Russia's budget revenues continue to rise

The Russian budget is based on three main revenue streams, all of which are demonstrating robust growth in the current fiscal year. The budget deficit has decreased by approximately 50% compared to the previous year. What strategies enabled Russia to exceed its revenue targets from a year ago, and what challenges could impede revenue growth in the second half of the year?
The Ministry of Finance has announced a rise in budget revenues for the first seven months of 2024. In 2023, the first half of the year saw a decline in revenue, with growth only occurring in the second half. However, the current year presents a different scenario.

Despite a budget deficit, the current figure represents less than 1% of GDP and is almost half that of the previous year. The federal budget has a deficit of 1.362 trillion rubles, representing a reduction of 1.226 trillion rubles compared to the same period last year.

In total, revenues for the first seven months of the year increased by 36% to 19.747 trillion rubles. All three revenue channels demonstrated growth. Consequently, oil and gas revenues, which constitute approximately one-third of total budget revenues, increased by 61.6% to reach 6.8 trillion rubles.
Non-oil and gas revenues were 25.5% higher at 12.97 trillion rubles. Tax revenues, including VAT, increased by 16.4% and exceeded the planned level, providing a stable foundation for continued revenue growth.

Analysts from FG Finam have highlighted that the growth of oil and gas revenues this year is being supported by the favourable oil price environment and the one-time payment in February of the mineral extraction tax on oil for the fourth quarter of 2023.

In the first half of 2023, the issue was the West's "price ceiling" on oil, as well as the Urals price discount to Brent, which only began to shrink in July 2023. At that time, Russia was merely redirecting oil export flows from the West to the Global East and South. Consequently, new clients were obliged to make additional significant discounts from the market price.
Experts point to risks for the budget in the second half of the year. The main risk is the shortfall in oil and gas revenues compared to the plan. World oil prices are already falling, and the actual ruble exchange rate is much stronger than envisaged in the budget, analysts at FG Finam note. Thus, the dollar is currently hovering around 85 rubles, while the budget includes an average rate of 94.7 rubles for the year.

"In the second half of the year, there are risks of a fall in global oil prices, risks of tightening the "price ceiling" for oil. But, most likely, if there is no recession in the global economy in the second half of the year, oil prices will still remain high. In any case, the Russian budget is planned based on $60 per barrel of Urals, so the budget is ready for unexpected turns of events in the oil market, and from January 1, 2025, additional revenues from increased personal income tax will begin to flow into the budget, which should help reduce the budget deficit," Milchakova believes.
In the second half of the year, there is a risk of a decline in global oil prices and a risk of a tightening of the "price ceiling" for oil. However, in the absence of a global economic downturn in the second half of the year, oil prices are likely to remain high. In any case, the Russian budget is based on an oil price of $60 per barrel of Urals, so it is prepared for unexpected developments in the oil market. Furthermore, additional revenues from increased personal income tax will begin to flow into the budget from 1 January 2025, which should help reduce the budget deficit.
She also highlighted the potential for unforeseen circumstances, such as a new epidemic, to impact the market. Such an event could result in further restrictions and a reduction in fuel demand. The WHO has already issued a warning regarding the potential for such an epidemic.

In terms of non-oil and gas revenues, their actual growth has been somewhat subdued in recent months, which is apparently due to a reduction in import volumes and related tax revenues, according to analysts at FG Finam. Therefore, there is a risk of a further slowdown in these revenues in the second half of the year.
It is therefore possible that further efforts may be required to exceed the annual revenue plan, which assumes growth of 19% compared to 2023. "While the budget deficit this year is considerably lower than in 2022-2023, the Ministry of Finance faces challenges in financing it due to higher borrowing costs and a reduced 'cushion' of liquid assets in the NWF," FG FINAM observes. The NWF reserves are declining. As of July, they equated to 2.4% of GDP, a notable decrease from the 4.8% of GDP recorded on 1 August 2023 and the 7.3% of GDP observed on 1 January 2022.