Conflict in Ukraine, sanctions will blow up Russia's finances

Conflict in Ukraine, sanctions will blow up Russia’s finances

  • This content was produced in Russia where the law limits coverage of Russian military operations in Ukraine

Nov 2 (Reuters) – The cost of Russian military mobilization and the impact of Western sanctions are set to blow government budget forecasts and drain Moscow’s reserves to their lowest level in years, according to the latest analysts’ calculations.

This will put an even greater strain on Kremlin resources as President Vladimir Putin seeks to fund a conflict with no end in sight and prepares for possible re-election in 2024.

After eight months of what it calls a “special military operation”, Moscow has drawn up a 2023 budget that does not take into account the cost of the recent call-up of 300,000 reservists, the declared annexation of four Ukrainian regions – the Kremlin claims that the four joined Russia freely – and Western efforts to cap Russian energy export prices, analysts said.

While Russia’s economy initially held up relatively well to the waves of Western sanctions imposed on it, the impact is beginning to be felt – in analysts’ assessments, if not those of the government.

“The macroeconomic forecasts, on which the budget is based, were calculated before mobilization,” said Alexandra Suslina, an independent analyst. “It does not take into account the new sanctions and therefore does not reflect reality.”

Putin’s current fourth term as president expires in 2024 and he has yet to say whether he will run again – a process that, judging by past campaigns, would likely involve wooing voters with pledges to spend more on wages, welfare and pensions.

Kremlin spokesman Dmitry Peskov told reporters on Wednesday that Putin had not yet decided whether he would run in 2024, but added: “The social obligations of the state are a top priority.”

Official Russian forecasts estimate that GDP will fall by 0.8% next year, while a Reuters poll of analysts predicts the economy will shrink by 2.5%. The World Bank expects a contraction of 3.6%. Read more


The Russian Finance Ministry expects next year’s budget deficit to nearly double this year’s to 3 trillion rubles, or 2% of gross domestic product. Analysts at state bank VTB (VTBR.MM) predict an even wider spread of 4-4.5 trillion rubles.

Moscow forecasts energy revenues of 9 trillion rubles next year, a third of its total revenue – a projection analysts say is also overly optimistic given upcoming sanctions on Russian energy imports by the West .

“The Ministry of Finance predicts incredible things such as energy revenues … would remain as before, as Russia would continue to produce the same amount of oil with unchanged demand,” said an economist from a Western financial firm.

As Europe cuts ties with Russia, Moscow risks losing 55% of its petroleum product exports, or more than 80 million tonnes, next year, the government has estimated. Gazprom’s gas exports have already fallen by 43% in January-October compared to the same period last year.

The Ministry of Finance projects that non-energy revenues, or those related to economic activity, will amount to 11.5% of GDP in 2023, about 7% more than this year and on par with levels of before the pandemic.

But analysts say that too is hardly realistic.

“Consumer demand will drop, people will buy less, cheaper, of lower quality – and then non-energy revenue forecasts… will have to be revised,” Suslina said.

While Russia officially ended what it calls its “partial” mobilization this week, some 300,000 reservists called up by the Kremlin for its campaign in Ukraine since September remain in military units, which is also hurting activity. economic.

According to a joint study by the Russian Presidential Academy Ranepa and the Gaidar Institute, Moscow could collect about 1 trillion rubles less a year in value added tax, its main non-energy revenue, due to the decline economic activity and weak imports.

Dmitry Polevoy, chief investment officer at Locko Invest, a Moscow-based broker, estimates payouts to those on the job – including above-average salaries and compensation for injury or death – could be between $900 billion. rubles and 3 trillion rubles in the next half year alone.

The finance ministry did not respond to a Reuters request for comment.

Finance Minister Anton Siluanov, without giving details, told Russian lawmakers last week that the budget “enables us to meet all social obligations without undermining macroeconomic stability.”


Russia has few options to close the budget gap, analysts say, as sanctions and counter-sanctions have hurt foreign investors’ ability to invest in domestic ruble bonds, and the finance ministry is already depleting funds. resources from the National Wealth Fund (NWF).

As Russia has actively started spending NWF money on everything from economic support to social payments, the finance ministry sees the fund halving to 6.25 trillion rubles, or 4.2% of GDP – its lowest since 2018 – by the end of next year.

“The primary fiscal risk in the context of significant sanctions pressures … is that of a complete NWF drying up, which could significantly undermine the stability of the federal budget and the fiscal system as a whole,” analysts from the Bank said. Financial University in a recent note. .

If it drops to 5.95 trillion rubles, or 3.7% of GDP, by the end of 2024, the amount of cash remaining would be the smallest Russia has had in its reserves in the last two decades, according to the budget comments of the state audit. Bedroom.

“Sources to finance the budget deficit are now scarcer than ever,” Suslina said.

“I really hope the Ministry of Finance avoids outright printing of money.”

Editing by Mark Trevelyan and Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.

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