Record deficit: war drives up spending
The foundation of the Russian budget-2023 turned out to be flimsy: instead of the initially planned surplus in 2022 in the amount of 1.32 trillion rubles, the government will receive a record deficit in recent years – 2% of GDP, or 2.9 trillion rubles. Finance Minister Anton Siluanov had to change his assessment of the budget deficit several times a year. The reason is the war, or “new tasks,” as members of the Russian government modestly put it. But even the new estimate is considered too optimistic: experts admit that by the end of this year the deficit will grow to 3.5% of GDP (4.5-5 trillion rubles), which is comparable to the 2009 budget of the era of the global financial crisis.
The dynamics of the Russian budget in 2022 perfectly demonstrates the appetite for “new tasks”: in the spring, the positive balance began to evaporate. The increase in military spending systematically "ate" the budget surplus: up to 1.4 trillion rubles in May, 1.3 trillion in June , 482 billion in July , 137 billion in August and 55 billion in September . The trend changed in October, helped by a temporary increase in oil prices and an increase in supplies, as well as a one-time increase in the mineral extraction tax (MET) for Gazprom.
This maneuver made it possible to close October (128.4 billion rubles) and November (557 billion rubles) with a surplus, and the overall effect for the budget from the maneuver is estimated at 1.25 trillion rubles (416 billion of this amount is expected in December). “Without them (revenues from Gazprom), October and November would look pale – not the right word, but oil and gas revenues for the year as a whole look even very good without additional contributions. There is an overfulfillment with a large excess against what was budgeted for this year, ”said Evgeny Nadorshin, chief economist at the PF Capital consulting company, in a conversation with The Insider.
Without additional revenues from Gazprom, the federal budget for January-October would have closed with a deficit of approximately 350 billion rubles. “In the fourth quarter, about 2 trillion will go to the budget from Gazprom, and Gazprom’s payments are a factor that determines why our budget has been in a surplus zone for 11 months. Of course, this is not a key factor, but if we ask ourselves why the budget is in surplus, despite the economic downturn, it is kept by the Gazprom factor,” agrees Natalia Orlova, chief economist at Alfa Bank.
The deficit is under pressure from an active increase in spending: over the 11 months of this year, they grew by 21% compared to the same period in 2021 and exceeded 24 trillion rubles. If in November 2021 the expenditure plan was fulfilled by 93%, and the income plan by 120%, then in 2022 these figures were 102% and 99%, respectively. The surplus recorded in October and November does not mean at all that the government has a chance to close the budget with a smaller deficit than the Ministry of Finance suggests. As a rule, a significant part of budget funds is spent in December: spending in this month is sometimes two to three times higher than the average monthly figures. It is at the end of the year that intergovernmental transfers, debt service, payment of contracts and social benefits fall. For comparison: in 2021, the budget surplus in November was 2.3 trillion, and in December it decreased to 514.7 billion rubles. Monthly spending increased by 23% – from 20.1 trillion to 24.7 trillion rubles.
And spending in December will rise more dynamically than in 2021 as the government is forced to finance the military and increase social benefits in a recession. In November, expenditures already exceeded the annual plan of 27 trillion rubles and amounted to 25 trillion. And Siluanov himself is already bluntly saying that by the end of the year, spending will exceed 30 trillion rubles – an absolute record. Spending on national defense in 2022 will amount to 4.7 trillion rubles, which is almost 1.2 trillion more than the planned figure. Given the chaotic mobilization, defense spending could reach 5.5–5.6 trillion rubles.
From the initially expected 1.9 trillion rubles, spending has grown to 2.6 trillion under the item “general government spending”, which includes servicing the presidential apparatus, legislative and executive authorities, the judiciary, and holding elections. The "national economy" has become more expensive by 24% – from 3.4 trillion to 4.3 trillion rubles, the costs are aimed at the "structural transformation" of the economy. Spending on social policy increased by 9.5%, amounting to 6.4 trillion rubles against the planned 5.8 trillion rubles. The increase is most likely due to the conduct of hostilities, including payments to the mobilized and their families.
