Executive Summary

1. Important measures targeting Russian energy exports are beginning to bite. With the EU’s embargo on crude oil in place since December 5, 2022, and on oil products since February 5, 2023, Russian exports are coming under increasing pressure. In addition, prices have moderated—supported by the G7 price cap—and Europe has moved away from Russian gas. 

2. Expanded sanctions could exacerbate these pressure significantly. We estimate that new restrictions—including lower price caps on crude oil ($50/barrel) and oil products (in line with the crude cap) as well as bans on Russian LNG and pipeline gas not sent via Ukraine—would reduce oil and gas export earnings but additional $56 billion in 2023 and $66 billion in 2024. 

3. The impact from a less supportive external environment on government finance deepens. Russia’s fiscal deficit reached 2.6 trillion rubles in January-February alone—or close to 90% of the full-year deficit planned in the budget. Revenues are under pressure, in particular oil and gas receipts, while the war drives up expenditures. A supplementary budget is inevitable. 

4. Higher deficits will put significant additional pressure on financing. At the pace of 2022Q4, Russia will use up the NWF’s liquid assets by the end of this year. With room for fiscal adjustment severely limited as war expenditures and social spending are unlikely to be touched, MinFin will need to heavily rely on domestic borrowing—the same way it did in late 2022. 

5. Domestic borrowing to pick up sharply in coming weeks. New OFZ issuance has fallen from the record level of 2.8 trillion rubles in 2022Q4, but we expect numbers to increase again as persistently high deficits require fresh funding. Importantly, and despite smaller issuance, auctions already show some stress—with bids unsatisfactory at times and yields creeping up. 

6. Russia’s banking system will have to bear most of the government funding burden. Foreign investors, which used to play a big role in the OFZ market, have essentially disappeared. Thus, domestic banks will need to buy up new OFZ issuance. This is an area where stricter sanctions could exacerbate already emerging challenges and put pressure on the Russian state. 

7. Sanctions on Russia’s central bank have severely limited access to reserves. As a less supportive weighs on the ruble— Russia’s currency has depreciated by more than 35% since the fall—and inflationary pressure rise again, limited resources will create a dilemma and force painful decisions, including an interest rate hike of around 300bps in 2023H1.