Executive Summary

1. Effectiveness and credibility of energy sanctions on the line. The key mechanism through which embargoes on Russian oil and the G7/EU price cap regime have weighed on export earnings and budget revenues—the discount on Russian supplies vs. global prices—is showing signs of trouble. For Urals grade crude oil, for instance, it declined from $40/barrel in January to below $14/barrel in September. Reduced volumes play a role but so does Russia’s growing ability to rely on a sanctions-proof fleet of vessels. These issues need to be addressed urgently to maintain pressure on Russia and ensure that the sanctions regime remains credible.

2. Rebounding export earnings will provide more policy space. Russia’s exports reached $18.8 billion in September, the highest level since July 2022. A persistent improvement of foreign currency inflows—as indicated by a higher current account surplus in Q3 ($16.6 billion vs. $9.6 billion in Q2)—will reduce pressure on the ruble and provide authorities with additional monetary and fiscal policy space to manage the economy in the fact of the war and sanctions. The currency’s significant depreciation since last fall—by close to 50% vs. both U.S. dollar and euro—has been one of the clearest signs of the deteriorating external environment.

3. Budget will improve further and allow for higher war spending. In recent months, revenues from energy extraction taxes and export duties bounced back strongly, reaching the highest level since May 2022, as export earnings increased, and the weaker ruble drove up their local currency value. As a result, the federal deficit fell to 1.7 trillion rubles in January-September, broadly in line with the 2023 budget’s original target. This is a marked improvement vs. earlier in the year, driven also by rising non-oil and gas revenues and expenditure restraint, and will allow Russia to sharply increase military spending (+68% vs. 2023 according to MinFin).

4. Russia’s economy set to grow at a robust pace in 2023-24. A variety of indicators shows a consistent picture of the economy recovering from the initial shock of war and sanctions. Most forecasters (e.g., CBR, IMF, market consensus, World Bank) project real GDP to grow by 1.6-2.2% this year and 1.0-1.5% next. One key factor is the future path of monetary policy: Should persistent ruble depreciation force the central bank to further hike interest rates and/or tighten capital controls, economic activity would certainly be impacted. It is critical to strengthen energy sanctions and prevent Russia from generating additional foreign currency inflows.