Russia faces a vicious circle

After all, trying to make up for the hole in the budget by selling foreign exchange reserves could ultimately drive up the ruble. This, in turn, is likely to further reduce export earnings, which are so important for the Kremlin against the backdrop of Western sanctions, analysts argue.

According to Vasily Karpunin, an expert at BCS Express, there is a risk that Russia’s energy export revenues will fall even further in February and March when the next stage of the G7 price cap for petroleum products comes into force on February 5. There was already turbulence on the markets in the summer of last year, which saw Russia facing bankruptcy.

According to estimates by CentroCreditBank economist Yevgeny Suvorov, the revenue gap in Russia’s budget could be two to three times larger than the 54.5 billion rubles missing in January. “This requires an increase in currency sales,” the analysts at Rosbank wrote in a recent assessment. Exchange rate dynamics, i.e. a strengthening of the rouble, could further deteriorate oil and gas revenues.

The Russian Ministry of Finance and the Central Bank recently announced that they would intervene in the foreign exchange markets for the first time in almost a year. The government in Moscow is trying to stabilize the economy because of the increasingly severe Western sanctions against Russia’s energy sales. Russia is extremely dependent on export taxes from the sale of hydrocarbons to fund its spending. These are horrendous because of the war in Ukraine.

Process could trigger weaker export earnings

The government therefore plans to sell the Chinese currency yuan worth 54.5 billion rubles (EUR 760 million) from the National Welfare Fund in the next two weeks or so to cover the lower income from oil and gas exports. However, analysts think the forex selling will only push the Russian ruble higher. This would further reduce Russia’s revenues in rubles. Because sales from oil and gas exports are largely based on global so-called benchmark prices, which are set in dollars.

This process could trigger weaker export earnings, which could require further FX selling and result in an even stronger ruble. This in turn would increase the budget deficit. The Russian currency has appreciated more than four percent against the dollar since the ministry and central bank’s plan were announced, and traded at around 68 against the dollar on Friday.

Deficit of 3.3 trillion rubles

Russia posted a deficit of 3.3 trillion rubles in 2022, equivalent to 2.3 percent of economic output – one of the worst results since President Vladimir Putin took office more than two decades ago. Government officials have also publicly stated their preference for a weaker ruble. However, foreign exchange interventions could prevent this. Alfa Bank experts said it was “puzzling” that the Treasury wanted to resume foreign exchange sales while the Kremlin was aiming for a weaker ruble.

Russia’s budget for this year is based on a price for Russian Ural crude oil of around $70.10 a barrel, although this oil is currently trading at around $58 a barrel. According to Reuters calculations, there was recently a two-year low of around $50 per barrel – calculated in rubles. “If the relatively low prices for the Urals last for a long time and the ruble remains rather strong, the budget gap will inflate,” said Anton Tabach, chief economist at RA Expert. State-owned financial institution Sberbank estimates that with Ural oil on average at $55 a barrel and the ruble at 67 to the dollar, the government would need to sell $1.5 billion – or 100 billion rubles – in foreign exchange holdings each month to close the gap shut down.