Russia Feels the Bite of Western Sanctions as Energy Revenues Plunge to Lowest in Two Years

A vessel carrying liquefied natural gas (LNG) cargo from Russia's Yamal LNG project at Rudong LNG Terminal in Nantong, Jiangsu Province, China, on July 18, 2018. Stringer/Reuters

Revenue from energy fell to its lowest level in over two years in Russia as the country continues to be pressured under Western sanctions for its invasion of Ukraine, with Moscow’s federal budget revenues seen to be declining on an annual basis.

“Oil and gas revenues amounted to 426 billion rubles ($6.02 billion) and decreased by 46 percent compared to January 2022, which is primarily due to a decrease in quotations for Urals oil and a decrease in natural gas exports,” a Feb. 6th press release from the Russian ministry of finance stated. This is Russia’s lowest monthly budget revenues from oil and gas since August 2020.

The average price for Urals oil in January 2023 had fallen to $49.48 per barrel from $85.64, according to a press release on Feb. 1. This is a decline of around 42 percent, which contributed to the fall in revenues for Russia.

“Taking into account the decrease in the representativeness of Urals oil price quotations as an objective price indicator of export prices for Russian oil, approaches are currently being developed to switch to alternative price indicators for tax purposes,” the Feb. 6th release stated.

The oil revenue fall has negatively affected the Russian budget. A preliminary estimate puts the volume of federal budget revenues in January 2023 at 1,356 billion rubles ($19.15 billion), which is 35 percent lower than January 2022 revenues.

Non-oil and gas revenues were also lower by 28 percent, at 931 billion rubles ($13.15 billion), which the ministry blames on a reduction in domestic value-added taxes and income tax revenues.

Meanwhile, federal budget expenditures for January 2023 rose by 59 percent. This is attributed to the rapid conclusion of contracts and the advanced financing of certain contracted expenditures.

Western Sanctions

Ever since Russia invaded Ukraine in February last year, the country has been hit with heavy sanctions from the West. The European Union has blocked seaborne crude oil imports from Russia which accounted for 90 percent of Moscow’s crude oil sales to the bloc.

In addition, EU member states have reduced the share of Russian gas imports to 15 percent from 40 percent prior to the war. On Feb. 5, an EU embargo on refined oils from Russia, which includes jet fuel and diesel, came into effect.

“We must continue to deprive Russia of the means to wage war against Ukraine. EU’s import ban on Russian petroleum products comes into force on Sunday,” Ursula von der Leyen, president of the EU Commission, stated in a tweet on Feb. 3.

“With the G7, we are putting price caps on these products, cutting Russia’s revenue while ensuring stable global energy markets.”

A price cap of $60 per barrel has been imposed on Russian Urals crude oil by the G7 nations. As of Feb. 6, Urals crude traded at $52.62 per barrel, which is roughly $30 below the $80.99 per barrel for Brent crude. Earlier, both Urals and Brent were trading at a similar price.

Budget Deficit

Russia is expecting a budget deficit of 2 percent of GDP for 2023. If the deficit were to be bigger than expected, it would require Moscow to adopt measures to deal with the situation, including more borrowing, higher taxes, lower spending, or the sale of foreign currencies.

Analysts at the Credit Bank of Moscow expect the budget deficit to be at 3.8 percent of GDP this year. In January, Russia’s deficit already stood at 60 percent of its deficit target for the entirety of 2023.

Domestic borrowing and the country’s accumulated energy revenues are the two main sources that Moscow uses to cover its budget deficits. In the last quarter of 2022, Russia raised its domestic borrowing.

In January, 38.5 billion rubles ($540 million) worth of Chinese currency yuan and gold were spent to cover the budget deficit. Some experts foresee higher forex sales in the coming months.

“Russia will almost triple the amount of foreign currency it plans to sell through early March as energy revenues plunge. With most international reserves frozen, the yuan is the main asset Russia can use to conduct sales from its wealth fund to cover spending,” reporter Annmarie Hordern stated in a tweet on Feb. 4.