How Russia compensated for the damage from the Nord Stream sabotage

Last year, the Federal Customs Service calculated that the sobotage of the Nord Stream pipelinescost the Russian budget over a trillion rubles in lost revenue from gas exports. Sanctions against the oil industry caused less damage to the budget. Despite this, the budget was managed. How did Russia compensate for such losses?
According to Ruslan Davydov, the acting head of the Federal Customs Service (FCS) of Russia, the sabotage of the Nord Stream and Nord Stream 2 gas pipelines caused the Russian budget to miss the planned 1.138 trillion rubles in revenues from gas export duties in 2023.

In 2022, gas revenues were the main contributor to the decline in oil and gas revenues, falling by 35%. Oil revenues decreased by 7.2% to 7.786 trillion rubles last year, compared to 8.391 trillion in 2022.

However, the general plan for transferring customs revenues to the budget was exceeded by 2.5% due to increased exportss. Last year, 74% of the budget structure was made up of export revenues, which compensated for the decrease in oil revenues caused by falling world energy prices and the completion of the tax maneuver. Davydov stated that the Federal Customs Service had achieved a record of 4.932 trillion rubles, which is 27% higher than the forecast target for exports .
Earlier, the head of the Central Bank, Elvira Nabiullina, stated that in 2023, the share of the oil and gas sector in GDP had decreased. In this sense, the economy has become less dependent on the oil and gas industry.

However, experts are more cautious about reducing the dependence of the Russian economy on oil and gas revenues. It is still premature to talk about a significant reduction in Russia's dependence on oil and gas revenues. The process of restructuring the economy towards high-tech production has already begun. For instance, Rostselmash recently launched the first newly built full-cycle tractor plant in 52 years. As the saying goes, every cloud has a silver lining. Although export revenues have declined, the extracted gas can now be used on the domestic market. According to Nikolai Pereslavsky, head of the 'Support' department at the CMS Group of Companies, gasification in the country is currently only at 73%.
Comparing the three-year period before the start of the SVO (2019-2021) with the incomplete three-year period from 2022 to 2024, there has been little change in the situation regarding oil and gas and non-oil and gas budget revenues. On average, oil and gas revenues accounted for approximately 34.1% of total budget revenues and 6.3% of GDP during the pre-SVO period. From 2022 to 2024, oil and gas revenues are projected to increase to 34.8% of total budget revenues and 6.3% of GDP. Nikolai Dudchenko, an analyst at Finam Financial Group, notes that it is premature to discuss reducing Russia's dependence on oil and gas revenues.

Data from the first few months of this year also indicate no decrease in dependence. Based on the results of January-February 2024, the Russian Federation's state budget received 1.62 trillion in oil and gas revenues, accounting for 32% of total budget revenues. Non-oil and gas revenues have made up two-thirds of Russian budget revenues for several years, which is generally positive. However, in January-February 2019, oil and gas revenues accounted for 39% of the Russian budget, while non-oil and gas revenues contributed almost 60%.

Despite geopolitical shocks such as the loss of Nord Streams, sanctions, and the price ceiling on Russian oil, the share of oil and gas revenues only decreased by five percentage points over the past five years, according to Natalya Milchakova, a leading analyst at Freedom Finance Global.
Meanwhile, the expert notes that although Russian budget revenues increased by 71% in January-February of this year compared to the same period in 2019, they still fell almost five times in absolute figures. As a result, Russia still has a deficit, albeit a relatively small one, at only 0.8% of GDP. However, it is worth noting that Russia's efforts to reduce its dependence on oil and gas have continued since 2018, and the country is now generating income from other sources.

It should also be noted that imports in 2023 increased by 9.5%, from $276.5 billion to $302.9 billion. The largest increase in imports was from Asia, which grew by almost 30% to $187.5 billion, as noted by Dudchenko. Russia's largest imports were machinery, equipment, vehicles, textiles, textile products, and footwear.
According to Pereslavsky, the devaluation of the ruble, which lost approximately 30% against the dollar, euro, and yuan in 2023, also contributed to the growth of export revenues.

He predicts that 2024 will be similar to 2023, with oil prices remaining around $80-90 per barrel due to lower supply. Gas prices in Europe have remained steady at $250 per thousand cubic meters and are currently trading at around $300. To increase budget revenues from exports, it is necessary to search for new markets while avoiding any changes in content. The oil industry has partially redirected its export flows. According to Pereslavsky, the implementation of the Power of Siberia - 2 project is now in the hands of gas producers.

In the first two months of this year, oil and gas exports have already contributed 1.6 trillion rubles to the Russian budget. The Ministry of Finance anticipates that oil and gas revenues will increase to 11.5 trillion rubles this year, representing 32.8% of total revenues. To achieve the plan, Urals oil is priced at $70.1 per barrel, with the dollar exchange rate at approximately 90.1 rubles. According to Dudchenko, these indicators are feasible, considering that the spread for Urals oil to world benchmarks has started to gradually decline, and world oil prices are expected to continue to rise.

It is important to note that historically, income from gas exports to Europe was not as high a priority for Russia as petrodollars, which were directed towards the National Welfare Fund (NWF). However, the sharp reduction in the share of Russian pipeline gas has had a significant impact on the economies of many European countries, causing them to lose much more than the Russian budget.

According to Milchakova, Europe lost approximately one trillion dollars in 2022 alone due to rising energy prices, as reported by Bloomberg.According to the Ministry of Foreign Affairs, the EU has suffered losses of around $1.5 trillion due to sanctions against Russia and trade restrictions. A study by the German Chamber of Commerce and Industry found that many CEOs in Germany, the EU's largest economy, believe that the region has become less attractive for business over the past five years. German businesses are dissatisfied with rising costs caused by increasing energy prices, in addition to excessive bureaucracy and trade barriers. As a major buyer of Gazprom, the German economy previously received a discount on gas, which was a competitive advantage. However, this advantage was lost at one point. As a result, Germany lost its industry, including the chemical industry. Manufacturing fell by 1.5% last year, with energy-intensive manufacturing experiencing a decline of 10.2%. The chemical industry also showed a decline of 10.2% compared to 2022, which is the lowest level since 1995.