"Inviolable" FNB gutted for the needs of the army
Budget revenues do not keep up with the increase in spending, but they are still growing, mainly due to a favorable background for the oil and gas industry. In January-November 2022, total revenues were 10.4% higher than the previous year, while oil and gas revenues increased by 30% (8.1 trillion rubles in January-November 2021 against 10.6 trillion rubles in 11 months of 2022). The plan for oil and gas revenues has already been fulfilled by 111.7%, since initially revenues from this item were expected at the level of 9.5 trillion rubles. However, in December, the revenue side may be hit by a drop in oil and gas revenues due to a decrease in export volumes. On December 5, an oil embargo came into force, prohibiting the supply of Russian oil by sea to the EU countries, and a “price ceiling” for Russian oil.
Oil and gas revenues form about 40% of budget revenues in 2022. But by the end of the year, the positive dynamics ended: in November, the budget received less than 90.2 billion rubles, in October – 7.5 billion , in September – 22.7 billion. .49 per barrel – even below the Western "price ceiling" for oil. A generally good year for the oil and gas industry will not be able to offset rising costs and cover the budget deficit on its own. Military spending in 2022 and future years will have to be covered by Russia's main moneybox, the National Welfare Fund (NWF).
The government was reluctant to spend the NWF money even in the covid 2020-2021 years, when businesses were waiting for help from the state. But no one is embarrassed to spend on war: by the end of the year, according to the forecasts of the Ministry of Finance, the volume of the fund will decrease from 13.5 trillion rubles to 8.99 trillion rubles. The finance minister promises that the government will do "everything necessary to minimize the use" of NWF funds to cover the deficit.
Where to get money from? The alternative is to borrow. Back in April, Anton Siluanov complained that it was too expensive, but in the autumn the Ministry of Finance returned to the debt market and in just a few months exceeded the borrowing plan by placing bonds for 3.281 trillion rubles.
Everything for the security forces, nothing for the economy: what will Russia spend on in 2023?
Next year, the Ministry of Finance expects a budget deficit in the region of 3 trillion rubles (2% of GDP), although a year ago the department hoped to reach a plus of 299.1 billion rubles. The new version assumes a significant increase in spending: by 3.8 trillion rubles (up to 29 trillion), while revenues will grow by only 590.1 billion rubles and amount to 26.1 trillion. The main part of the expenses, contrary to the statements of the President of Russia about the unwillingness to transfer the economy to a military footing, will go to the law enforcement agencies.
Analysts are confident that the real budget deficit next year will significantly exceed the Finance Ministry's expectations.
“Many factors will affect the size of the final deficit, but under our basic assumptions and the unchanged spending plan, the final deficit could be in the range of 3-4% of GDP, that is, one and a half to two times higher. Formally, a larger deficit will mean a more stimulating budget policy, which is logical given the continued recession in the economy. But this scenario may also threaten higher inflation and, as a result, the Central Bank's rate, which will be negative for the economy undergoing structural adjustment, ”said Dmitry Polevoy, investment director at Loko-Invest.
Natalia Orlova also expects a significant increase in the budget deficit. According to her, it can be from 3 to 5 trillion rubles, but even such a figure is not a global problem for the Russian budget, since the Ministry of Finance can manage cash flows and influence the expenditure side. But the department may have difficulty cutting costs, and the reason for this is the upcoming presidential election in 2024.
“You need to understand that there is a question of the direction of the budget policy, because next year we have a pre-electoral one, because we have presidential elections in March 2024 and on the eve of the elections it is difficult to tighten the budget, although if we imagine the scenario of an agreement on Ukraine, this could lead to very quickly to reduce the direct costs of the NWO and potentially this will give the budget support. There is a lot of uncertainty on the expenditure side,” Orlova notes.
Spending on "national defense" and "national security and law enforcement" will increase by 40% and 52%, respectively, compared to those planned in the previous draft budget. Spending on these items will reach almost 9.4 trillion rubles, which is about a third of the entire expenditure part of the budget. Compared to 2022, spending on “national defense” will increase slightly — by only 300 billion rubles, while spending on security forces will immediately jump by 1.6 trillion rubles (+58%). The Ministry of Finance not only significantly increases spending on the war, but also does not disclose exactly where the money will go: in 2023, the government classified a record amount of spending – about a quarter (6.5 trillion rubles). Apart from the traditional military spending, the authorities do not disclose how much will be spent on the annexed territories.
