Russian Economy's Bleak OuTlook –  Fiscal deficit Widens

It’s been a year now since Russian-Ukraine War. The Economic outlook of Russia looks bleak. Falling Oil and Gas production in 2023 along with sanctions are hurting Russia’s economy.  The International Energy Agency estimates that Oil production will fall to 1.6 million barrels per day (bpd) in 2023. This is far low than the pre-war level of 9.7 million bpd.

In 2021, Russian crude and condensate output were up to 14% of the world’s total supply. The Revenue from Oil and Natural gas accounted for almost 45% of Russia’s Federal budget in 2021. Russia’s own budget projects a fall in oil and gas revenue in 2023 by 23% compared to 2022.  

Recession and GDP contraction in Russia

In 2022, the Russian economy entered recession, still better off than initially then expected – despite wide-ranging sanctions due to the Ukraine war. The first assessment of Russian GDP for the year 2022 was released last week by Russian Statistical Service.

GDP and major components

According to Rossstat (Russian Statistical Service), the GDP contracted by 2.1% (i.e. -2.1%) in 2022. Consumer Spending has declined by 1.8% (i.e. -1.8%).  Whereas Public Spending increased by 2.8% and Fixed investment increased by 5.2% despite an uncertain investment environment and many western companies have pulled off from Russia.

This shows that the Numerous Fiscal Stimulus measures by the Russian Government have helped to prevent a deeper Recession in 2022.

Trade

According to Rosstat, the Net Trade accounted for 12.8% of GDP in 2022 – this is higher than in 2021 (which was 9.4%). Though Rosstat withheld the foreign trade data, the preliminary Balance of Payments (BoP) indicates that total imports contracted by 9% (i.e. -9%) Year-on-Year (y-o-y) and the value of total exports expanded by 14% in 2022.

Consumption

Private Consumption has contracted by 1.8% whereas Public consumption increased by 2.8% in 2022 (compared to 2021). This also means there is a decline in real income by 1% (y-o-y).

Capital Formation

On Year on Year basis, Gross Capital Formation (GCF) has declined by 3.2% – this is mainly due to a massive drop in inventories. However, the Fixed Capital investment has increased by 5.2% – thanks to investment projects with public support launched in 2022 and the Government’s investment projects. Budget Funding for Public Projects increased by 29% in 2022.

Budget/Fiscal Deficit

On March 6^th, 2023, according to a Reuters report, the Finance Ministry of Russia stated that the Budget deficit for the first two months (January and February 2023) has increased to 2.58 trillion roubles($ 34.19 billion).

The Preliminary data showed that Oil and Gas revenues were at 947 billion roubles – this is 46.4% lower than the corresponding period last year. The Overall budget revenues for the combined two months are down 24.8% as per preliminary data. Spending for the first two months of 2023, has increased by 51.5% at 5.74 trillion roubles.

The budgeted deficit is 2.3% and Finance Minister Anton Siluanov has pledged to stick to it. However, in two months the deficit is already approaching 2.93 trillion roubles – actually, it is 2.581 trillion roubles which is almost 45% of the target for 2023.

A Reuters report stated that the Bank of Russia may become more aggressive as there is a widening in the budget Deficit. The Bank of Russia held its key rate at 7.5% but stated that if there is further widening in the country’s budget deficit then the Central bank is bound to raise the cost of borrowing.

 If there are no new significant challenges, the Central Bank said, then the GDP dynamics will be much better than its baseline forecast of 1% contraction to 1% growth.

My Perspective

In 2023, the rising military spending and declining energy export revenues will be an additional burden on the budget which will widen the Budget Deficit. 

Russia is not only one of the major players in Global energy markets and but it is also one of the world’s top three Crude oil producers (after Saudi Arabia and the United States). Not only that, Russia is the world’s 4^th largest LNG exporter which accounts for approximately 8% of global LNG supply. 

But Russia is not an economy which is not without any economic issues. The sanctions may have just scratched its economy but what it has to worry about is long-term structural economic issues. The main long-term issues are more dependent on energy exports, Decline in Russia’s Demography, an inability to attract investments (this is at least for the medium term) and a widening Debt/ Deficit burden on Federal Buget. These economic issues will restrain its growth potential along with more burden on the Budget.