February 21, 2023 Special Dispatch No. 10500

Leading Russian Economist Nikolayev: Russia Burning Through Its Finances At Alarming Rate, May Soon Have To Take Money From Citizens

February 21, 2023
Russia | Special Dispatch No. 10500

Igor Nikolayev, Head Researcher at the Institute of Economics of the Russian Academy of Sciences, looks at the publicly available budget figures (many previously available publications have gone dark ostensibly to combat the Western sanctions) and extrapolates from the January figures that the 2023 deficit will be massive. While the money squirreled away in the National Wealth Fund may cover the 2023 shortfall, what can Russia expect for next year? If the current trend of sharply higher government expenditures coupled with decreased revenue persists, Russian government could sell gold or, alternatively, may decide to collect more taxes from the citizens.

Nikolayev's column, titled "The Specter Of Sequestration Looms Over The Russian Budget: The Numbers Don't Add Up," follows below:[1]

Igor Nikolayev (Source:

The question as to why there is little revenue and a lot of expenditure arose immediately after the Ministry of Finance published the data on the implementation of the federal budget for January 2023. As a result of the fact that the expenditures were very high, significantly higher than the revenues in the first month of the current year, a large deficit of the federal budget has been recorded.

It looks like this in numbers: expenditures in January of 2023 totaled more than 3.1 trillion rubles [about 42 billion USD], exceeding last year's analogous figure by 59%. Whereas the federal budget revenue raised was less than 1.4 trillion rubles, which turns out to be 35% less than in January of 2022. As a result, the federal budget deficit in the first month of the year was significantly higher than 1.7 trillion rubles.

The information is actually very important and, I can tell you right away, alarming. The public sector is certainly aware of this: their income is wholly and fully dependent on the state treasury. And the rest of us, it would seem, have nothing to worry about, provided we are not being paid from the budget, right? Everything is quite simple: if there is a shortage of money in the budget and expenditures have to be financed somehow, one possible way of doing so is raising taxes.

Who is affected by the tax increase in the first place? Right, the very employees of the private sector, who seem to have nothing to worry about in terms of the shortfall in budget revenue. And provided businesses have to pay more taxes, it is very likely to have an impact on the salaries of the people employed in the private sector (at the very least, growth of such salaries may slow). Thus, everyone has to worry about the fullness of the [public] 'coffers.'

And this is not just a hypothetical issue. It's indicative that just a couple of days after the federal budget's issues became known, information emerged that the authorities are going to impose a large one-off payment of 200-250 billion rubles on businesses. Here you have it, a blow to private sector workers...

There is another reason why the information on the federal budget implementation in January of 2023 seems important. Since the spring of 2022, much of the important economic statistical data has become unavailable to the public. They stopped publishing it.

This secrecy was explained by the fact that it would help counter the sanctions more successfully. Perhaps some information could indeed be classified, but so much important financial data has been withdrawn from the public domain that it has become a clear case of overkill.

And I'm not talking about some of the figures previously published by the Russian Ministry of Finance that were related to the budget, but also about important information from the Federal Tax Service, the Federal Customs Service, the Russian State Register government corporations, etc.

When a lot of important economic statistical data becomes a mystery, you perforce begin to appreciate the remaining statistical data which is still publicly available. And in this regard, the information about the federal budget implementation in January is very important since it allows us to draw conclusions about what is really happening to the economy.

What conclusions, you ask? After all, at a first glance the economy seems fine, even better than might have been expected. It was expected that the country's GDP would fall by 8-10% in 2022, but the decline is likely to be around 2.5% (the final figures have not yet been published). There is naturally plenty of room for speculation about that matter and why this happened. However, it is hard to rejoice over the fact that GDP did not fall as much as it could have. Because, like it or not, it has fallen, and the economy is still in crisis. Information on the state of the budget validates this fully.

