Russia Considers Austerity Measures Amid Falling Oil Prices and Growing Budget Deficit

Russian officials are contemplating enforced reductions in federal spending due to declining oil prices that are depleting the necessary reserves for financing the ongoing conflict in Ukraine, as reported by Bloomberg on Tuesday, referencing a confidential source involved in initial discussions.

The government is reportedly considering an adjustment to its budget rule, which governs the allocation of funds from the National Wealth Fund (NWF).

Currently, the Finance Ministry utilizes the NWF to compensate for deficits in oil and gas revenue whenever the price of Urals crude falls below $60 per barrel. The source indicated that this threshold might be lowered to $50 starting next year if oil prices remain subdued.

However, implementing this change would restrict access to the NWF, compelling the government to implement cuts in other budget areas.

The draft budget for Russia in 2025 originally projected an average Urals oil price of $69.70 per barrel, but by March, prices had fallen below $60. In April, the average price dropped to $54 and further declined to $49 in early May.

Consequently, tax revenues from natural resources in the first quarter were 10% below forecasts.

In response, the Economic Development Ministry has revised its oil price estimate for 2025 down to $56 per barrel, while the Finance Ministry adjusted its budget forecasts, predicting a shortfall in oil and gas revenues of 2.6 trillion rubles (approximately $32 billion). This would result in a budget deficit of 3.8 trillion rubles (around $46.8 billion) — the largest since the pandemic began.

Lowering the fiscal rule threshold to $50 could necessitate spending reductions of between 1.5 trillion to 1.6 trillion rubles (approximately $18.4 billion to $19.7 billion), according to Natalia Orlova, chief economist at Alfa Bank. She cautioned that any decision to reduce spending would be difficult for those reliant on the budget.

“Geopolitical considerations still take priority,” she pointed out.

A significant challenge lies in military expenditures.

This year, the Russian government is projected to allocate around 30% of the national budget, equivalent to 13.2 trillion rubles (about $162.6 billion), to military and defense procurement — the largest proportion since the Soviet period.

Cuts to military spending are deemed unlikely. Instead, civilian programs, many of which have already seen funding reductions, are expected to endure more severe budget cuts, according to Dmitry Polevoy, chief investment officer at Astra Asset Management.

However, the Kremlin’s options are constrained.

“The Finance Ministry recognizes that there are insufficient reserves to sustain a prolonged period of low prices,” Polevoy said.

Since the onset of the Ukraine invasion, authorities have utilized two-thirds of the NWF’s liquid assets to address budget shortfalls and support state corporations. As of April, the fund held only $39.5 billion in liquid assets, marking the lowest point since its establishment in 2008.

Without modifications to the budget rule, the Finance Ministry is predicted to withdraw at least 800 billion rubles (about $9.8 billion) from the NWF this year to compensate for lost oil revenues. Additionally, approximately 1 trillion rubles (around $12.3 billion) is allocated annually for large-scale infrastructure projects and assistance to state-owned enterprises.

Analysts at Gazprombank project that the NWF’s assets could be depleted within two years if oil prices stabilize around $50 per barrel, and within just over a year if prices fall to $40.

The escalating pressure on government finances could raise the likelihood of new tax increases on non-oil commodities, Polevoy warned.