Spending on national security and security forces is a third of the new budget
Spending on social policy will increase by 1 trillion rubles compared to the previous draft budget (17%) and by almost 900 billion rubles (13%) compared to 2022 . All because of the indexation of social benefits in line with inflation, which, according to the forecasts of the Central Bank, will be 12-13% this year, with a target of 4-4.5%. In addition, the increase in spending is partly due to the conduct of the war, because “social policy” means, among other things, disability benefits, as well as payments to the mobilized and their families.
On the articles “national economy” and “nationwide issues” , the expenses for which turned out to be significantly higher than planned in 2022, they decided to save next year. Spending on “nationwide issues” should be reduced by 600 billion rubles to a level of 1.9 trillion rubles. They plan to spend the same 3.5 trillion on the “national economy” as in the previous draft budget, as if there were no sanctions and international isolation. The decrease compared to 2022 will amount to 800 billion rubles (almost 20%).
Spending on environmental protection will slightly decrease compared to both the previous draft budget and spending under this item in 2022, while spending on education will remain approximately at the same level of 1.3 trillion rubles. Spending on housing and communal services, culture, healthcare (1.4 trillion rubles), media, physical education and sports are expected to be at a level higher than the previous draft budget, but lower than expenditures for 2022. The document does not provide for significant changes in the financing of these articles.
Oil and gas companies – fork out
In 2023, budget revenues are projected at 26.1 trillion rubles, of which about 34% will come from the oil and gas sector. Receipts are expected at a relatively modest level of 8.9 trillion rubles, which is 2.7% lower than what was forecast in the previous bill (9.1 trillion rubles out of 25.5 trillion in revenues), and 23% lower than in 2022 (11.6 trillion rubles out of 27.6 trillion rubles, according to preliminary estimates). The fall in income, as noted in the document, is primarily due to a decrease in oil production.
To compensate for the decline in production and, as a result, exports, the government intends to increase the tax burden on the oil and gas sector. The budget provides for an increase in the mineral extraction tax (MET) on natural gas, the tax on profits from exporters of liquefied natural gas (LNG) and taxation of the oil industry. Gazprom will pay 50 billion rubles a month to the budget, which is 600 billion rubles a year. Income from adjusting the very mechanism for calculating the MET in 2023 will amount to approximately 56.6 billion rubles. LNG exporters will also pay higher income tax – the rate will increase from 20% to 34%. Half of this amount will go to the federal budget, and the other half – to the budgets of the regions.
It is expected that the increase in the tax burden on the oil industry will bring an additional 208 billion rubles to the budget in 2023. The government also intends to reduce the cost of providing a damper for oil feedstock, thanks to which the budget will save about 212 billion rubles. The Ministry of Finance explains such measures by the irrelevance of the current mechanism, which operates in conditions of inflated prices for petroleum products on the European market, while its significance for pricing domestic petroleum products is declining.
In total, innovations for oil industry workers will bring the budget more than 1.2 trillion rubles. However, an increase in taxation will be accompanied by a fall in revenues due to a decrease in production and exports.
"Price ceiling" and oil embargo will lead to a hole in the budget
The oil embargo is expected to reduce Russian oil production by 0.5-1 million barrels daily, the International Energy Agency (IEA) even predicts a drop in daily production by 2 million barrels by March 2023. It is unlikely that it will be possible to effectively redirect oil flows from Europe to Asia under the risk of harsh sanctions. Hope remains only for an increase in demand for oil or a sharp reduction in production by OPEC – both scenarios can provoke a jump in prices.
Another factor that could affect budget revenues is the “price ceiling” for Russian oil set by a coalition of Western countries. The threshold has been agreed upon at $60 per barrel, a generally acceptable level for Russia, which should allow the country to continue to supply oil to the international market and make a profit, but deprive it of excess profits. Russian oil is already trading at a significant discount relative to Brent: in November, the average price per barrel of Urals was $66.47, and in the period from November 15 to December 14, it dropped to $57.49 per barrel.
