“There will be cuts in road and infrastructure projects.” The economist told how the Russian budget finances the war in Ukraine
The reserves of the Russian Central Bank in China in yuan is possible for Putin to take responsibility for Ukraine for a few more years. Analysts come to this conclusion polled by Bloomberg.
According to the agency’s model, with Russia’s Urals oil price at a probability level of about $50, Russia could be hiding a budget deficit, in high demand in its use of yuan reserves, for three years as well. The yuan is the only world currency that Russia, after the start of the war in Ukraine, can sell on the global market in order to pay off the budget deficit by requesting the introduction of ceiling prices for Russian oil. Bloomberg analysts believe that Russia’s yuan dollar reserves may run out this year only if the average price of Russian oil is released to the level of 25 per barrel or lower.
More pessimistic for Moscow’s forecast are the analysts of the American Citigroup Inc.: they say that the reserves in yuan in 2023, Moscow will deplete the price of oil at $35, instead of three in the Bloomberg forecast.
At the same time, on February 5, the embargo will come into effect not only on Russian crude oil, but also on refined products. And as he writes Reuters agencythis embargo on the state budget will have more serious consequences than the ceiling on oil prices.
About how many years of the war Russia will have enough money, – said Alexandra Prokopenko, an expert on Russian economic policy.
– How are oil prices going down in the Russian budget right now? Did the government deficit start to rise after the price ceiling was set?
– The state budget deficit after the change in the upper limit of oil prices began to really grow, but it is not yet connected with the ceiling. The estimators associated with the outliers, linked to the income ceiling, are still quite speculative, they are all arithmetic exercises. We need more time to assess how the Russian budget will be empty because of the ceiling on oil and how it will be empty because of the ceiling on oil products. Even in the same model, Bloomberg has announced some changes that may not be mature.
The fact is that a lot depends on whether Russia will be able to redirect falling volumes from the European market to the Asian market. This is the main unknown we don’t have.
The second unknown is that Asian buyers, primarily China and India of course, are respecting the price ceiling. Officially, they did not join the sanctions, but, most likely, they buy high-priced fuel.
The return to the budget, the 40% discounts on Russian oil that we are now seeing is, of course, a direct result of the European embargo and the imposed ceiling.
Plus, most of Russia began to deliver oil to Asia and other buyers. In general, it is a combination of factors. But I think that somewhere in the middle of March it is already possible to build a more accurate model, to make more accurate calculations: how empty the Russian treasury will be.
Now the Ministry of Finance officially expects a drop in oil revenues by 23% by 2022. This is quite significant – almost a quarter. But these are very optimistic estimates. They are seriously overpriced. In fact, the fall was very strong. And, perhaps, more than a third of the oil and gas revenues of the Russian budget are not accounted for.
– But at the same time, all Western politicians say that the penalties that are introduced should have a cumulative effect – accumulate. From February 5, a ban is introduced on the purchase of even petroleum products, and not just oil itself. Do you understand how much money can be spent on war in the conditions of Russia?
– The bad news is that Russia still has enough money for the war. If you look at very natural and social spending, they are roughly different from oil and gas revenues, that is, revenues that Russia receives regardless of the export of hydrocarbons.
This leads to the idea that Putin, in general, can cut budget spending on any other items, leave human and social expenses, and he will have income that will last for at least the least year for sure. It seems to me that since Russia is still using part of the reserves, Russia is still collecting taxes and there are still buyers for Russian oil and gas – it can afford, unfortunately, to accept this war next year too.
– Do you think that the Russian authorities will follow this scenario: cut some other budget items, but not citizens?
– Even before the war, budget expenditures for hospital and social needs were considered so-called protected. In other words, these spending were cut in August in a sort of strong sequestration. So far, we cannot say that the Russian budget system will look quite serious. All shocks are predictable. Most likely, of course, there will be problems with any other expenses, for example, road construction expenses, some infrastructure projects may be shipped. But hospital and social costs—pensions and benefits—are the last to go under the knife. The fact is that Russia has virtually no additional income from anywhere.
– This year, the Russian Central Bank returned to the so-called budget rule. Explain what this means? Is it related to exchange rates and resources that Russia is selling? Does the fact that the Central Bank returned to it mean a complete adaptation of the Russian economy to the war?
– So you can’t say that the Russian economy has adapted to the war, because in terms of economics, war greatly increases uncertainty. Economic agents still cannot plan their activities. Because of the war, a lot of unknowns happened in the planning of natural economic activity. No, we cannot say that the economy has adapted. The economy continues its adaptation period. According to my estimate, it occurs somewhere in the middle of 2023.
The budget rule is by no means a symbol of adaptation; first of all, it is an attempt to smooth out the volatility of the ruble exchange rate, which, as we have seen, is back-pegged to oil without the budget rule. If you look at the future ruble exchange rates that we saw last year, they are very much tied to the price of the Urals: the Urals fell in price – the ruble fell in price. In fact, the ruble exchange rate was observed exclusively by the trade balance. A strong movement in the ruble occurs on inflationary expectations. And this already blocks inflation and generally worries people. Because the exchange rate is one of the main indicators of what is happening in the economy.
Therefore, the return to the fiscal rule should first of all increase as a replenishment, firstly, a return to the mechanism, and secondly, to smooth the future in the development of national currencies. When it does not exactly last the accumulation of reserves, because it is expected that the oil and gas resources will be less than what will be built. And the Ministry of Finance will only sell yuan for the time being, not collect it.
There is, of course, a very big risk in the new construction of the budget rule, which Russia is laying: it is the growing dependence of the economy on the yuan.
– And the West does not have the opportunity to influence these 310 billion yuan that Russia has?
– No, the West formally does not have such an opportunity. Only some kind of negotiating position with China. But here Russia will not be very comfortable in the sense that both the size of the reserves and it is assumed that the policy will depend very much on such a “black swan”, namely on the decisions of the National Bank of China or on the decisions of the Communist Party, which, firstly, for Russia is not very transparent. And secondly, everything that we see in the reviews: Therefore, if it is necessary to weaken the yuan a lot, they will weaken it. Plus, China needs to maintain fairly large dollar reserves. Therefore, China will be a very bad ally for Moscow in its crusade against the dollar.