Page 3 - Russia OUTLOOK 2023

1.0 Executive summary

The Russian economy is approaching the end of 2022 in a far better state
than many had anticipated in the spring following the invasion of Ukraine
and ensuing Western sanctions. The fall in GDP has only amounted to about
3% or even less, and the US dollar is still trading at less than 65 rubles. Even
the Western ban on high-tech imports, although challenging, has proved
manageable. But none of this means that Russia’s economy is out of the
woods: many risks still remain. We asked economists from Russia’s leading
investment banks to highlight the new warning signs that have emerged in
recent months.

Oil and gas revenues started to fall sharply. In November, oil and gas
revenues contributed RUB866 billion ($13 billion) to the state budget – down
2.1% year on year. This is not a critical fall in revenues. However, in reality,
almost half of that sum ($6.4 billion) came from a one-off payment of
Gazprom’s mineral extraction taxes. Without that money, oil and gas income
was down 48.9% compared with 2021.

There are two possible reasons for this. First is the near-total cessation of
pipeline gas exports to Gazprom’s lucrative European market following the
closure and subsequent explosions on the Nord Stream gas pipeline. Second
is the fall in prices for Russian oil, which led to November’s oil revenues being
down 25.4% y/y.

Russia’s Finance Ministry is printing money to cover this deficit. Part of
the hole can be filled using the National Welfare Fund, but this alone will not be
enough. Relying solely on the NWF would mean the liquid part of that fund
would run out by 2025 according to the projected budget deficit, Central Bank
analysts reported.

This fall, the Finance Ministry turned to large-scale borrowing in the federal
loan bond market to cover the rest of the deficit. These internal loans raised
RUB1.44 trillion ($22 billion) for the ministry. Of this sum, 77% derives from
bonds floating rates, which will ultimately be tied to Central Bank rates. The
main buyers of these bonds were leading banks, which previously borrowed
RUB1.39 trillion ($21 billion) through REPO transactions. Therefore we are
effectively looking at hidden money emission.

This has obvious consequences: it will likely increase inflationary pressure,
forcing the Central Bank to raise interest rates and sacrifice economic growth.
However, not every economist regards this scheme as inflationary. Economist
Viktor Tunev believes that, from the point of view of modern monetary theory,
this borrowing algorithm will have no significant economic consequences. He

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