The key buyers of Russian oil – China and India – did not join the restrictions, but now they will obviously seek significant discounts: after the introduction of the "price ceiling" and the embargo, India began to buy Russian oil for less than $60 per barrel.
Russia formally refused to supply oil to countries that approved the "ceiling". Vladimir Putin signed a decree that was supposed to be a tough response, but in fact, vague wording leaves room for supplies.
The budget includes the cost of a Russian barrel at $70.1, which is above the “ceiling”. In September, the Ministry of Finance called $50 per barrel the most acceptable oil price for Russia – but only if production remains at the level of 11 million barrels per day. The IEA estimates average production in 2023 at 9.6 million bpd, a return to late 2023 levels. Natalya Orlova believes that under such conditions, tax increases cannot be avoided, otherwise it will not be possible to balance the budget:
“Our budget has returned to the state before 2014. There is such an indicator – the price of oil, balancing the budget. Until 2014, we had it from $120 per barrel. This year, if these one-time incomes of Gazprom are removed from revenues, then the price that balances the budget in 2022 will be $115–120. We have returned to the high dependence on oil revenues that we had before 2014. The ceiling on oil prices and the reduction in Russian exports significantly increase fiscal vulnerability. On the other hand, they were high until 2014, and the Ministry of Finance successfully reduced them. It seems to me that the main problem of getting out of these risks is that the Ministry of Finance will have to think about raising taxes, because without raising taxes and only managing the expenditure part, it is very difficult to return to a balanced state.”
The oil embargo and price ceiling will be “a new economic shock that could significantly reduce the level of economic activity in the coming months,” Central Bank analysts say . Even if Russia manages to find new buyers, rebuild supply logistics and negotiate with China and India, the short-term effect of sanctions will affect budget revenues.
The situation with gas exports does not look better either: Russia has lost its main sales market – only the Turkish Stream and the pipeline through Ukraine (Sudzha station) have remained of the working routes to Europe. Gazprom reported that since the beginning of the year, exports to non-CIS countries have fallen by 45.1%, while production has decreased by 19.6%. High energy prices helped compensate for the decline in supplies: the cost of gas in Europe at its peak reached $3,000 per thousand cubic meters. In 2023, the situation may not be so favorable for the Russian budget, and it is still not clear which buyers Gazprom wants to replace Europe with. Gazprom will not be able to save the budget this time, Nadorshin is sure:
“There are big problems with the receipt of income from the so-called non-primary economy, and it is obvious that the current levels of economic activity are not enough to comfortably fill the federal budget with income. In recent months, only Gazprom's payments have smoothed the overall picture, but in December, most likely, even they will no longer help (especially since they will stop in December), because oil prices have fallen. There are no grounds to expect such significant payments next year, there will be 50 billion rubles of additional payments, which were agreed by the Ministry of Finance. This is ridiculous against the background of what Gazprom gave to the budget this year.”
With the world on a string. Where else will the Ministry of Finance look for money?
In addition to oil and gas companies, other exporters will also fall under the distribution: from January 2023, export duties on fertilizers are introduced, and the MET rate on coal is also temporarily increased. The rate for fertilizers will be 23.5% at a price of over $450 per ton; if the value does not exceed this mark, then the fee will be zero. With this measure, the Ministry of Finance wants to collect about 105 billion rubles from the chemical industry.
Until 2023, chemical companies managed to avoid the introduction of duties, although the Ministry of Agriculture has repeatedly proposed this initiative. An increase in the tax burden threatens companies with a loss of 8-12% of their export earnings – a significant reduction in the face of sanctions and problems with logistics. At the same time, exports are falling: by the end of 2022, a decrease in the supply of fertilizers from Russia by 17% is expected .
The MET rates for coal (except for brown) will be temporarily increased by 380 rubles per ton – the measure will be valid from January 1 to March 31, 2023 and will bring an additional 30 billion rubles to the budget. At the same time, they decided to abandon export duties on coal – the industry is already in a deep crisis due to the inability of the Russian transport system to reorient itself to the East. The Ministry of Finance noted that the MET on coal is an exhaustive measure – at least for now, but promised to "monitor the situation" in the first quarter of 2023.
