Russia set to post massive $55 billion budget deficit in December

After months of budget surpluses thanks to soaring energy prices and a windfall tax on state giant Gazprom, Russia could see a huge budget deficit in December, to the tune of $55.2 billion (3.5 trillion Russian rubles), as its spending typically rises towards the end of each year, analysts say.

This would be significantly more than the roughly $9 billion surplus that Russia posted between January and November, Oilprice.com reports.

Russia has guided for an annual budget deficit of 2 per cent of GDP this year, and in order to meet that target, the country will have to spend much more in December than its revenues, and the deficit could reach $55.2 billion, Evgeny Suvorov, an economist at CentroCreditBank, told Reuters on Tuesday. 

But going forward, the problem with Russia’s state finances is only beginning, analysts say. 

Earlier this year, after the Russian invasion of Ukraine, Finance Minister Anton Siluanov estimated that the federal budget deficit would be 2 per cent of GDP at the end of the current year. 

“In general, we have a budget surplus, a conditional surplus, because all spending will go towards Q4 when we have to use all resources,” Siluanov said in June, as carried by the Russian news agency TASS. 

Before the war in Ukraine, Russia had guided for an annual budget surplus of 1 per cent of GDP.

Despite the high state revenues and the budget surpluses so far this year, Russia is boosting its military spending to fund its war in Ukraine and will be tapping the rainy-day National Welfare Fund (NWF) and taking on more debt with bonds on the domestic market as the war drains its financial resources. Domestic bonds are popular because the sanctions are essentially limiting investment opportunities for local investors.

So far this year, Russia has posted monthly budget surpluses, according to data from the Russian Finance Ministry compiled by Bloomberg. But a large deficit is looming for December, as the spending typically accelerates in the fourth quarter, analysts say. 

Higher deficits could lead to tighter monetary policy, the Bank of Russia has warned, which means that the economy would slide into a deeper recession. 

This year and next, Russia will run a deficit of around 2 per cent of GDP, Siluanov said last week. 

“We are now carrying out major transactions in the financial market, and at the end of the year substantial budget expenditures will be carried out, some of them from next year’s expenditures,” the minister noted. 

Borrowing on the market and tapping more money from the National Welfare Fund will be used to plug the deficit, he added. 

Russia claims its oil production and economy will not be significantly hit by the EU-G7 price cap on Russian crude oil. 

“Overall, we do not share the opinion that the introduction of a price cap is an event that will lead to major consequences for the Russian economy,” Russia’s First Deputy Energy Minister Pavel Sorokin said last week. 

To fund the invasion of Ukraine, Russia is boosting its military and security spending at the expense of financing for schools or hospitals. 

The UK Ministry of Defence has assessed that Russia’s defense spending significantly increased and will represent over 30 per cent of Russia’s entire 2023 budget, the U.S.-based Institute for the Study of War (ISW) said this week.

“Putin is thus continuing to drain his budget into his war in Ukraine and may need to defund other international or domestic campaigns in the process,” ISW experts wrote. 

While Russia has largely managed to keep budget surpluses this year, thanks to the energy sector, fiscal pressure on the state finances is only set to increase, some analysts say. 

Oleg Vyugin, a former top official at the Finance Ministry, told Bloomberg last week, “The main problem of the Russia budget is that they want to spend far more than they can really afford.”

“The fact they have to tap the wealth fund to cover the deficit is a clear sign that problems are beginning.”