it had reached $30 per barrel. This discount is a direct result of Russian oil producers having to switch to the Asian market and slash prices due to the risk of sanctions — as well as the price cap.
  • And low prices will likely remain. A new embargo on supplying Russian oil products to Europe takes force on Feb. 5, obliging Russian exporters to seek alternative markets for another 1.5 million barrels of crude oil each day (Asian countries only buy Russian crude to process in their own refineries).
  • These lower oil prices have led to catastrophic fall in Russia’s oil and gas revenues. On paper, they were up 6% in December compared with the same month last year and totalled $14 billion. However, $6.2 billion of this comes from a one-off mineral extraction tax payment paid by state-owned gas giant Gazprom. Without that payment, oil and gas revenues were down 41.2% year-on-year.
  • The current budget plans for 2023 are based on an average price of $70.2 for a barrel of Urals crude (even at that price, the authorities anticipate a budget deficit of $45 billion, or 2% of GDP). But if the average price of Urals turns out, instead, to be $60 per barrel (a figure that forms the basis of calculations by, for example, Alexander Isakov, Bloomberg Economics’ chief Russia economist) and Russia produces 10 million barrels a day, the government will be $15 billion short.
  • Officials are, apparently, not unduly worried at the moment. One federal official reminded The Bell that, in 2016, the average price for a barrel of Urals crude was less than $40 (the actual figure was $41.9 — The Bell) — and there were no serious consequences. “We can balance the budget even at $50,” he said. Another official told The Bell that there isn’t yet enough information to start panicking.
  • Isakov from Bloomberg Economics did not share their optimism. For one, in 2016, it was easier to reduce spending. Pensions and welfare payments were not index-linked and there was a public sector pay freeze. Second, back then, the authorities made up the shortfall in oil and gas revenues by taking on debt. That is also happening now. However, in 2016, 60% of new debt was financed by non-resident investors who brought with them foreign currency — which partly compensated for low energy prices. It may now be possible to slow capital outflows by raising interest rates, but this will not have such a big effect.

Why the world should care

Despite low oil prices, Russia won’t face a financial catastrophe in 2023 (the money stashed away in Russia’s sovereign wealth fund alone could cover the country’s costs for at least a year). But, as Russia approaches the second year of its war in Ukraine, the economy faces a deadly combination of reduced revenues and an increased budget deficit at a time when the commodities market is poor and reducing military and social expenditure is impossible. If this continues, the authorities will have to either cut spending, expropriate more funds from business (or the population), or resort to printing money.

Russia considers confiscating real estate of anti-war emigres

Russian officials last year regularly proposed punishments for anyone who had left the country and continued to criticize the regime from abroad. Last week, however, this question was raised once again — and more seriously. The authorities made it clear they are working on something concrete that can be used against those they call “traitors” and “villains.”

  • One of the most prominent advocates of punishing those who criticize Russia from abroad is the speaker of the Russian parliament, Vyacheslav Volodin. He suggested confiscating real estate belonging to these people and intends to use existing legislation that punishes inciting extremism, rehabilitating Nazism and “discrediting” Russia’s military. The main difference between this proposal and its predecessors is that it was supported by the influential Andrei Klishas, head of the Constitutional Committee in the upper chamber of the Russian parliament.
  • These legislative changes will go before the Human Rights Council, a presidential advisory body whose main task is to develop civil institutions and monitor the observance of human rights. Council member Kirill Kabanov pointed out that attempts to introduce punishments for “traitors” have no legal force, because that terminology has no legal basis. However, Kabanov supported the initiative to “punish treachery in any form.”
  • Russian lawmakers are already working on measures to punish those who leave Russian and criticize the regime. Oleg Morozov, a deputy of the ruling United Russia party, said that these sorts of people “can and should be stripped of their rights — political, social and property.” Among other things, Morozov suggested depriving them of their right to take part in elections.
  • Since Russia invaded Ukraine, many Russian public figures have spoken out against the war and left the country. In May, 2022, for example renowned musician Boris Grebenshchikov described supporters of the war as “mentally ill fascists.”

Why the world should care

It appears the Russian authorities have found a new way to punish prominent opponents of the war. Politicians have proposed confiscating their property, withdrawing state awards and possibly depriving them of citizenship. It is possible that if any of these measures become law, “ordinary” Russians who criticize the Kremlin from abroad may also be affected.

Russia’s Defense Ministry praises Wagner Group mercenaries

Russia’s Defense Ministry made a rare public acknowledgement Friday of the success of mercenary group Wagner in the war in Ukraine. The ministry said that Wagner soldiers successfully captured the small town of Soledar in the Donetsk Region. This recognition comes amid a long-running conflict between the Armed Forces and Wagner, which has been involved in the war since day — but without any official status.

  • Soledar is a small town 10 kilometers north of the larger Bakhmut which Russian mercenary forces have been trying and failing to capture since the summer. Wagner founder, Evgeny Prigozhin, announced the capture of Soledar on Jan. 12. The next day, the Defense Ministry reported the “liberation” of Soledar, but its press release made no mention of Wagner.
  • In response, Prigozhin said that “someone is constantly trying to rob [the Wagner Group] of its victory.” About eight hours later, the ministry circulated a new statement that admitted that direct attacks on Soledar were undertaken “by the courageous and selfless actions of… Wagner assault squads.”
  • The dispute between Prigozhin and the Ministry of Defense is long running. The businessman has reportedly criticized the performance of military commanders in face-to-face conversations with President Vladimir Putin and believes that the ministry “relies too much” on fighters from his group.
  • The conflict entered a new phase in late December when the mercenaries released a video calling Valery Gerasimov, head of Russia’s General Staff, a “fag” and a “damned fucker.” Wagner’s soldiers have complained about a lack of ammunition and support from the army. Prigozhin openly supported the men who made the video.

Why the world should care

Prigozhin, the leader of a paramilitary group with no legal status in Russia, has nothing like the resources of men and equipment available to the Armed Forces. However, Wagner has significant media resources, which can sometimes be just as powerful.

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