From April 2023, the government wants to cancel preferential measures for the import of a number of goods that fall into the category of "critical imports" (from plastics and rubber to medicines and medical equipment). Zero rates of import customs duties and tariff privileges were valid throughout the territory of the Eurasian Economic Union (Russia, Belarus, Kyrgyzstan, Kazakhstan and Armenia). It was decided to cancel duties in the spring of 2022 due to Western sanctions, and at the request of Russia, the Eurasian Commission in September extended the preferential regime until March 2023. After this period, the government will gradually end the operation of zero rates and tariff benefits – the transition will bring the budget 125.8 billion rubles.
The government wants to receive an additional 100 billion rubles by tightening control over the tobacco industry . The Ministry of Finance believes that now there are no "effective mechanisms" in the tobacco market to combat counterfeiting. The department proposes a number of measures that will reduce the volume of the illegal market and at the same time replenish the budget, and the indexation of excise rates on tobacco products will bring an additional 37 billion rubles. Also, from 2023, excise taxes on sweet drinks will be introduced – in the amount of 7 rubles per liter, due to which the budget will receive an additional 35 billion rubles; Funds will be used to help fight diabetes.
From 2023, a new tax regime will be fully operational – "Automated Simplified Taxation System" , designed for small and medium-sized businesses. The government plans to attract new taxpayers through a more convenient, as stated, system. The introduction of the "Automated Taxation System" should bring about 20 billion rubles to the country's budget.
They also decided to collect more taxes at the expense of agriculture : in 2023, the exemption from VAT on the import and sale of breeding livestock will expire, which will replenish the budget by 4.9 billion rubles. The preferential rate was introduced in 2016 and extended for two years in 2020. In 2021, the State Duma was proposed to consolidate the benefit until 2025, because Russia, contrary to the Food Security Doctrine, was unable to bring the level of self-sufficiency in milk to 90%. As a result, 2022 turned out to be a crisis enough to print the NWF, but not a crisis enough to reduce the tax burden on livestock.
Domestic business was dissatisfied with the increase in the tax burden. The Russian Union of Industrialists and Entrepreneurs (RSPP) timidly noted in its conclusion that the initiatives submitted to the State Duma during the discussion of the draft budget were not discussed with the parties concerned. Business representatives complained that the burden on business is regularly increasing through adjustments to the tax base, marginal values, changes in the procedure for calculating taxes, and other indirect, semi-administrative measures. The increase in taxes in the current conditions, according to the Union, will worsen the position of companies, because of which the budget, on the contrary, will receive less taxes. “The trend towards a “creeping” increase in load must be stopped,” the RSPP said.
Delovaya Rossiya turned out to be a little bolder in terms of the budget. Innovations will affect all industries, negatively affect the activities of enterprises and slow down the growth of the national economy, the organization believes. “The planned increase in the burden on business does not seem productive,” the organization said in a statement. Partially, the appeals of lobbying groups were heard: the government nevertheless refused to introduce a number of taxes – for example, from export duties on gas and coal. However, the Ministry of Finance is still pondering other steps: the government is discussing the issue of increasing the MET on iron ore and coking coal, which could help the authorities withdraw windfall profits from companies during a period of high prices for raw materials.
The problem with an asterisk: how to plug the deficit?
The cumulative effect of the measures taken should replenish the Russian budget by about 1.7 trillion rubles in 2023, however, these measures will not allow to cover the budget deficit of 2.9 trillion. NWF reserves and new borrowings will come to the rescue. Siluanov promises to minimize spending from the main money box: the government will give preference to borrowing on the domestic market to finance the deficit as long as there is demand for federal loan bonds (OFZ).
About 1.7 trillion rubles will be received by the authorities due to tax increases
The hole in the budget, however, may turn out to be higher than the estimated 2.9 trillion rubles: in 2022, the deficit estimate has almost doubled. The government’s forecasts also changed dramatically: back in April 2022, Siluanov stated that the government “has no need to borrow in the markets”:
“We do not plan to enter the domestic market or foreign markets this year. It makes no sense, because the cost of such borrowing would be cosmic.”
