Russian fiscal deficit has hit a record 1.8 trillion rubles ($24.4 million) in January of 2023, with spending growing by 58% compared to the previous year, amidst revenues falling by more than a third.
All of this comes amidst World Bank, IMF and OECD reports stating that the Russian GDP dropped by at least 2.2%, and at most 3.9% in 2022, with further contractions expected in 2023. Industrial production and retail sales in December fell to their worst year-on-year contractions since the pandemic, with retail consumption falling by 10.5%, and industrial production dropping by 4.3% on a year-on-year basis.
The Russian finance ministry and central banks, however, state this all of this is within their models, and that several unique circumstances and accounting technicalities could explain the scale of the January deficit, according the Chris Weafer, CEO of a Macro Advisory based in Moscow.
The drops in tax revenue were accounted for by changes in the tax regime since the beginning of January, according to the Russian finance ministry, which stated that the previous bi-monthly tax system for companies has been changed to a single, consolidated payment plan once a month, on the 28th. The finance ministry then went on to suggest that a large portion of January tax payments had not yet been accounted for by January 31, and will instead be reflected later, in February or March.
Another point that was highlighted was the fact that a change in Russian oil tax maneuvers that came into force in January needs some kinks ironed out, and that due to the nature of Russian public spending, most of it is heavily concentrated at the very end of a year, increasing the fiscal deficit.
Some other factors that may have distorted the deficit figure would be the fact that this was the first report since the Russian crude oil embargoes, which went into force on December 5, which led to Russia buying up tankers and gaining access to more ships in their fleet to re-route the seaborne export trade overnight, after Europe stopped purchasing Ural crude, which also caused a fall in the Ural crude pride, averaging a measly $46.8 per barrel from mid-December to mid-January, according to the Russian finance ministry. Pre-payment from the public sector to the military industrial complex for the war in Ukraine also contributed to the deficit.
However, as of now, with Ural crude prices rising back up to $50 a barrel, and the ramping up of Russian sales of Chinese yuan as energy revenues decline, which is expected to amount to roughly 160.2 billion rubles' worth of FX between Feb 7 and Mar 6, Russia seems to have "plenty left in the tank", according to Christopher Granville, MD of global political research at TS Lombard, and that the Kremlin would not let its yuan reserves to be fully exhausted before it resorts to other methods of fund procurements.
Several reports suggest that Moscow is set to invest in another wave of yuan and other "friendly" currency reserves, in the event of acceptable oil and gas revenues, and that it has plans to issue debt domestically, allowing banks to buy government debt.
The unique nature of the Russian economy, in which a substantial portion of its GDP is generated by state-owned enterprises, allows Russian domestic life and war effort appear to be relatively unaffected by sanctions, at least at face value. The private sector, however, faces fat greater volatility, as seen by the woes of the Russian automotive production sector. The Russian economy is not set to collapse under the weight of sanctions, as some may suggest.
These sanctions, however, are going to lead to diminished technology access, and according to Demarais, author of a book on the global impact of U.S. sanctions, the most significant long-term damage to the Russian economy will stem from its exclusion from the international technology sharing sphere, as it faces further ostracization from the international community, leading to a large gap between western and Russian technological capabilities in the coming years.
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