In the latest KSE Institute Russia Chartbook, “Enforcing Energy Sanctions to Maintain Pressure on Russia“, we highlight the escalation of Russia’s budget deficit, evidence of violations of the sanctions regime, and the emergence of >Russian “shadow” reserves. This comprehensive analysis is an essential resource for understanding the country’s current economic state amidst increasing pressures.

Russia’s energy sector is feeling the pinch of sanctions, leading to wider discounts on its oil. This has contributed to severe drops in trade and current account surpluses. In 23Q1, goods exports stood at $101 billion, a 28% drop vs. 22Q4, the trade balance fell to $29 billion in 23Q1 (-50%), and the current account to $15.8 billion (-58%).

Importantly, the same developments are also weighing on Russia’s budget. Over January-April, the federal government’s deficit reached 3.4 trillion rubles, thereby already exceeding the full-year plan by 17%. KSE Institute estimates the 2023 deficit to hit around 12 trillion rubles, or approximately 7-8% of GDP.

The mounting budget deficit will increase financing pressure considerably and require both stepped-up withdrawals from the National Welfare Fund (NWF) as well as sharply higher domestic borrowing. The latter will be a burden on domestic banks, especially as foreign investors have disappeared from the market.

While these developments are encouraging, evidence for potentially widespread sanctions violations, especially of the G7/EU price caps is emerging. Ukraine’s allies will need to strengthen the sanctions regime and step up enforcement.

KSE Institute also highlights the substantial accumulation of new foreign assets by Russian entities. In 2022, driven by a significant trade surplus, banks and corporates amassed close to $150 billion abroad. These assets need to be identified – and effectively removed from the reach of the Russian regime. The same applies to the $320 billion in reserves estimated to have been frozen due to sanctions in 2022.

Enhanced restrictions could significantly alter Russia’s macroeconomic trajectory, influencing export earnings, fiscal revenues, and overall monetary stability. Specifically, lower price caps on crude oil and oil products could increase pressure and potentially expedite the resolution of the ongoing conflict.