Putin won’t run out of money for his war any time soon
One of the main aims of Western sanctions against Russia is to reduce Russian President Vladimir Putin’s ability to pay for his war in Ukraine. Since the invasion, Russia has lost access to about half of its reserves of gold and foreign currency — while economic links between firms, in addition to supply chains, are undergoing a slow reconfiguration. The European energy market is also closed to the Kremlin. The European Union’s oil embargo and the G7 price cap on Russian oil has driven down the price of Urals crude. Russia now has to sell Urals at just $47 a barrel — a price that includes a discount of $30-40 depending on the buyer. Next week, the EU will impose an embargo on Russian oil products.
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Despite all these restrictions, Putin has sufficient money to pursue his war for at least three more years — if things remain as they are. Russia has plenty of reserves of gold and Chinese yuan. Even if it becomes necessary to cut spending, military expenditure (like social spending) is ring fenced. In previous financial crises (2009-09, 2014-15 and 2020) the Finance Ministry managed to persuade Putin to cut spending — but, even then, military and social spending was unaffected.
Social spending is ring fenced by law and Russia’s budget is designed in such a way as to ensure that ring fenced expenditure is independent of oil and gas income. These outgoings are linked to “predictable” income streams, which are not at the mercy of the vagaries of the market. In 2023, the Finance Ministry anticipates ring fenced expenditures will need to rise by 0.5% of GDP to about 17.2 billion rubles (11.5% of GDP) and will stay at that level through 2024 and 2025.
Military spending and national security expenses are extremely unlikely to be reduced. According to a former official: “everyone knows that they cannot be cut, so at budget meetings even the Ministry of Finance does not often propose to reduce them.” Military expenditure is planned to be 9.5 trillion rubles (both military and national security) while social spending is set to be 7.3 trillion rubles.
Putin promised last month that there would be no reduction in military expenditure. “The economy is functioning: taxes are collected, businesses are adapting,” one federal official said. “We still have a piggy bank.” It is likely that, if there is another major financial shock, the government will choose to cut infrastructure spending — and implement infrastructure projects, instead, through quasi-state institutions like development banks.
Russia recorded a current account surplus of $227.4 billion last year. And most expect another surplus this year. Despite Western sanctions, Russia is still exporting a sizable chunk of its hydrocarbons. However, income from this will be substantially less that the authorities expected even a few months ago.
First, official forecasts do not fully reflect what exactly is going on. For example, the state budget includes 1.7 trillion rubles of revenue from the export of 125 billion cubic meters of gas. However, this is completely inaccurate — as Alexander Isakov from Bloomberg Economics pointed out in a post on the Cold Calculation Telegram channel. The macro forecasts also fail to take into account the explosion on the Nordstream pipeline, which happened just before the budget was submitted to the Duma in September. “If 90 billion cubic meters [of gas] are exported, that’s already a good result,” Isakov said.
On top of this, the state budget ignores caps on oil and gas prices and Russia may agree to gas discounts and payment deferrals for Turkey in 2022 and 2023 (Ankara is asking for as much as a 25% discount). “I value them at $29 billion and $42 billion respectively – we are talking about $18 billion,” wrote Loko Bank analyst Dmitry Polevoy.
Deficit
Russia on Monday extended a deferred payment of insurance premiums until 2024. In December, the budget deficit was 2.1 trillion rubles greater than planned — one of the reasons was that it was needed to pay off 772 billion rubles in deferred insurance premiums. How the government spent the remaining 1.3 trillion rubles is unclear. The decision to defer this month means these costs won’t be reflected in the budget until 2024, according to the Solid Figures Telegram channel. Thus, the budget deficit is likely to be 2.3% of GDP (officially, it is expected to be 2% based on oil prices of $70 a barrel).
A decrease of $10 in the average price of oil over the course of this year would cost Russia a total of about $15 billion, estimated Elina Ribakova, deputy chief economist at the IIF. Bloomberg Economics has even more conservative estimates: if Urals costs an average of $50, the deficit will increase to about 3% of GDP.
However, Russia has sufficient reserves of gold, yuan and euros to cover the deficit for the next three years. The sale of foreign currency could increase from 55 billion rubles this month to 120 billion rubles in February, Bloomberg estimated. Russia would burn through its entire reserves of yuan in a year if oil prices fell to $25 — but this is very unlikely.
Why the world should care
Even if there is a sharp fall in oil and gas revenues and the state’s other “piggy banks” are emptied, Russia’s military expenditure can still be taken from tax income. In such a worst case scenario, investment in economic development would likely be transferred to quasi-state institutions and Russians expected to tighten their belts.
Written by Alexandra Prokopenko, translated by Andy Potts
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