Russian macro: Contrary to a tradition, the 2023 budget is unlikely to be amended if the Brent/Urals spread remains wide

RUSSIA ECONOMICS - Report 18 Jan 2023 by Evgeny Gavrilenkov and Alexander Kudrin

At the very end of December, the Finance Ministry announced that federal budget expenditures exceeded R31.1 trln rubles in 2022, which meant that, after a series of amendments, actual spending last year exceeded the initially targeted amount by nearly one-third. It was already a tradition that the initially approved budget would be significantly amended every year, as the government always preferred sticking to a very conservative approach stipulated by the fiscal rule. The reality, however, used to be very different from the government's assumptions and forecasts. In recent years, the pandemic naturally forced the government to spend more than planned, especially in 2020, and the same happened in many countries. The additional spending was supposed to be a one-off event in Russia, but the appetite for spending appeared unstoppable.

Oil-and-gas revenues accounted for 41.6% of the total amount of revenue in 2022 and exceeded the 2019 level (39.3%). In 2020 and 2021, the share of oil-and-gas revenues in total revenues of the federal budget was much lower (28.0% and 35.8%), implying an increased risk for the authorities going forward. Indeed, expenditures were massively raised, while the budget became more dependent on the taxation of the oil-and-gas sector amid mounting sanctions.

The government may be too optimistic on the 2023 revenue side overall as it expected when drafting the budget a too-high Urals oil price in 2023 (around $70/bbl) while in reality, it may be around the same level as seen recently, i.e., $50/bbl or below. A wide spread between Brent and Urals (currently around $33-34/bbl) may persist, and if this uneasy scenario materializes, then 2023 may be a year without amended expenditures and wide budget deficit. However, financing this deficit won’t be a problem in 2023.

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