Russia missed a quarter of oil and gas revenues: how will this affect the economy

Trading in raw materials under sanctions, unfortunately, is bringing less and less profit to the Russian budget. At the end of last year, according to the Ministry of Finance, oil and gas revenues fell by almost a quarter, not even reaching the target of 9 trillion rubles. There are objective explanations for this unpleasant trend: in 2022, the effect of Western energy sanctions against Moscow was still weakly felt, so sales volumes and prices for hydrocarbons were higher. In the future, the Russian economy, apparently, will have to rely more on non-resource sectors, the turnover of which is gaining momentum and is already more than twice as fast as income from energy sales.

Last year, the Russian government suspended the publication of official data on the domestic raw materials sector, so the statistics released by the Ministry of Finance in January look like something of a revelation and help shed light on the state’s problems on the energy front. The obtained indicators look clearly ambiguous. On the one hand, the country’s basic oil and gas revenues (a fixed forecast profit that takes into account not only the export of raw materials, but also domestic fiscal fees) increased by almost 23%. On the other hand, the amount collected as a result (revenue taking into account possible more attractive market conditions) did not reach the planned level, also decreasing over the year by about a quarter: from 11.6 trillion to 8.8 trillion rubles. In fact, our country had to forget about additional oil and gas revenues, the size of which fell 6.2 times – from 5 trillion to 820 billion rubles.

The reasons for the reduction in the country’s income from trade in “black gold” and “blue fuel” can be said to lie on the surface and clearly illustrate noticeable changes in the global energy market. In 2022, when the most stringent Western sanctions had not yet been introduced against Moscow, limiting both sales volumes and prices for export raw materials, Russian hydrocarbon supplies remained at the same level. In 2023, most European powers completely abandoned fuel from Russia, and the G7 participants artificially dropped the prices of our export grade Urals oil to $60 per barrel, which naturally affected export oil and gas revenues to the domestic treasury.

The impact of these restrictive and prohibitive measures turned out to be extremely painful for the Russian federal budget, whose deficit at the end of last year amounted to 1.9%, or 3.2 trillion rubles. True, there is a silver lining: domestic oil producers have learned to bypass the prohibitions established by the West, and have become almost the main suppliers of hydrocarbons to China and India, considered the main consumers of energy resources in the world.

However, despite the conspicuous increase in oil supplies to Asia, domestic producers have not yet been able to fully compensate for losses from the reduction in exports to Europe, says BitRiver financial analyst Vladislav Antonov. The obstacles are related both to logistical problems and to the discount imposed by the West on Urals compared to other international grades of “black gold.” World oil prices in the first half of 2023 were approximately 20-25% lower than in the same period in 2022, therefore, even having increased the volume of supplies to Asian countries by the end of 2023 in value terms, Russia still failed to achieve the previous indicators of the year. In 2024, the analyst believes, there may be a slight increase in Russian oil revenues due to an increase in export capacity, but it is still unlikely to reach the 2022 level.

A similar picture is observed for gas. Although Russia is actively increasing supplies in the eastern direction through the Power of Siberia pipeline, and also increasing the production of LNG for export in tankers, it will be difficult to fully replace former exports to the European market. Therefore, profits from alternative importers of Russian gas will most likely not be too high.

“The set of measures taken by the government,” notes Antonov, “helped smooth out negative trends in oil and gas revenues and avoid an even more significant reduction in this important item of public finances.” In particular, in October 2023, raw material revenue increased by 27% compared to the same period in 2022, which made it possible to stop the downward trend in this indicator that had emerged in previous months. However, a commensurate (in terms of volumes and income) reorientation of trade flows and logistics will require at least another year.

According to the Ministry of Finance’s forecasts, in 2024, Russia’s oil and gas revenues will increase by a third, to 11.5 trillion rubles, which will allow them to approach their values ​​in the pre-sanction year 2021. The most serious factor in the increase in the indicator, according to Oleg Kalmanovich, chief analyst at Neomarkets, will be our country’s reduction of the discount on “black gold” from 10% to 6%.

Foreign deals with “blue fuel” also promise to please. Preliminary forecasts indicate an increase in pipeline gas supplies to China along the Far Eastern route and transit through Mongolia. According to plans, an increase in the design capacity of the Power of Siberia to 38 billion cubic meters is expected only in 2025, explains Freedom Finance Global analyst Vladimir Chernov. But already this year Beijing is considering the possibility of expanding exports along this route beyond previously approved volumes. In turn, the launch of the Arctic LNG – 2 project will increase the volume of exports of liquefied raw materials from Russia by 15%.

“With the restoration of global energy demand, Russia’s oil and gas revenues will begin to grow again, faster than the rate of each previous year,” the expert is confident. “At the same time, revenues from the raw materials sectors to the domestic budget depend not only on the possibilities of increasing exports, but also on world prices for energy resources, which still remain at relatively low values ​​and cannot be expected to increase in 2024.”

In such a situation, the main hopes for increasing the country’s budget revenues rest on industries not related to the extraction and sale of fuel. Russia’s non-oil and gas revenues last year showed an increase of 25% to 20.3 trillion rubles (out of 29.1 trillion total treasury profits). As the Ministry of Finance previously reported, the dynamics of revenue under this item of the national budget, including turnover taxes and income tax, “remains in a consistently positive area.”