The federal budget is the country's main financial plan. If this plan somehow does not add up, there is cause for concern. The federal budget is an indicator of the state of the economy, which, judging by the January results, showed that problems exist.

The aforementioned budget deficit in the first month of this year alone was well in excess of 1.7 trillion rubles. Is this a lot or a little? After all, let's be honest, for many such figures – trillions, billions – mean little. So, by the end of the 2023, that is for 12 months of 2023, it's forecasted that the federal budget deficit should total somewhat more than 2.9 trillion rubles. It appears that in just one [month], the first month of 2023, we exhausted about 60% of the [forecast] annual budget deficit. Let's agree, the magnitude of the budget deficit figure becomes more understandable in this comparison.

Let me provide you with another figure for complete clarity: in 2023, all expenditures under the "National Economy" section of the federal budget should reach 3.5 trillion rubles. I repeat, this is the entire volume of spending under this section for the entire year. And the total, as one can see, is quite comparable to the already existing and planned federal budget deficit. So, this truly adds up to a huge federal budget deficit.

Another important question is why the federal budget's performance was suddenly so poor at the beginning of the year. The Russian Ministry of Finance clarified that revenues fell short due to a drop in the price of Russian oil and lower exports of natural gas.

Now let's explain this in figures: the federal budget for 2023 was drawn up on the assumption that the price of Urals brand oil would be 70.1 USD per barrel. But in reality, in January 2023, Russian oil was sold about 20 USD per barrel more cheaply (this was reported earlier by the Ministry of Finance). That's a whopping difference: 70.1 and about 50 USD per barrel. And there is a good chance that this price differential will be preserved throughout the year.[2]

Now let's get mention the reason why the federal budget expenditure rose so significantly in January. The Russian Ministry of Finance attributed it to expeditious contract management and advance financing of certain contracted expenses. Well, that can partially explain the increase in expenditure. Although a natural question arises in this regard: were there no plans to manage contracts expeditiously?

Finally, to the issue of where to get money in order to balance the budget. One possible source has already been mentioned, i.e., additional contributions from business. But this, provided it does happen, won't, naturally, solve the problem of the budget deficit. One or two hundred billion rubles could be raised in this way but our estimated deficit is already in the trillions.

There are two important sources to cover the budget deficit: borrowing on the market and the National Wealth Fund (NWF). The government is already actively borrowing money on the domestic market. As for the NWF, the government's nest egg, there still remains enough money there: 10.8 trillion rubles, as of 1 February 2023.

However, not all of these funds can be put into balancing the budget. The thing is that very substantial NWF funds have already been invested in all sorts of assets (projects). Therefore, the a certain volume of the so-called liquid assets of the NWF (funds stored in accounts at the Bank of Russia) are allocated for the needs of the budget. As of February 1, the amount of these assets reached the equivalent of 6.3 trillion rubles. Now, let's compare this figure with the planned deficit for 2023 (i.e., the aforementioned 2.9 trillion rubles) and it becomes clear that our safety cushion in the NWF is not that big. If the trend of expenditures exceeding revenues continues, the actual deficit could be much larger than planned. I would estimate it to be around 5 trillion rubles at the end of the year, if not more.

Naturally, the Finance Ministry will also resort to internal borrowing in order to balance the budget, but it is still alarming, because calculations demonstrate that even in this case, the NWF will not suffice in the long run. Back in January, according to the Ministry of Finance, 3.6 tons of gold in impersonal form were sold to cover the federal budget deficit. No doubt, selling the gold is one solution, but it seems like it is a bit early to start doing that.

Let's say we pass the current year 2023. That's great! There is enough money to solve the budget problems in the NWF, but what then? Today, in February of 2023, we can and should be worried about budget problems not so much for the current year but for the next year, 2024. When there will be no sources to cover budget expenditures, then those expenditures have to be cut. Do you remember what sequestration is? It seems like a term from the distant past. Let's pray we will not have to dust this term off...


[1], February 13, 2023.

Share this Report: