Russian budget strained as oil prices hit year-low

Russian crude oil has become cheaper, dropping to $60 per barrel and reaching its lowest level since the beginning of the year. This is "definitely uncomfortable for the federal budget," reports "The Moscow Times." The Russian Ministry of Finance had forecasted higher revenues from selling raw materials in its budget draft.

A few days ago, we reported that oil prices on global markets fell below the key level of $70. It turns out that the relatively low cost of the resource is hitting Russia. As "The Moscow Times" explains, the price of Russian crude oil has fallen below the level that ensures the stability of the state budget.

This situation could have severe consequences for the Russian economy, which heavily relies on revenues from exporting energy raw materials. The decline in oil prices on global markets in September led to a drop in the prices of Russian Urals oil, negatively impacting oil companies' revenues.

According to Bloomberg data, at the beginning of the week, the price of Russian oil in Baltic ports dropped below $60 per barrel, reaching its lowest level since the beginning of the year. In Primorsk and Ust-Luga on September 10, Urals oil was sold for $57.44 and $57.79 per barrel, respectively. Slightly higher prices were recorded in Novorossiysk, where a barrel cost $60.33. Within just two weeks, the price of Russian oil has fallen by 18 percent, which poses a significant challenge for the Russian budget.

Bank analysts warn that the current oil prices are "definitely uncomfortable for the federal budget." The Russian Ministry of Finance developed a budget draft for this year, assuming the price of Urals oil would be $70 per barrel, about 17 percent higher than the current prices. Similar assumptions were made in the budget draft for 2025.

Economist Yevgeny Suvorov from Bank Centrocredit points out that the oil price collapse could cause serious budget issues. To compensate for the lack of revenues, under current rules, the government will be forced to draw funds from the National Wealth Fund. However, the resources of this fund are limited—it has only 4.8 trillion rubles ($52.8 billion) of liquid assets left, of which 1.3 trillion ($14.3 billion) has already been reserved for expenditures in December.

Although the budget recorded a surplus of 767 billion rubles ($8.5 billion) in August, and the cumulative deficit for eight months amounted to only one-sixth of the annual plan, the revenues from oil and gas in August were 28 percent lower than in July and 20 percent lower than the average level of the previous seven months. The International Energy Agency reports that Russia's revenues from the sale of oil and gas fell by $1.6 billion in August to $15.3 billion, reaching the lowest level in a year.

Investment banker Yevgeny Kogan points out additional challenges related to next year's budget. The Ministry of Finance initially planned to reduce military spending by 2.3 trillion rubles ($25 billion). However, in the current geopolitical situation, this is hard to believe. Suppose the share of military spending in the economy remains at the current level. In that case, an additional 3.3 trillion rubles ($36 billion) will be needed, and another 1.4 trillion rubles ($15.5 billion) is necessary to implement President Vladimir Putin's May decrees.

Kogan warns that with oil prices below $70 per barrel, the National Wealth Fund could quickly run out. Given the current situation in the global energy markets, the likelihood of low oil prices persisting is significant, which could pose severe challenges for the Russian economy shortly.