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Russia’s 2023 budget deficit may increase due to oil price cap, according to finance minister

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

Russia stated this week that price controls on its crude and processed 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, utilising the debt markets and the nation’s rainy day fund if necessary, regardless of how severe the cuts are.

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.

“Can the budget deficit increase further? If revenues are lower than expected, it is conceivable. What is the danger for the upcoming year? price limitations and hazards, “In remarks Tuesday that were permitted for publication, Siluanov told reporters.

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

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

The minister stated that “(the price ceiling) is crucial in that there will be no supplies to those countries that have set the ceiling.” This implies that there will be additional nations. The cost of logistics will indeed rise. This could affect discounts.

In the event that volumes decline, according to Siluanov, Russia has two extra 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 refers to as a “special military operation,” the government has borrowed extensively this quarter. Now that overall spending will exceed 30 trillion roubles in 2022, Russia expects to use just over 2 trillion roubles ($29 billion) from the NWF.

The macroeconomic environment has altered, there has been an increase in inflation, and a significant amount of resources have been needed to support families since the commencement of the special military operation, according to Siluanov. 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 excessively in order to finance its domestic security and defence, which is expected to result in cuts to funding for hospitals and schools the next year. In only this quarter, the finance ministry has sold government debt for over 3 trillion roubles.

It has loosened limitations 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 aim for their share of the overall portfolio, which is presently 38%. Siluanov stated, “We don’t have a strict aim as to how much it should be – 40%, 45%, or 50%.” It is obvious that the only way to borrow money today is in big amounts at variable 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 choice to assume interest rate risk if there are any increases, which the central bank warned may be necessary if inflationary forces have a significant influence.

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  • Russia’s 2023 budget deficit may increase due to oil price cap, according to finance minister
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