War, oil price cap to weigh on Russia's budget; Moscow likely to hike tax

Russia's budget has become too reliant on oil income to cover expenses, warned economists and said that if crude prices do not rise as anticipated this year, the government may be forced to increase taxes, showed a Reuters report.

Since early December, when Western countries led by the Group of Seven (G7) set a $60 price cap on Russian oil exports to limit Moscow's ability to finance the Ukraine war, the price of Urals oil, Moscow's largest export, has fallen more than 20 per cent.

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The government's 2023 budget is based on Urals price of a touch over $70 per barrel, but prices are now trading closer to $50 per barrel, which is a concern for Moscow.

Russia has relied on China and India, the world's largest and third-largest importers, to fill the price ceiling gap due to Western sanctions and the EU embargo to make it tougher for Moscow to export oil.

"The growing dependence of the budget on oil raises concerns," Alfa Bank said in a note that warned a decline in revenue from gas and oil product exports "looms on the horizon."

According to analysts, the oil price needed to balance the budget soared from $67 to $101 a barrel in 2022 as the government's spending increased by more than a quarter, partly to pay for its military presence in Ukraine.

The actual price of oil required to balance the books might be as high as $115 per barrel when the $27.5 billion in dividends and one-time taxes paid by state-owned energy behemoth Gazprom last year are taken into account.

According to Finance Minister Anton Siluanov, Russia's budget deficit for the previous fiscal year was $49 billion, or 2.3 per cent of the country's gross domestic product (GDP).

As the price cap reduces Russia's export revenues, the deficit may rise to 2 per cent again in 2023.

Tax hikes?

In December, Alexei Sazanov, the deputy finance minister, warned that there would be another tax increase and that the administration would continue exploring alternative tax bases in 2023.

Which industries would see tax increases and how much of the burden would be placed on the populace is still being determined, said Sazanov and stated that the income tax, profit tax, and VAT rates would not change, but other industries might pay more in taxes.

"Detailed, substantive analysis allows us to still find resource sectors where high margins are formed and where it is possible to increase the fiscal burden without harming the operational and investment activities of companies," said the Deputy Finance Minister.

"When there is a big gap between the actual price (of oil) and the balancing price, it cannot be sustainably covered by borrowing," said Natalia Orlova, chief economist at Alfa Bank.

"Some measures are needed to adjust fiscal policy, cutting spending or looking for additional revenues," the Chief Economist added.

She noted that spending cuts are out of the question because President Vladimir Putin is anticipated to run for an unprecedented fifth term in the 2024 presidential election, and regional elections will be held later this year.

As Russia's 10-month war operations in Ukraine continue, the government has hiked taxes significantly on the oil and gas business for 2023 through 2025, the largest increase of this kind in its history.

According to a Reuters budget study, Moscow will spend roughly a third of its budget, or 9.4 trillion roubles ($140 billion), on defence and security this year alone.

(With inputs from agencies)

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This leaves less money for health, education, and research.