In early 2024, the Russian budget saw a remarkable upturn, standing out against the backdrop of previous years marked by Western sanctions. The surge in oil and gas revenues in the first quarter suggests diminishing effectiveness of sanctions. Apostrophe investigates why Russia remains profitable in oil trade and proposes strategies to curb its earnings.
Budgetary improvement
In 2024, Russia experienced a substantial financial upturn compared to the prior period. Preliminary figures from the Russian Ministry of Finance reveal that first-quarter receipts to the federal budget totaled 8.7 trillion rubles ($93 billion), marking a 53.5% increase compared to the same period in 2023.
Since the beginning of 2024, revenues for the Russian Federation's budget have seen a substantial surge. Non-oil and gas revenues reached 5.8 trillion rubles ($62 billion), marking a 43.2% rise from the previous year, while oil and gas revenues soared to 2.9 trillion rubles ($31 billion), representing an impressive 79.1% increase.
During the first quarter of 2024, Russia's budget deficit contracted to 607 billion rubles ($6.5 billion) from over 2 trillion rubles ($21 billion) in the previous year. This reduction was spurred by a remarkable surplus of 867 billion rubles ($9.3 billion) in March, setting a record for the past two years. However, January-February saw the budget operating at a deficit of 1.47 trillion rubles ($16 billion).
The bulk of the budget revenue surge occurred in March, with a particularly noticeable spike in the final days of the month. Specifically, compared to February, oil and gas revenues surged by nearly 40%.
The unexpectedly impressive indicators raise some skepticism, given the Russian authorities' tendency towards manipulation. While outright distortion of facts may not be evident, the published data still lack complete objectivity.
‘Firstly, comparing first-quarter data may not be ideal due to the unique budget implementation dynamics at the turn of the calendar year in Russia. Secondly, the published figures encompass increased tax payments from 2023. Thirdly, given the Ministry of Finance's active issuance of federal loan bonds in Q1 2024, liquidity challenges likely persisted within the budget. Hence, the published figures reflect fiscal authorities' calculations rather than cash execution. Therefore, all these figures still needs to be clarified,' economist, former member of the Council of the National Bank of Ukraine Vitaliy Shapran tells to Aposrophe.
Unfortunately, Russia's financial stability suggests it possesses the material resources to sustain its aggression against Ukraine. This underscores the ongoing challenges faced by Ukraine in countering the conflict.
Pierced ‘ceiling’
Shortly after the Russian invasion of Ukraine on February 24, 2022, Western countries imposed sanctions against Russia. Particularly, a price "ceiling" of $60 per barrel was imposed on Russian oil exports, aiming to slash the country's revenue from this sector. However, despite the sanctions, the aggressor country's oil revenue is on the rise. Even after adjusting for potential manipulation in the first half of 2024, Russia's oil revenue hasn't declined as anticipated. So what is the matter? What went wrong?
Maksym Oryshchak, the analyst at the Center for Exchange Technologies, highlights that Russia stands as one of the world's top oil exporters. Thus, attempting to remove Russian supplies from the market carries inevitable consequences.
‘The oil market's delicate balance means even a slight deficit can trigger price hikes. This dynamic offsets any reduction in Russian oil exports due to sanctions,’ the expert explains to Apostrophe. ‘Furthermore, soaring prices incentivize the establishment of shadow shipping operations. Complex delivery schemes via third-party countries become profitable. Combating this is challenging, especially given support for Russia from nations like China, India, and Middle Eastern countries. Attempts to dissuade them prove futile, as the benefits are too enticing.’
The expert also highlighted that in 2023, the Russian ruble depreciated by 26%, which paradoxically benefited the budget. ‘With oil prices remaining constant, the Russian Federation saw a 53.5% increase in budget revenues in the first quarter of 2024 compared to the same period in 2023. Meanwhile, state expenditures only grew by 20.1% during the same timeframe, leading to a reduction in the Russian budget deficit.’
According to Vitaliy Shapran, Russia continues to profit primarily from oil, as the price of the Russian URALS blend has exceeded $60 per barrel. This has been made possible through the utilization of the same ‘shadow fleet.’
‘The evasion of sanctions has broadened the scope of oil trade and narrowed the discount between Brent and URALS. Additionally, OPEC's limited oil production, banking on a crisis in China that failed to materialize, has played a role,’ the expert explains.
“On the contraryUkrainian attacks on Russian refineries have had minimal impact on the global rise in oil prices, to say the least,’ he stresses.
It's no secret that prices for Russian oil have previously exceeded the sanctioned "ceiling" of $60. For instance, in October 2023, it traded at over $80.
In April of this year, URALS prices surged once more, with Russian oil fetching as much as $88 per barrel in markets like India. While inflated costs for insurance and transportation eat into a significant portion of this income, the price still yields substantial profit for Russian oil companies.
Financial analyst Aleksandr Kolyandr pointed out another crucial aspect. He emphasized that the oil revenues of the Russian budget rely less on the prices at which Russia sells oil on the global market and more on tax revenues generated by oil companies within the country.
'The tax structure in Russia is designed so that oil taxes are not heavily reliant on sales prices. However, this setup diminishes foreign currency inflows and oil company profits, potentially leading to reduced production in the future,' Kolyandr said to Carnegie Endowment.
Even more sanctions
According to Maksym Oryshchak, depriving Russia of income from oil sales is currently only feasible if oil prices collapse.
‘Indeed, achieving a collapse in oil prices would necessitate a significant downturn in the global economy. However, such a scenario would lead to income reductions across all countries, thus unlikely altering the balance of power,’ the expert suggests.
‘Responsibility for evading sanctions, imposing sanctions on insurers covering the "shadow" tanker fleet - chiefly Ingosstrakh and the Russian National Reinsurance Company. Setting a price ceiling of $40-50 and diplomatic endeavors in India to deter purchases exceeding the G-7 price "ceiling",’ suggests Vitaliy Shapran.
Even if Russia manages to retain some portion of its income despite increased sanctions pressure, it will still experience a significant decrease. Consequently, its capabilities for financing the war will diminish.
This raises the question of why this hasn't been done so far. Or, if attempts were made, why they weren't decisive enough?
By and large, this is a rhetorical question. After all, it's been widely acknowledged for some time that Russia has mastered the art of evading sanctions. However, the US has only recently started taking measures to hold owners of "shadow" tankers accountable. Calls to lower the price "ceiling" for Russian oil were also made as early as 2023, but little action followed these discussions.
Indeed, political will is paramount in addressing these issues. It's crucial to remember that sanctions against the country responsible for initiating an illegal and unjustified war against Ukraine are indeed in effect, even if not as prominently as desired. This reality is well understood within Russia itself, despite any attempts to argue otherwise.
