The Russian economy was boosted by non-resources businesses

By Rhod Mackenzie

The Russian budget will receive an additional 4 trillion rubles in tax revenue in 2023,( $42 billion). with credit going to non-oil and gas businesses. Amid a challenging year for the oil sector, it was the non-resource sector that managed to bolster the Russian economy. How was this possible?
In the course of the past ten months, the budget has collected an additional 3.6 trillion ( $38 billion) rubles in taxes in comparison to the previous year, resulting in a total of 37.6 trillion ( $385 billion) rubles, as conveyed by the Ministry of Finance's director, Daniil Egorov, during his meeting with Russian President Vladimir Putin. Furthermore, transfers are set to grow by 4 trillion to reach a total of 46 trillion rubles by the end of 2023. Egorov emphasised that there are ample grounds for this.

"It is noteworthy that the primary sources of budgetary income will not come from the oil and gas sectors of the economy, as was traditionally the case, but from non-oil and gas industries. This year, revenues from companies not associated with oil and gas will increase by 3.2 trillion rubles."

Specifically, income tax revenues from the non-oil and gas sector are predicted to rise by 20%, value-added tax by 11%, insurance premiums by 29%, and personal income tax by 13%. And the head of the department noted that, despite there being only half the number of inspections this year compared to last year, the Federal Tax Service was still able to achieve great success.
How did Russia achieve such outcomes, and what is the significance of tax revenue growth?

The rise in tax contributions to the budget of the Russian Federation is due to high inflation rates in the nation.

. "The rise in tax contributions to the budget of the Russian Federation is due to high inflation rates in the nation. As a result, the income of businesses and consequently, the taxable sum is increasing," remarked Vladimir Chernov, an analyst at Freedom Finance Global.

The rise in tax contributions to the budget of the Russian Federation is due to high inflation rates in the nation.

"Nominal GDP growth is primarily responsible for the rise in taxation." Considering the 3% GDP growth projection by the Ministry of Economy and the anticipated inflation rate of 7.5%, it is reasonable to anticipate an average tax hike of 10.5%,” stated Anatoly Trifonov, a BCS Forex analyst.

The rise in insurance premiums is attributed to the deferment option granted for their payment last year, while the hike in income tax is primarily secured by the augmented profitability of banks. The increase in VAT is only marginally higher than the expansion of nominal GDP and is owing to the acceleration of consumption, and the increment in personal income tax is linked to a surge in disposable income, mainly against the backdrop of a rise in real wages," Trifonov remarks.
The rise in earnings resulting from the personal income tax and insurance premiums is linked to an upsurge in wages for the public, in line with the high inflation rates prevalent in the country, and an unprecedented low unemployment rate in the Russian Federation. This occurs alongside a personnel shortage, as stated by Chernov. The top payers in this category are the metallurgists and fertiliser producers. 

The excess profit tax, which is obligatory for Russian companies, also aids in revenue growth.  "So far, the amount is only $40 billion, but it is anticipated to surge up to $300 billion by the end of November due to the doubling of payments after that date. We currently have a grace period for voluntary donations to the budget," stated Chernov.

The reason why revenues from businesses not associated with oil and gas are now leading in tax revenue structure is of interest.
The rise in non-oil and gas sector payments can be attributed to the hastening of import substitution and parallel imports in Russia, according to Chernov.

 The specialist highlights that goods imported into Russia surged in the first six months of the year, resulting in a 24% YoY increase in VAT. Meanwhile, domestic VAT only saw a 2% uptick during the same period. Overall, the increase in non-oil and gas revenues suggests a boost in Russian business activity.

However, there has been a decline in the performance of oil and gas revenues as compared to last year. Specifically, oil and gas revenues for the first ten months of 2023 were 26.3% lower than the same period in the previous year, totalling to 7.21 trillion rubles. 

"The primary cause for the decrease in oil and gas earnings this year is the significant decline in revenues from export levies on Russian gas due to plummeting exports to Europe and lower gas prices overall," explains Trifonov.

Moreover, in the first six months of the year, oil export income declined due to reduced oil prices and the significant concession that had to be provided for Russian oil, which was under Western sanctions." In July, the recovery process started as the discount on Russian oil reduced and world prices grew. Consequently, oil and gas revenues began to increase from August, leading to a better budget replenishment. As a result, by October 2023, oil and gas revenues exceeded last year's level by more than 27%. Nevertheless, the disastrous first half of the year has not been entirely mitigated yet.

Actually, 2023 cannot be considered a fully successful year due to the budget deficit present in the initial three quarters. Emphasising the significance of the non-energy sector that aided in the challenging year of restructuring oil exports and logistics is critical. Nonetheless, 2024 may offer an overall improvement in the situation.

Next year, we anticipate a rise in tax earnings for the Russian budget due to a decrease in the markdown on Russian oil export grades.

The markdown, which was at over 35% earlier in the year, has now fallen to 15%. Furthermore, the growth of the clandestine tanker fleet in Russia will result in greater export volumes, just as the ongoing shift of export supplies towards the east will. In particular, Chernov concludes that the capacity of the BAM and the Trans-Siberian Railway will lead to a rise in traffic volumes, anticipated to reach 180 million tons in 2024.