October 10, 2023
Russian Budget Projections for 2024
The Russian budget very heavily depends on revenue from the energy sector; particularly from oil and gas. Of the total 2024 Russian federal budget revenue of 35 trillion rubles (T RUB), 34% is expected to come from the energy sector. The Russian deficit, according to the 2024 budget, is expected to be around 1.6 trillion rubles – an optimistic scenario. The Russian budget for 2024 is compiled based on following assumptions :
- Oil price for Russian oil: $74 per Bbl; Russian budget for 2024 used a Urals oil price $70.10/Bbl, although the average price is forecast to be $80.
- Exchange rate 97.31 RUB/USD,
- Oil Production 11.05 MMBbl/d
Russian Expenditures in 2023
Of the total 2023 Expenditures of almost 28 T RUB, one third or just over 9 trillion is for military and security. This is followed by social programs at 7.3 T RUB (26% of the total) and 4.2 T RUB for Economy, Infrastructure (15%).
The budget deficit will be financed from the both the National Wealth Fund, which was 9-10 T RUB at the end of 2022, as well as borrowing on the domestic market. Borrowing on external markets is essentially off-limits to Russia now. In November, the Russian government borrowed over 0.344 T RUB on the domestic market instead of 0.15 trillion as planned for Q4, 2022. The funds were obtained on much less favorable conditions than before, and it is unclear how much Russia could obtain in 2023.
The Low Scenario for the Russian budget is based on an oil price $60/Bbl and oil production of 9.2 MMBbl/d. In this scenario, the deficit will increase an additional 2 trillion rubles, or 5 trillion rubles in total when combined with the 3 trillion in the 2023 Russian budget. This will lead to an accelerated depletion of National Wealth Fund. In any case, the Reserve fund will be sufficient enough to finance the Russian economy and war efforts in 2023. The National Wealth Fund is used to finance retirement obligations and therefore, cannot be completely depleted.
There are three ways how a slowdown in the Russian oil industry will affect Russian revenue:
1. A decline of oil prices: oil price drop of 1$ will lead to 0.125 T RUB reduction in Russian revenue.
2.A decline of oil production: Production drop of 1.0 MMBbl/d will lead to $1.36 T RUB reduction in Russian revenue.
3.The indirect impact of a slowdown in the Russian oil industry on revenue: for example, due to the price cap on Russian oil, Russia is buying more tankers and providing insurance for them. It is an additional expenditure that will ultimately lead to a decline in revenue. Additionally, many other business activities related to oil exploration and production, such as oilfield services, infrastructure development, etc. will slow down.
Russia is currently adapting to reduced oil revenues by:
- Imports are declining due to sanctions and low consumer confidence; this currently leads to a stronger Russian ruble. However, the currency needs to be somehow devaluated eventually considering declining oil revenue.
- Domestic production and consumption is also down due to economic slowdown.
- If prices drop very low, theoretically, Russia may define a floor for oil price and won’t sell oil lower than this floor. For example, it could be $40/Bbl which would cause worldwide oil prices to increase.
Therefore, continued decline in oil revenues will ultimately lead to an immediate collapse of Russian economy. As mentioned, although the National Wealth Fund will be sufficient to finance the Russian economy and war efforts in 2024, and perhaps longer, the financial stability of Russia remains uncertain.