Putin probably has to tap reserves: Russian government deficit is rising significantly

Putin will probably have to tap reserves
Russian government deficit increases significantly

Because Russia has been exporting fewer energy commodities since its attack on Ukraine, the income from the business is also falling. This puts a strain on the budget, but should not initially become a major problem for the Russian state: it can tap into reserves. However, they melt properly.

According to rating agency Scope, lower revenues from oil and gas exports will widen the hole in Russia’s state budget this year. The deficit is likely to rise to 3.5 percent of gross domestic product (GDP), according to an analysis by the European credit rating agencies available to the Reuters news agency. In 2022, the shortfall was a good two percent. “The sanctions and the war limit Russia’s fiscal flexibility,” emphasized Scope. “This is due to lower export earnings, higher war-related spending and a steady decline in economic output.”

However, the state should be able to plug the hole in the state budget without any major problems. “For the time being, Russia can finance its deficit relatively easily by using the National Property Fund,” the rating agency stressed. However, this is likely to melt: by the end of 2024, the fund will probably only correspond to 3.7 percent of GDP, after it was 10.4 percent at the end of 2021 – i.e. shortly before the outbreak of the war against Ukraine.

Infrastructure is at a disadvantage because of arms spending

Another way to plug the budget hole is to issue domestic bonds to state-owned banks. According to Scope, the high armaments expenditure will adversely affect the Russian economy in the long term, as it was at the expense of investments in infrastructure, digitization, housing construction and environmental protection. “The structural shift in spending will negatively affect Russia’s longer-term economic prospects,” the rating agency’s analysts said. The long-term growth potential is likely to be only 1.0 to 1.5 percent and thus far below that of other large emerging countries.

Earlier this year, Russian Finance Minister Anton Siluanov admitted that the western price cap for Russian oil could widen the budget deficit in 2023. “Is a bigger budget deficit possible? It’s possible if revenues are lower than planned,” Siluanov said. With the upper limits, the West wants to ensure that the Russian leadership has less money at its disposal for the war against Ukraine that began a year ago.

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