The impact of sanctions imposed by the West on Moscow in revenge on him war in Ukraine begin to influence its fiscal picture Russia as its income decreases and defense spending increases, causing its budget deficit to widen. In January, Russia showed a budget deficit of 1.76 trillion. rubles, an amount equivalent to almost $25 billion, namely $24.78 billion, which is the highest figure for a given month since at least 1998. The reason, of course, is the decline in Moscow’s income from oil and natural gas exports.

Revenues from oil and gas fell by 46% compared to January last year. Meanwhile, government spending rose 59% over the same period as Moscow decided to significantly increase defense spending because of the war in Ukraine. According to the Russian Ministry of Finance, the reason was the fall in prices for Urals oil, which makes up the bulk of Russian oil exports, as well as a significant drop in natural gas exports. The decline in oil and gas revenues is the result of Western sanctions, which now include a European Union ban on most marine imports of crude and refined fuels, as well as a G7 price ceiling.

In January, the price of Urals oil averaged $49.48 per barrel, the lowest level since December 2020, but above all, this price was well below the $70 per barrel expected by Moscow in its budget. As for Brent, on average it rose to $77.82 per barrel. At the same time, however, Russia’s non-hydrocarbon revenues also fell 28% in January, with the finance ministry attributing this in part to a change in VAT rules.

For its part, the Russian Ministry of Finance insists that it continues to meet its budget targets for the current year. However, according to Natalia Lavrova, a senior economist at investment bank BCS Global Markets, for the first time in modern Russian history, Moscow has increased spending so dramatically, even though its revenues are falling rapidly. In an interview with the Financial Times, he even stressed that “the last time we saw something like this was in 2015, when national defense spending soared.” However, he adds that the difference between today and 2015 is that there was not such a large drop in government revenue back then. She stressed that the only factor with which the current drop in Moscow’s tax revenues can be compared is the corresponding drop during the first wave of the pandemic in the spring of 2020. balance”.

The price of Urals oil in the first month of 2023 averaged $49.48 per barrel, the lowest level since December 2020.

However, to supplement its revenues and fill the gap left in its exports by the EU embargo, Moscow has turned to other markets, mainly China and India. In particular, in January 70% of Russian oil exports were sold to India, which is the world’s third largest oil consumer and accounts for 30% of global consumption. Thus, India has become Moscow’s number one buyer of Urals oil, which it buys, of course, at a big discount. In December, its oil imports soared to their highest level in five months as it rushed to take advantage of deep discounts and purchase large volumes of Russian oil. And as Indian Energy Minister Singh Puri told reporters, “the country has not let geopolitical tensions, the pandemic or any other factor prevent it from securing essential supplies for its consumers.”

In addition, the finance ministry said it sold 3.6 tons of gold in January, as well as 2.3 billion yuan from the sovereign wealth fund to cover the shortfall. Most of Russia’s international reserves are “frozen” due to international sanctions. The ministry said it believes it can still meet its financial targets this year.