15.11.22 Review

Double Pressure: Russia's budget problems will sharply aggravate in the first half of 2023

The budget dynamics are deteriorating: revenues have been falling for four months in a row due to a severe decline in non-oil and gas revenues, while expenditures have been growing at double-digit rates for the fifth month in a row, according to the January-October 2022 statistics from the Russian Ministry of Finance. This trend will continue: at least until the middle of next year, the economy will be contracting relative to the peak of the fourth quarter of 2021, which means that non-oil and gas revenues will also be decreasing, while spending will not be reduced. Therefore, even if the oil embargo will not significantly reduce oil and gas revenues, the budget problem will be exacerbated by the double effect of reduced oil and gas and non-oil and gas revenues.
The Russian Ministry of Finance has published a preliminary assessment of the federal budget execution in the first 10 months of 2022, which shows that the budget is still supported by oil and gas revenues, providing the bulk of the state treasury revenues, while non-oil and gas revenues, reflecting the dynamics of economic activity, are declining.

The October dynamics of oil and gas revenues were supported by the increased severance tax receipt from Gazprom of 416 billion rubles (additional payments of about 1 trillion rubles will come in November and December). As a result, oil and gas revenues showed an increase of almost 16% in annual terms. Oil and gas revenues in nominal terms have outpaced non-oil and gas revenues once again (as it was in April 2022) — 1.28 trillion rubles against 1.12 trillion. 

The situation with non-oil and gas revenues (VAT, income tax, non-tax fees) continues to deteriorate as a result of the shrinking economy and, therefore, the taxable base.

The reduction of non-oil and gas revenues in October amounted to -20.1% after -4% in September. Before that, a decrease in budget tax revenues without oil and gas by more than 20% was recorded in July (-29%), when it was the lowest in 11 years. The tax yield of the economy has decreased particularly because of a reduction in VAT on imported goods, a slowdown of domestic VAT collection (by 39% compared to September), and a decrease in income tax (by 26.3% compared to last October), which reflects the low import recovery rate, declining consumption and the overall slowdown of the economy. According to the Ministry of Economic Development, the GDP drop in September has already reached 5%, and the leading indicators of October demonstrate the continuing deterioration of economic dynamics. 

A sharp decline in non-oil and gas revenues (despite the increase in oil and gas revenues by almost 1.9 times by September due to Gazprom's payment) pulled down the dynamics of total federal budget revenues — they fell by 4.3% in October (to 2.4 trillion rubles). Therefore, the reduction of federal budget revenues continues for the fourth month in a row. Annual inflation in October reached 12.6%, which means that in real terms the budget revenues decreased even more significantly. At the same time, federal budget expenditures growth in October has slightly slowed down against September (the expenditures have grown by 26.7% in annual terms), which ensured the total monthly budget surplus of 74 billion rubles after four months of the state treasury deficit. At the end of 10 months, the federal budget surplus is estimated at 128.4 billion rubles. Total federal budget revenues for 10 months of 2022 have reached 22.139 trillion rubles, and expenditures — 22.011 trillion rubles. According to the Ministry of Finance forecasts, the revenues this year will total 27.7 trillion rubles, the expenditures — 29 trillion rubles, and the deficit — 1.3 trillion rubles. 

Falling non-oil and gas profits create a major threat to the Russian economy and the Russian government. In the fourth quarter, the decline in the economy by the fourth quarter of 2021 will reach about 7% (in November-December 2021, the pre-war Russian economy reached its peak). 

However, according to the forecasts, including the Russian Central Bank's one, next year the economy will continue to shrink. This means the non-oil and gas tax base will decrease, and non-oil and gas revenues will continue to fall. At the same time, oil and gas revenues will decline as a result of the embargo, though it is not known by how much.

Meanwhile, the government continues to raise expenditures. The current Ministry of Finance spending plan is 5.3 trillion rubles higher than what was planned for this year at the end of 2021. Since May 2022, the Ministry of Finance has classified operational information on all federal budget expenditures, after the April data release, showing an almost 2.5-fold increase in military spending. However, there is no doubt that they have only grown and that next year's budgeted expenditures will also be exceeded.