How Russia’s Military Spending, Oil Prices, and Sanctions Impact the Country’s Budget Deficit

According to analysts, Russia is increasingly relying on oil and gas revenues to support its efforts in Ukraine. Therefore, analysts predict that the Russian government may have to raise taxes if oil and gas prices do not meet expectations.

As a result, this tax rise may not be good for the general living conditions of the citizens in the current economic climate. Urals oil, Russia’s prime export, has significantly declined since December. In early December 2022, the G7 nations led the world in decreasing the price limit of Russian oil exports to $60 to hinder their ability to finance their military operations in Ukraine.

This price cap significantly hinders the ability of Russia to finance its operations because the oil and gas revenues make up a significant amount of the country’s budget. According to Reuters, the country’s budget relies on a price cap of $70 per barrel, and the current $50 per barrel is a big problem.

That is not all the sanctions placed on the country severely impact its ability to export oil, leaving Russia to trade with India and China. India and China have the world’s largest populations and are major oil importers worldwide.

According to analysts, Russia stepped up its spending in 2022 significantly after the incursion into Ukraine. As a result, of the increase in spending, the price per barrel needed to cover costs shot up from $70 to $100.

The government would need to generate more revenue from oil exports to balance the books and make up for the revenue lost from Gazprom’s dividends and taxes. Russia could achieve this at a much higher oil price of $115 a barrel. This statement illustrates Russia’s budget’s dependence on the revenue generated from its energy sector.

According to Anton Siluanov, the deficit in the Russian budget was more than 2% of its GDP at more than $48 billion. Moreover, he expects the budget deficit to exceed another 2% in 2023 as drops in the price cap continue to exacerbate the situation.

Tax Increases

According to several analysts from Alpha Bank, the only way to address the economic turmoil the country is facing is by reducing spending in other areas or increase in taxes. As such, one analyst, Natalia Orlova, says that the budget cuts will not be possible, with Vladimir Putin vying at the polls next year.

The only way to go will be an increase in taxes. However, the government did announce in late 2022 saying that it would be looking for new areas to tax. In addition, military spending in the country is set to exceed $130 billion in 2023, which will mean reduced spending in health, education, and other major sectors of the economy.

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