Page 8 - RusRPTFeb23

Russia’s overall economic development continued to be supported by the all-important oil industry. Oil production rose in January-November by 2% y/y. A large share of production goes to exports. The volume of Russian crude oil exports only began to shrink in the final months of last year. While the EU’s ban on imports of Russian crude oil took effect in December, the import ban on petroleum products only enters into force at the beginning of February. Russia sought out new oil export markets last year, most notably India.
While high commodity prices drove Russia’s export revenues to historical highs, imports started to contract sharply last spring due to sanctions and the collapse of the ruble’s exchange rate. Limits on capital flows and economic sanctions have reduced capital flight from Russia, so Russia’s record-high export earnings largely remain in Russia. This initially led to sharp ruble appreciation, but recently these trends have reversed. Preliminary data suggest the volume of Russian oil exports declined in December and export prices fell. The drop in export revenues has led to a decline in Russia’s current account surplus and depreciation of the ruble.
The weakening of oil exports and economic recession are reflected in Russian government finances. Finance minister Anton Siluanov recently evaluated that the federal budget deficit in 2022 would be much higher than previously expected, reaching 2% of GDP. The government piled on debt in the form of domestic bond issues in the final months of 2022 to finance the widening deficit. Windfall taxes imposed on some of Russia’s biggest commodity producers – most notably gas giant Gazprom – helped generate substantial revenues for the government at the end of last year.
The outlook is bleak as the Russian economy enters 2023 in recession, and recent key forecasts see Russian GDP contracting by 3–4% this year. Exports should decline sharply as sanctions begin to bite.
According to this year’s federal budget, government spending is set to remain flat. This implies a decline in real terms since most forecasts expect Russian inflation to average 4–6% in 2023. Even with flat expenditure, the federal budget deficit is expected to reach at least 2% of GDP in 2023. The risks of even weaker performance remain large, however, as long as Russia continues to conduct its war in Ukraine.
8 RUSSIA Country Report February 2023 www.intellinews.com