Cheaper oil and war in Ukraine are blowing a hole in Russian finances

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According to data released this week by the Russian Ministry of Finance, Russia’s budget surplus has virtually disappeared over the summer. At the end of June, the surplus was 1.37 trillion rubles ($23 billion); by the end of August, it had fallen to just 137 billion ($2.3 billion).

Revenues are under pressure. Oil has traditionally been a larger part of the Russian budget than natural gas, and prices for Brent crude, the European benchmark, have fallen about 25% since their peak in early June.

That’s a big hit even before an EU embargo on Russian oil imports by sea and a planned G7 price cap goes into effect in December. And while natural gas prices in Europe remain extraordinarily high, Russian gas deliveries to the European Union and the United Kingdom have fallen 49% since the start of the year, Gazprom said last week.

According to Janis Kluge, senior associate at the German Institute for International and Security Affairs, spending is also on the rise, both on the military and on measures to protect the economy from the impact of biting Western sanctions.

He says real-time data from the Russian government indicates that the budget is now in deficit, adding that the gap in the Kremlin’s finances could widen as military spending increases.

“Military spending was originally planned at 3.5 trillion rubles this year, but this level was most likely exceeded by September,” Kluge told CNN in email comments.

Russian business newspaper Vedomosti reported on Wednesday, citing sources close to the government, that the Ministry of Finance had told government agencies they would have to cut spending by 10% by 2023. Defense spending would increase, however, Vedomosti quoted a source close to the Defense Ministry as saying.

During his speech on Monday, Russian President Vladimir Putin denied that the economy was in trouble.
Putin met Chinese leader Xi Jinping at a summit in Uzbekistan on Thursday. Trade between the two countries has exploded in the past six months as Russia has sought new markets for its energy and Chinese exporters have taken advantage of the exodus of Western brands.



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