However, experts do not believe that the Ministry of Finance will manage with the volumes of borrowings that are declared in the budget. First, the authorities do not want to allow the NWF to run out completely, as evidenced by Siluanov's rhetoric. Secondly, the borrowing mechanism allows the government to increase the amount of debt at the rate of 3 trillion rubles a year for several more years.
“In such volumes, the Ministry of Finance can allow borrowing without noticeable and significant consequences in terms of the economy, and this can be done without problems for 10 years. It all depends on how to dispose of such a resource and how it will be digested by the local financial market, which is not used to such volumes,” Evgeny Nadorshin notes.
The key problem in increasing borrowing is creating demand for government paper.
“The Ministry of Finance can place absolutely any amount of OFZ, the only question is the rate at which banks and other investors want to buy this volume. For example, it is hardly possible to raise 1-2 trillion rubles through classic OFZs at the current rate slightly above 10%, but demand may appear at 12%. Therefore, the question of the appetites of the Ministry of Finance is always a compromise in terms of the volume and cost of this debt with the market, ”recalls Dmitry Polevoy.
However, the sharp desire of the Ministry of Finance to increase borrowing raises the question of who, in conditions of economic isolation, could satisfy the government's requests. In 2021, the OFZ issue amounted to 2.6 trillion rubles, over the past seven years, the share of non-residents in the public debt has fluctuated around 20%, but now the state has to find new buyers in the domestic market. Private investors will not be able to meet such a high demand for OFZs – the share of the population among public debt holders does not exceed 3%. The main holders of government bonds are banks and pension funds, the largest of which is Sberbank (it accounted for 17.7% of OFZ in 2021).
“There are three groups of players within the country — banks, pension funds and the population, but the population’s investments in public debt are unlikely to be large, because traditionally bank deposits and government debt bonds are plus or minus instruments of the same order. The population is not a very significant factor, but banks and pension funds are two key players in the public debt market. Banks were already there, it’s just that before there was a share of non-residents of 20-30%, and now non-residents will not participate in such a volume, somewhere a couple of percent of the debt market, so in reality we are talking about an increase in the role of banks, ”confirms Orlova from Alfa -jar.
True, under the conditions of international sanctions, the state-owned banks themselves are not doing very well: this year Sberbank was able to reach a net profit only in October. In the first ten months of 2022, the largest Russian state-owned bank earned 50 billion rubles (against 1 trillion rubles a year earlier). Therefore, funds for the purchase of OFZs by state-owned banks will most likely be provided by the Central Bank, as it was already in 2022. In early November, the regulator injected 1.4 trillion rubles into the banking system in the form of REPO loans (lending secured by securities, including bonds – that is, banks must buy OFZs in order to receive a loan from the regulator against them). With the help of such a scheme, the Central Bank allocates funds to banks, which, in turn, help close the hole in the budget – in fact, the Ministry of Finance uses the money printed by the regulator, which in the future may create certain problems.
State banks will be forced to finance the budget through the largest borrowing program
Risks from the "printing press"
Experts disagreed about the possible risks. Turning on the “printing press” implies an inevitable increase in inflation, but so far the amount of funds that the Central Bank has poured into the banking system is small, says HSE professor and investment analyst Evgeny Kogan. If the Ministry of Finance really will mainly rely on borrowing to finance the deficit, inflation will gradually rise, and the regulator may have to raise the key rate again, he notes.
“This is a very popular “horror story” about Russian QE ( quantitative easing ). But everything is much more prosaic: by borrowing significant amounts in OFZ, the Ministry of Finance takes liquidity from the system until it returns back through budget spending. If there were no REPO transactions with the Central Bank, then the volatility of rates in the money market would be very high, which would violate the task of the Central Bank to keep the cost of short-term rates close to the key one and would complicate the task for banks to determine rates for major transactions. Therefore, under the Ministry of Finance auctions, the Central Bank lends to banks secured by securities, and when this liquidity returns to the banks through budget expenditures, the banks will repay these loans to the Central Bank. It worked in the past without creating any significant risks, it will work now. Inflation is affected by the budget deficit itself, and not by the mechanism of its financing. If the Central Bank had redeemed OFZs on its balance sheet, then yes, it would have been a different story, but this is not and, we hope, will not be, ”explains Polevoy.
