Russia says its facing problems as energy profits disappear

Russian Finance Minister Anton Siluanov admitted his country was facing problems due to the falling oil and gas revenue at a time when government spending has reached all-time highs.

In a public video conference with President Vladimir Putin, Siluanov blamed "all these discounts" for the 50% decline in Russia's oil and gas revenues according to The Financial Times.

“Russia’s non-energy revenues are on track for growth as planned, with the potential for a small surplus by year-end, but there is a problem with energy revenues,” said Siluanov, which could mean that the Western price cap on Russian oil is making a difference.

Siluanov's remarks come after a report earlier in May from Russia's Finance Ministry said that Moscow had spent one year's worth of the country's planned budget in the first four months of 2023.

On May 10th, Russia’s Finance Ministry released a preliminary assessment of how the country’s federal budget had been executed in the first four months of the year and it showed that Vladimir Putin and his government might be facing significant problems. 

Federal revenues between the beginning of January to the end of April took a major hit and fell by 22% over the same period in 2022 to just 7.8 trillion rubles, which would be equivalent to roughly $45 billion USD based on analysis from The Moscow Times. 

One of the big reasons for the Kremlin’s dropping revenue was due to a decrease in Russia’s oil and gas revenue. This key economic sector saw a 52% drop in its earnings year-over-year and made Russia just 2.3 trillion rubles or $30 billion USD. 

Moscow did see non-oil and gas revenues increased by 5% to 5.5 trillion rubles or $72 billion USD. But that increase was not enough to save Russia from a significant budget shortfall that brought the country’s federal deficit to the largest it's been in years. 

The Finance Ministry’s report noted that the Russian government’s expenditures in the first four months of the year reached an astonishing 11.2 trillion rubles, meaning the Kremlin spent roughly $145 billion USD in the first four months of 2023. 

“Rising military production and huge state spending are keeping Russia’s industry buzzing along,” noted a May 11th Reuters report, but Moscow’s spending has come at a significant cost and it could put the country in a more vulnerable position later this year.

Russia's increased spending, coupled with the country’s declining revenues, resulted in a budget deficit rise of 3.42 trillion rubles or $45 billion USD between January and April according to The Moscow Times—which surpassed total government targets for 2023. 

How Russia’s ballooning budget deficit will affect the country has yet to be determined but some economists are predicting that it could lead to higher inflation in the country. 

“Russia’s budget balance continued to deteriorate in April,” wrote Bloomberg’s Russia Economist Alexander Isakov. “Despite government efforts to rein in spending, fresh data does not provide evidence it is succeeding.”

“Surging public spending is likely to push inflation higher in the coming months and require the central bank to roll back some of the policy rate cuts it delivered last year,” Isakov added.

Russia’s economy was widely expected to collapse in the face of Western sanctions imposed after the country invaded Ukraine but Moscow has kept things afloat on the back of its domestic spending and oil and gas revenues according to Newsweek. 

In December 2022, the United States and the European Union put a $60 dollar price cap on Russian oil in an attempt to disrupt Moscow’s ability to fund its war, a strategy that has largely worked according to one economist who spoke with Axios in April. 

"Most people would say it's probably helped reduce revenues," Robert McNally, president of the Rapidan Energy Group and former energy advisor to President George W. Bush, said according to Axios.

Reuters noted that Russian Finance Minister Anton Siluanov has frequently said the country’s budget deficit would not exceed more than 2% of Russia's Gross Domestic Product, but the news organization also pointed out that most analysts disagreed with this assessment. 

“The big question we can’t answer yet is what will happen to expenditures in the rest of the year,” Renaissance Capital economist Sofya Donets said, according to Bloomberg. “What happened with revenues, both energy, and non-energy, was to be expected.”