BOFIT Viikkokatsaus / BOFIT Weekly 2022/39
The government recently approved a preliminary 3-year budget proposal (2023–2025) that foresees federal budget revenues rising by 9 % this year. The largest revenue boosts should come from taxes on the production and export of oil & gas, which the finance ministry expects to climb by nearly 50 % this year. Oil & gas revenues accounted for nearly half of all federal budget revenues in January-August. Federal budget revenues are expected to contract by 6 % next year on a roughly 25 % drop in oil & gas revenues. Total revenues are expected to grow modestly in 2024–2025, even if oil & gas earnings contract by a couple percent in both years.
Federal budget spending under the plan should grow by 17 % this year. Due to high inflation, real spending growth is likely to be much more moderate. In 2023–2025, nominal budget spending would remain roughly at the 2022 level, i.e. decrease in real terms. Under the preliminary budget proposal, the share of defence and national security as well as social expenditure in budget spending are slated to rise next year. Spending cuts are planned e.g. for categories of national economy and administration (including for example, roads and other infrastructure projects).
The plan foresees federal budget deficits running from 2022 through 2025, with annual deficits in the range of 1–2 % of GDP (for a total of about 7.7 trillion rubles or roughly 130 billion dollars at the current official rate). The budget deficit would be financed with money from the oil reserve fund (National Welfare Fund) and additional borrowing from domestic markets. The liquid assets in the National Welfare Fund are presently invested in foreign currency instruments and therefore Western sanctions restrict Russia’s access to them. Instead, the finance ministry could transfer its frozen assets to the central bank in exchange for rubles.
Russia’s finance ministry returned to the bond market this month for the first time since the Ukraine war began. On September 14, the finance ministry issued 10 billion rubles worth of 10-year government bonds. The finance ministry balked, however, on its planned 30-billion-ruble bond issues on September 21 due to low demand.
While the Russian government should have little trouble financing the projected deficits over the next three years, the budget framework could be based on overly optimistic assumptions. Finance minister Siluanov already noted that this year’s budget deficit can be higher than expected. Changes to the budget proposal are possible before its final approval.