Page 42 - bneMagazine March 2023 oil discount

42 I Special focus I One Year On bne March 2023
spending spike of 59% on the year to RUB3.1 trillion that was compounded by a crash in revenue of 35% to RUB1.356 trillion, opening up a wide hole. Oil
and gas revenue were the main culprits for the gap after they plunged by 46%
in January y/y to RUB426bn mainly because of lower prices for the Urals oil blend and lower exports of natural gas.
Russian Finance Minister Anton Siluanov played the collapse down, blaming it on new accounting methods and the government’s decision to pre-pay some obligations to smooth out payments over the year. However, economists said that if the trends continued for the full year Russia would end 2023 with a deficit of not RUB3.3 trillion ($47bn) as per the plan, but
revenues are linked to the Urals price but that has fallen, but the price is not clear any more, as now the prices are more of a surrey than a report of the real prices. Then we also had a lot of unseasonal spending in January, when usually there is not a lot of spending, which could have been military spending,” says Ribakova. “So I wouldn’t fully write off the budget with a RUB6 trillion, RUB9 trillion, for this year just because they are capable of removing all spending on babushki and investing it all into military spending.”
Oddly, the revenues fell sharply
in December and January, but oil production did not. Russia was producing 11mn barrels a day (bpd) on the eve of the war and production
the bond issues will easily be enough to cover the deficit.
“The most important thing is to look at the budget balance that we will have at the end of the year. Our plan is to have 2% of GDP at the end of the year, no one cancelled the plan, and we will adhere to these parameters,” he said during a televised interview.
The federal budget law stipulates that Russia’s budget deficit should amount to 2% of GDP in 2023, to 1.4% in 2024, and to 0.7% in 2025.
If, however, things do go catastrophically wrong, together the NWF and OFZ issues can still cover even the worst case RUB9 trillion deficit scenario – the most extreme forecast amongst economists
– and that would set Russia up for yet another crisis in 2024. Few expect this to happen.
But MinFin is not taking any chances and has already started talks with Russia’s largest companies on ways
to increase its tax take. The mineral extraction tax (MET) has already been increased and in January MinFin started talks with the Russian Union of Industrialists and Entrepreneurs (RSPP), a big business lobbying group, on voluntary contributions to raise an addition RUB200bn.
In another preparatory move the budget rule was changed in January. Previously excess oil and gas revenues above $42 per barrel of Urals oil were siphoned off into the NWF. At the same time, the oil price cap is specifically tied to the price of Urals blend barrels and that are determined by the Baltic oil exchange. But since the embargo the amount of oil that travels via the Primorsk-Rotterdam route has fallen dramatically and those prices are becoming increasingly meaningless. Russia has other blends and, for example, has boosted the amount of oil sent via its Black Sea ports by a quarter in the last year.
Under the new budget rule, the Urals price has been abandoned completely and now the cut-off is predicated directly from the oil and gas revenues
“Despite the volatility on the energy markets MinFin maintains its forecast for the 2023 budget deficit at 2% of GDP”
something closer to RUB6 trillion to RUB9 trillion. That amount would eat up all of the National Welfare Fund (NWF), which held RUB6.6 trillion at the end of 2022, as well as all of the RUB3.5 trillion Ministry of Finance (MinFin) was intending to issue in Russian Finance Ministry’s OFZ treasury bills over the course of the year.
Despite the dramatic collapse in revenues, this was still not a disaster for the Kremlin, as it has the resources to easily cover the shortfall and moreover, this is less than the RUB4.4 trillion deficit that Russia ran up during the coronacrisis in 2020.
More importantly, economists doubt that the oil and gas revenues will remain so low and expect them to recover in a few months after the market adjusts to the huge changes in the routes oil exports will have to find following the implementation of the two rounds of oil sanctions.
“The oil and gas revenues are down, as they are still using the Urals price. The
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has fallen in 2022, but Russia was still producing 9.8–9.9mn bpd of oil in January, unchanged from December, according to Deputy Prime Minister Alexander Novak. That is still far above the 6mn bpd that was predicted by the Yale report in last summer. For the full year, Russia produced as much oil in 2022 as it did in 2021. The following week the Kremlin announced it would cut production by 500,000 bpd, but it
is not clear why. Some analysts have speculated that it has to, as it can sell everything it is making, while others
say the Kremlin is simply hoping to drive prices up. The fact that shipborne exports soared in January suggests
that the production cut has more to do with price than the lack of demand. On February 21 the government announced the production cut would be for the month of March only, further suggesting a lack of demand is not the problem.
Despite the volatility on the energy markets MinFin maintains its forecast for the 2023 budget deficit at 2% of GDP, Siluanov said on February 17, in which case the liquid portion of the NWF plus