KSE Institute’s March 2023 Russia Chartbook highlights the growing pressure from the war and sanctions on the Russian economy. The decline in energy export earnings, a widening budget deficit, and limited access to Bank of Russia reserves will lead to a deepening of the economic crisis in the Russian Federation this year. At this critical junction, expanded sanctions could exacerbate pressure on the Kremlin significantly and accelerate the end of the war.

The EU’s embargo on Russian crude oil and oil products is starting to take a toll on Russia’s energy exports. In addition, global energy prices have moderated – supported by the G7 price cap –  and Europe has dramatically reduced its reliance on Russian gas. Additional sanctions, such as a lower price cap on crude oil and oil products – by $15/barrel in a first step – as well as a ban on Russian LNG and pipeline gas not sent via Ukraine could increase pressures and cause a further reduction in oil and gas export earnings – by $56 billion in 2023 and $66 billion in 2024. 

An increasingly challenging external environment is taking a toll on Russia’s government finances. This is reflected in the country’s fiscal deficit reaching 2.6 trillion rubles in January-February 2023, close to 90% of the deficit planned for the entirety of 2023. Revenues, particularly oil and gas receipts, are under pressure, while war-related expenditures continue to rise. As a result, a supplementary budget in 2023 is inevitable.

The increasing fiscal deficit will put significant additional pressure on financing, and the Ministry of Finance will need to rely heavily on domestic borrowing, as fiscal adjustment options are limited. Domestic borrowing is expected to pick up sharply in the coming weeks, as persistently high deficits require fresh funding.

Russia’s banking system will have to bear most of the government funding burden, as foreign investors have essentially disappeared from the OFZ market. Sanctions on the Bank of Russia have severely limited access to reserves, and as the ruble depreciates, limited policy space will force painful decisions, including a likely interest rate hike of around 300bps in 2023H1.

Russia is approaching a turning point in 2023. The Kremlin is facing difficult decisions in terms of fiscal policy, borrowing, and interest rates, while the banking system is likely to come under increasing pressure in the coming months.

Therefore, KSE Institute experts emphasize the need for Ukraine’s allies to take additional measures to exacerbate existing vulnerabilities and accelerate the end of the war.

For details and highlights, please seeKSE Institute’s March 2023 Russia Chartbook: https://kse.ua/wp-content/uploads/2023/02/Chartbook-February-2023.pdf