Orlova also agrees with Polevoy, noting that the Ministry of Finance and the Central Bank use the generally accepted market mechanism, which reduces risks for the stability of the financial system. She considers the very term “printing money” to be incorrect in relation to the scheme proposed by the government and the regulator. “Printing money is when the government comes to the Central Bank and says: “We need to finance expenses,” and the Central Bank gives money. This is not the case with us, the Central Bank does not conduct direct emission to finance budget expenditures. The Central Bank gives refinancing to banks against securities, and this is a normal market mechanism that is practiced by all the central banks of the world, ”says the chief economist of Alfa-Bank.
Evgeny Nadorshin from PF Capital, like Kogan, still sees certain risks in this scheme, however, in his opinion, they depend on the conditions and volumes that key actors will implement. “It depends on the intensity of borrowing, on what strategies the main players will choose and what conditions the Ministry of Finance and the Central Bank will offer them. Of course, REPO as a tool to increase profitability in this manipulation will certainly be used. Even if a three-five-fold leverage appears, yes, there will be a small pyramid. Further it will depend on how careful both the banks themselves and the Ministry of Finance and the Central Bank will be with financial instruments. In such volumes as now, this scheme can work for years, ”he is sure.
Waiting for a new devaluation
The ruble exchange rate, which at the end of 2022 showed sudden volatility and collapsed by almost 20% in just three days, could play a significant role in budget formation: the dollar exchange rate exceeded 72 rubles, and the euro went above 77 rubles. For 2023, the dollar exchange rate, according to the forecasts of the Ministry of Finance, should be 68 rubles, and in 2024–2025 it will rise to 71–72 rubles.
The oil embargo imposed by Western countries may lead to a reduction in the supply of Russian oil on the market and, consequently, a decrease in the inflow of foreign currency into the country, which will weaken the ruble. Experts expect the rate at the level of 64-67 rubles per dollar, and with additional pressure – 65-70 rubles, which is generally in line with the estimates of the Ministry of Finance. In the summer, First Deputy Prime Minister Andrei Belousov called the exchange rate of 70-80 rubles per dollar optimal for the Russian economy and even stated that the government was ready to target the national currency rate, and not inflation. A weak ruble is a helper for Russian exporters and a potential bailout for the budget, but it could trigger inflation.
Evgeny Nadorshin believes that the fall of the ruble in 2023 is very likely, since a weak currency can be a temporary salvation for both the budget and the economy. However, if the collapse of the ruble can be a solution for the Russian authorities in the short term, then in the long term it can lead to serious problems, for example, sharply disperse inflation, which will start a lot of negative processes.
“The way to make the ruble cheaper is one of the easiest in terms of fulfilling all spending obligations. In the short term, the Russian authorities regularly preferred something similar, because in the short term the budget benefits from this, but not in the long term. It cannot be ruled out that next year the surprises with the exchange rates of the national currency may turn out to be very impressive,” the expert believes.
Russia enters 2023 with the most unrealistic budget of the Putin era and the most uncertain outlook for the economy. Oil and gas revenues are highly likely to continue to fall, the government will have to actively get into debt or take drastic measures and lower the ruble. An increase in the tax burden on the country's leading industries is unlikely to have a positive impact on the development of businesses that have already suffered during the war year.
The Ministry of Finance and the Central Bank are balancing between bad and very bad options, which are designed to maintain at least the appearance of stability in the financial system, because 2023 is an election year, so cuts in social spending, coupled with another sharp jump in prices, could create social tension, which the Kremlin traditionally prefers to stop. At the same time, even the most stressful scenarios for the Russian economy will not turn into a catastrophe, at least immediately – the system still has a margin of safety. However, this stock is not infinite, and the price of such a policy is a rollback decades ago. It is very easy to avoid negative consequences: it is enough to reduce the costs of the war with Ukraine.