Gold – gold bricks – illustration photo.
Moscow – The Russian budget was not in the best shape in 2023. In January, its deficit amounted to 1.8 trillion rubles (about 550 billion CZK), which is a record for many years. Russian oil continues to sell below the world price, the economy is declining and the war is demanding more and more money. For now, reserves are enough to patch the budget holes. However, the British BBC asks on its Russian-language website how long these reserves will last.
The National Welfare Fund (FNB), which is Russia's main reserve, had more than 10.8 trillion rubles (about 3.32 trillion CZK) at the beginning of February. That's about 7.2 percent of gross domestic product.
At first glance, that seems like a lot. But against the backdrop of the ongoing war against Ukraine and the economic crisis the war has created, Russia's reserves are hiding in plain sight. At the beginning of 2022, there were more than 13.6 trillion rubles in the fund.
In January 2023, the Ministry of Finance sold yuan and gold from the fund for 38.9 billion rubles – and it all went to patching the budget. In 2022, about three trillion rubles went from the fund to these goals, and another trillion went to various investments (the authorities often helped companies that suffered a crisis in this way).
The situation will hardly change this year. The budget calculates a deficit of almost three trillion rubles, and this at an oil price of 70 dollars per barrel. But Russian oil has been cut off from the world market due to Western sanctions, and a barrel of Urals oil cost much less in January than government forecasts had predicted: just $49.48 a barrel. If this continues, the real deficit will be much higher than expected.
This leads to a simple conclusion: budget revenues are clearly not enough to cover all expenses, so reserves will continue to thin.
< p>In recent years, the Russian authorities have pursued a very strict budget policy. Before the war, the budget was balanced at an oil price slightly above $40 per barrel. Real prices were much higher – and the surplus flowed to FNB. The current almost 11 trillion rubles is the result of this frugality. But it's not that simple with them.
FNB is divided into a liquid part – assets that can be easily spent, for example deposits in yuan, rubles or gold. But it also has an illiquid part, which are deposits in various securities and investments in companies. This part is much harder to use.
About 40 percent of the existing volume of the fund represents illiquid assets that can hardly be used to cover the budget deficit, explains Alexander Isakov from Bloomberg Economics.
The liquid part of FNB decreased significantly at the beginning of February – a total of 6.3 trillion rubles (about 1.93 trillion CZK).
If the budget deficit will be at the level of three trillion rubles per year, then simple mathematics says that the reserves are only enough for a few years. Economists interviewed by the BBC make similar forecasts.
The liquid part is enough for a year or two under the condition that the government will not increase expenses and will operate within the framework of the adopted budget, Alexandra Osmolovská-Suslinová judges. Similarly, Sofija Doněcová from Renessanc Kapital predicts.
But these predictions have an important clause. “The state of FNB will directly depend on how long the war will continue, under what conditions it will end, and also on the price and demand for Russian hydrocarbon raw materials,” says Osmolovská-Suslinová.
But does Russia really have at its disposal few years? The Ministry of Finance released statistics on January's budget implementation on Monday – and it was quite a shock.
The budget deficit amounted to almost 1.8 trillion rubles. Revenues are down more than 35 percent from a peaceful January 2022, and oil and gas revenues are down 46 percent. But the situation with spending looks worst – in January it jumped by almost 60 percent to more than three trillion rubles.
“The main reason for the deepening of the deficit is unusually high spending for January. If spending were to remain at last year's level, the deficit would did not exceed 700 billion rubles,” says Isakov.
The economist identifies the growth of expenses as the main risk for this year's budget. But he doesn't expect anything good from the revenue side either: oil and gas revenues will be a few trillion lower than forecast.
Various internal taxes are also going into the budget, which may fall when business stagnates. In January, those revenues also thinned out. But here bureaucratic reasons rather played their role – value added tax refunds and advance payments from profit tax. So far, economists consider it a temporary drop.
The Ministry of Finance assures that the January collapse is only temporary – and claims that spending will be within the planned budget.
But many doubt it. For example, Loko-invest investment director Dmitry Polevoi is convinced that the budget deficit will be higher at the end of the year, about 3.5 or 3.6 trillion rubles.
FNB was created in 2008, when the then stabilization fund the government split into two – FNB and the reserve fund. According to the plan, FNB was not meant to help the budget, but to stabilize the pension system, which is also not in good shape in Russia. But these intentions were long forgotten.
In 2018, the reserve fund was depleted and its remnants merged with FNB. Then there was also a rule that budget revenues from the price of oil exceeding a set level ($44.2 per barrel in 2022) went to the FNB, which was constantly replenished. It also reduced the dependence of the ruble exchange rate on the price of oil.
Before the war, the budget system worked stably: reserves were growing, there was no deficit. But the war destroyed this system. Almost immediately after its outbreak, Moscow stopped following the remembered rule and expenses began to grow rapidly.
The authorities promised to develop a new rule. They did not lie, it appeared at the end of last year, but in a very truncated form: the size of the income was set at the level of eight trillion rubles, and everything that would go over this amount was supposed to go into reserves. This will hardly work.
Russia still has other “pillows”, such as central bank reserves, which amount to almost 598 billion dollars (about 13.25 trillion CZK). But those are partially frozen.
FNB represents part of the central bank's reserves in gold and currencies, but the government has the right to dispose only of them, says Osmolovská-Suslinová. So the government can additionally borrow from the central bank, but only by issue, when the bank prints rubles, which will increase inflation.
In this way, the authorities receive funds from FNB that have been frozen by Western countries. “The Central Bank simply transferred rubles to the Ministry of Finance in exchange for foreign currencies,” Polevoj explains. All operations took place within the balance sheet of the central bank.
True, the government also has a reserve, but it is not large and is usually spent on extraordinary expenses so as not to disrupt the budget. Some economists believe that in January this money was also used to patch holes in the budget. But overall there is not enough money in this reserve to finance the budget deficit.
What if FNB runs out? There aren't many options. The budget policy will be tightened and it will be necessary to use only revenues from oil and gas and internal loans to cover the deficit, says Osmolovská-Suslinová. The point is that the authorities will limit expenses – that is, those that they can limit. It is almost impossible to limit spending on defense and national security, but it is possible, for example, on the development of the economy or science. And the state will also borrow from residents.
FNB was intended to support future generations and balance the pension system. But this role can already be forgotten.
“From a strategic asset, the fund has become more of a source of quick patching of budget holes,” says Osmolovská-Suslinová. “It is not certain whether he will even live to see the next generations, whose pension problems he was supposed to solve according to the original plan,” she added.