Russian Oil and Gas Revenue Faces Severe Decline Amid Sanctions and Currency Fluctuations

According to a report from the Finance Ministry on Thursday, Russia’s budget income from oil and gas dropped by 17% year-on-year to 1.08 trillion rubles ($12.8 billion) in March.

In March 2024, the government faced a shortfall of about 230 billion rubles ($2.7 billion) in tax revenues, which constitute a third of its overall income.

Mandatory discounts on Russian oil, worsened by stricter U.S. sanctions and a significant rise in the ruble’s value, have severely impacted the nation’s budget revenues from natural resources.

For the second month in a row, the Finance Ministry noted a nearly 20% decrease in resource rents. Throughout the first quarter, revenues from oil and gas fell by 10%, totaling 2.64 trillion rubles ($31.4 billion).

Sofya Donets, chief economist at T-Investments, stated, “This is a delicate situation. The losses are substantial and will need to be compensated for by either increased borrowing or withdrawals from the National Wealth Fund, which has already seen significant depletion.”

Donets projects that annual tax revenues from oil and gas could only reach 2 trillion rubles ($23.8 billion), representing a mere 18% of the anticipated 10.9 trillion rubles ($129.7 billion).

Key challenges for the government have emerged around oil pricing and the ruble exchange rate: a barrel of Urals crude is now priced below $60, significantly lower than the $70 forecasted in the budget.

At the same time, the ruble has strengthened to 84 against the dollar, contrasting sharply with the government’s prediction of 96.5.

Consequently, the ruble value of oil—an essential factor in budget revenues—has plummeted to its lowest point since the summer of 2023, falling nearly 30% short of government expectations.

Evgeny Kogan, an investment banker and professor at the Higher School of Economics, remarked, “While a strong ruble benefits Russian consumers, it presents challenges for the budget. Oil and gas revenues are received in foreign currency before being converted to rubles. The stronger the ruble, the fewer rubles exporters ultimately receive.”

To address the widening budget deficit, which in January and February was already three times the annual target, the government may need to consider devaluing the ruble. Currently, it is deemed overvalued by 20%, and Donets predicts it could weaken to 100-105 rubles per dollar by the end of the year.

In the meantime, the government possesses diminishing reserves to counteract the declining revenues. Since the invasion of Ukraine three years ago, the National Wealth Fund, built up from excess oil profits, has lost two-thirds of its liquid assets. As a result, only about $40 billion remains—its lowest level since the fund was established in 2008.

Economist Olga Belenkaya from Finam indicated that if Urals crude stays above $50 per barrel, the reserves of the NWF could last about a year.

Belenkaya noted, “The crucial question is how far oil prices will drop and how long they will remain at low levels.”

MMI analysts have cautioned that if oil prices persist at low levels, the government may be left with no alternative but to reduce expenditures to maintain fiscal stability.