Page 99 - RusRPTMar23

Decisions by Western firms to reduce their Russian oil imports compelled Russia to large discounts on Urals blend crude oil as early as March, even if the Urals price underscored the level of 12 months earlier only in early autumn. On the other hand, the value of oil & gas taxes, which are denominated in dollars, declined in ruble terms as a very large current account surplus and stringent currency controls drove up the ruble exchange rate sustaining from late spring until virtually end-2022. A slight increase in oil output lifted the share of oil production tax revenues in all oil & gas tax revenues to over 72%, while Gazprom’s extra production tax payment raised the share of natural gas production tax revenues.
With the acceleration of consolidated budget spending growth in the spring and slowing inflation, spending increased at a considerable pace in real terms after mid-summer, due e.g. to a sharp increase in spending on fixed investment (information on other spending categories has not been released since April figures). Federal budget spending already accelerated in the months around the invasion of Ukraine and was boosted in the final months of 2022 to about 40% y/y. The dramatic increase in spending on fixed investment points to a sharp rise in defence spending (which was already up by nearly 40% y/y in January-April). The real increase in total government spending, however, has yet to exceed the tempos seen in some of the previous recessions.
With fading revenues and increased spending, the small federal budget surplus (0.4% of GDP) in 2021 transformed in 2022 in a larger-than-expected deficit (2.3% of GDP – even with Gazprom’s tax boost equivalent to nearly 1% of GDP). This situation should characterise roughly the overall government sector deficit as regional and municipal budgets and the budgets of state social funds can hardly finance any deficits. In early autumn, the government still contemplated covering the federal budget deficit with significant drawings from the reserve fund (National Wealth Fund). However, in late autumn it resorted to financing the deficit almost entirely through massive domestic bond issues.
In early autumn, the finance ministry drew up revenue estimates based on a relatively optimistic economic forecast, issued in a government budget policy framework. It also presented a very modest increase in consolidated budget spending that only slightly exceeded forecast inflation. Federal and state social fund spending approved by the Duma in December did not exceed the autumn estimates even if the allocation of federal budget spending (at least at that stage of the game) pulled back on the huge spending increase planned for domestic security and law enforcement and added some spending on sectors of the economy struggling with the current recession. The large and fast excess in federal budget spending last year from what was expected already indicates that existing spending plans and schedules presented in public may see rapid additions this year in circumstances of war and recession.
The current government goal to rein in spending growth is based on limiting the federal budget deficit this year to 2% GDP. The limit could be exceeded, however, given the overly favourable revenue estimates and extra spending
99 RUSSIA Country Report March 2023 www.intellinews.com