Russia’s budget deficit in the coming year might exceed the expected 2% of GDP as the oil price cap hurts export income, the country’s Finance Minister Anton Siluanov said on Tuesday.
This marks the first time a Russian official has acknowledged that the $60 per barrel price cap imposed on Russia by Europe and G7 nations will negatively impact its economy. Siluanov says the country will tap debt markets to bridge the deficit. Russia expects to use just over 2 trillion roubles ($29 billion) from the National Wealth Fund (NWF) in 2022 as total spending exceeds 30 trillion roubles, above the initial budget.
Russia’s economy is expected to contract three percent in the current year - a sharp turnaround from its growth in 2021, with Central Bank governor Elvira Nabiullina citing “worsening trade conditions” as a key reason. Russia’s cash flows are expected to weaken considerably in 2023 as oil and gas sales to Europe plunge. Ukraine’s Ministry of Economy expects that the EU embargo on Russian oil and petroleum products should cut Russia’s profits by at least 50%.
“We expect the collapse of profits from oil and gas exports to be at more than 50%, precisely because of the introduction of the EU embargo on oil and petroleum products and the introduction of price restrictions. Oil and gas account for 60% and 40% of federal budget revenues. We expect that Russia’s revenues will fall below the critical level of $40 billion per quarter,” Yuliya Svyrydenko, First Deputy Prime Minister and Minister of Economy of Ukraine, has said. She has expressed hope that plunging profits will make it more difficult for Russia to continue waging an expansive war.
Meanwhile, the Russian rouble has finally caved in, slumping past 70 per U.S. dollar to a more than seven-month low courtesy of plunging crude prices as well as fears that sanctions on Russian oil could hit the country’s export revenue, Reuters reports. Russian equities have also taken a hit, with the dollar-denominated RTS index down 5.4% to 982.8 points, a more than two-month low.
By Alex Kimani for Oilprice.com
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The Western price cap on Russian oil exports has already failed and soon will be consigned to a waste bin. The proof is that when the cap was launched on 5 December, Brent crude was $73 a barrel but since then it has risen to $85.43 today, a 17% rise.
Moreover, neither OPEC+ countries nor Russia will agree to sell their oil at the cap price of $60 a barrel when the price in the market is above $85. If sellers refuse to sell their oil and Western buyers refuse to pay more than $60, whom do you think will be the loser? Sellers can easily find buyers for their oil but Western countries can’t and without oil their economies will come to a standstill. They will be the ultimate losers.
Furthermore, Russia won’t lose. Its main buyers like China. India, Asian countries and Asian oil traders have already ignored the price cap and are continuing to buy Russian crude in increasing volumes. For instance, China alone has so far bought $89 bn worth of Russian oil, gas, LNG and coal this year equivalent to 89% of the entire EU’s purchases of Russian oil and gas in 2021.
Even if Russia sells 6 million barrels a day (mbd) of crude oil at today’s Brent price of $85.43, it gets more revenue than selling 7 mbd at $73. Therefore, Russia’s budget won’t lose a single penny. On the contrary, if the price goes to $90 as is projected or Russia sells more than 6 mbd, then the Russian budget’s surplus could only expand.
The admission by Russian Finance Minister Anton Siluanov that Russia’s budget deficit could widen in 2023 as a result of the price cap is, in my opinion, a deliberate disinformation aimed to lull Western countries into a false sense of security.
Moreover, neither reports by Reuters on the ruble nor the pontification on the Russian economy by Yuliya Svyrydenko, First Deputy Prime Minister and Minister of Economy of Ukraine are trustworthy because they have vested interests and therefore should be ignored.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert