As an oil price cap reduces export income, Russia’s budget deficit in 2023 may be higher than the planned 2% of GDP, according to Finance Minister Anton Siluanov. This would present Moscow with an additional financial challenge as it spends heavily on its military operations in Ukraine.

His remarks were the clearest indication yet from Moscow that the $60 per barrel cap, which was imposed on December 5 by the Group of Seven, the European Union, and Australia in an effort to restrict Russia’s ability to finance the military campaign, could indeed have a negative impact on state finances.

Russia stated last week that price controls on its crude and refined products may cause it to reduce oil production by 5% to 7% in the first few months of 2019. Nevertheless, Siluanov assured that spending commitments would be kept, utilizing the debt markets and the nation’s rainy day fund as necessary, regardless of how severe the cuts are.

“Is a bigger budget deficit possible? It is possible, if revenues are lower than planned. What are the risks next year? Price risks and restrictions,” Siluanov told reporters in comments cleared for publication on Tuesday.

On December 9, President Vladimir Putin referred to the price cap as “stupid,” adding that the $60 cap matched the price at which Russia was already selling and to “don’t worry about the budget.”

As some nations avoid Russia and it seeks to develop new markets—a process that will determine export returns—a reduction in the volume of energy exports is possible, according to Siluanov.

“(The price ceiling) is significant to the extent that to those countries that have set the ceiling, there will be no supplies,” the minister said. “This means there will be other countries. Yes, logistics (costs) will increase. Discounts may change as a result.”

In the event that volumes decline, according to Siluanov, Russia has two additional funding options: loans and the National Wealth Fund (NWF), which builds up state reserves.

After several dry months following Moscow’s decision to send tens of thousands of troops into Ukraine for what it calls a “special military operation,” the government has borrowed heavily this quarter.

Now that total spending will exceed 30 trillion roubles in 2022, Russia expects to use just over 2 trillion roubles ($29 billion) from the NWF.

“Since the start of the special military operation, the macroeconomic conditions have changed, inflation has risen and a large volume of resources has been required to support families,” Siluanov said.

Spending on NWF in December may total 1.5 trillion roubles. The NWF’s liquid assets as of December 1 amounted to 7.6 trillion roubles, or 5.7% of Russia’s GDP.

Russia is borrowing heavily in order to finance its domestic security and defense, which is expected to result in cuts to funding for hospitals and schools the following year.

In just this quarter, the finance ministry has sold government debt for over 3 trillion roubles.

It has loosened restrictions on issuing bonds with floating-rate coupons, which have carried the bulk of the burden during its recent borrowing binge, but it doesn’t have a set target for their share of the debt portfolio, which is currently 38%.

“We don’t have a strict target as to how much it should be – 40%, 45% or 50%,” Siluanov said. “It is clear that today you can only borrow large volumes with floating rates.”

Since an emergency rate hike to 20% in February, Russian interest rates have gradually decreased, but room for further reductions in 2019 may be limited by above-target inflation.

The finance ministry may come to regret its decision to assume interest rate risk if there are any increases, which the central bank warned may be necessary if inflationary factors have a significant impact.

“We see that inflation is coming down and will definitely be at a low level in the first half of next year,” Siluanov said. “The question here is the following: do we believe that inflation and rates will come down, or do we not? We have shown by our actions.”

(Adapted from Reuters.com)

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