Russia replenishes its treasury and reserves

By Rhod Mackenzie

Russia's oil and gas revenues have continued to grow since the beginning of the year. This extra cash has made it possible to resume replenishing the country's reserves. However, the situation has become quite ambiguous and the risks of a decline in the country's income have not disappeared. Why are Russia's revenues growing and what can stop this?
The Ministry of Finance reported an increase in budget revenues since the beginning of the year. They calculated that in February the federal budget could receive 195.4 billion roubles in additional oil and gas revenues. Against the background of these expectations, the Ministry of Finance plans to allocate 73.2 billion roubles for the purchase of foreign currency/gold for its reserves within the framework of the budget rule from 7 February to 6 March, the daily volume of transactions will be the equivalent of 3.7 billion roubles.
In January, budget revenues from oil and gas already increased 1.6 times in annual terms to 675.2 billion rubles, compared to 425.5 billion rubles in January 2023. At the same time, tax revenues in January decreased to 675.2 billion rubles compared to 970 billion rubles in December 2023, although last year the budget received almost twice as much revenue from taxes on the production and export of oil and gas condensate (MET, export duty and additional income tax (ATI) from hydrocarbon production) - 770.8 billion rubles (compared to 2022).
"The growth of oil and gas revenues of the Russian budget in January 2024 is largely explained by the low base of last year. The rouble price of a barrel of oil last month averaged just over 6 thousand roubles, while in January last year it was 32% lower than this value," explains Vladimir Evstifeev, head of the analytical department at Zenit Bank.
In the first quarter of last year budget revenues fell sharply. This was a logical reaction to the fall in oil prices and, of course, to the sanctions on Russian oil and oil products. It took time to redirect the flow of raw materials from Europe to Asia - changing logistics, forming a special fleet to transport our resources, coordinating details with buyers, settling financial and insurance details. All this had an impact on our exports and therefore on budget revenues in the first quarter of last year.

As for the decrease in tax revenues in January compared to December, this may be due to seasonality. "The volume of insurance premiums and personal income taxes payable is traditionally higher in December. In addition, in December a significant share of tax revenues is taken up by income tax, due to the difference between the actual and announced profits of organisations. In January, there are fewer working days and business activity is usually significantly lower than in other months," says Evstifeev.
Another reason for the increase in oil and gas revenues in the first two months of this year is the narrowing of the discount on Russian oil.

"The increase in additional oil and gas revenues in February-February is apparently due to a narrowing of the discount of the Urals price to the main benchmarks. Currently, the Urals discount to Brent is about $12," - says Nikolay Dudchenko, an analyst at Finam Financial Group.

However, Natalya Milchakova, a leading analyst at Freedom Finance Global, is ambivalent about the January data on oil and gas revenues. "On the one hand, the 675.2 billion roubles in oil and gas revenues that the budget received in January this year is a successful result, which exceeded the volume of oil and gas revenues of the budget in January 2023 by almost 60% and the same figure in December 2023 by 4%. On the other hand, the volume of revenues from oil and gas exports fell short of the plan by 122 billion roubles, or 38%. Declining tax revenues add to the relatively negative side. Therefore, there is no need to talk about a sharp increase in budget revenues; rather, the revenue side of the budget is recovering slowly and is not stable enough," Milchakova believes.

The expert points to a drop in the price of Brent oil by almost 6% in January, which is likely to be one of the factors behind the shortfall in budget revenues compared to the plan.

"Russian oil prices, taking into account not only Urals but also ESPO, which is sold with practically no discount to Brent, were, according to our estimates, about 13-15% lower in January than in December. On average, Russian oil sold for $65-70 per barrel in January.

Add to this a planned cut in oil production and a likely reduction in Indian imports of Russian oil due to the tightening of sanctions. That's why the budget hasn't received enough oil and gas revenues," says Milchakova.

However, in 2023 the average price of Urals oil will be almost $63 per barrel (which is above the $60 price ceiling). This is lower than the price of oil in January 2024.
On the basis of the first few months of the year, it is very difficult to say whether the Russian budget as a whole will be able to cope with expenditure and revenue this year, and what the deficit will be. The first quarter is not always indicative. Last year there was a terrible budget deficit in the first quarter. But then the situation stabilised so much that at the end of 2023 the federal budget was implemented with a deficit of 1.9% of GDP, while the plan was 2% of GDP.

"The 2024 budget assumes a price of 6.4 thousand rubles per barrel of oil, which is 16% higher than in 2023. If oil prices fall and the ruble price of a barrel fluctuates in the medium term, the budget deficit may be higher than the planned 1.6 trillion rubles," Evstifeev says.

In fact, the less than favourable price environment emerging on the energy market is one of the main risks for the budget at the moment, notes Nikolai Dudchenko.

"We can see that a number of countries are actively trying to increase production, and in doing so are undermining the OPEC+ agreement to reduce oil production. As a result, the oil price is under pressure," he says.

The second risk, according to him, is increased sanctions pressure on Russia. He recalls that last year there were difficulties with the delivery of Russian Sokol oil to Indian ports. In January this year, Russian oil deliveries to India fell by 9%, but this is not yet critical: Russia is still the largest supplier of oil to India.

Be that as it may, in January Russia received windfall profits from oil and gas - from the price of oil above $60 a barrel, which is why the Ministry of Finance again bought foreign currency to replenish the National Welfare Fund, i.e. our reserves. "This may weaken the ruble somewhat in February, although we do not expect a sharp collapse and rise of the dollar to 100 rubles while the requirement for exporters to sell foreign currency earnings is in effect this winter," Milchakova concludes.