Russia Budget Gap Spikes Despite Oil Windfall Driven by Iran War

m0l9qd0ebbgmpn0stmvrqx6c_media_dl_1.png Finance Ministry

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(Bloomberg) — Russia’s budget gap sharply widened despite a windfall in energy revenue driven by the tensions around the Strait of Hormuz, as the Kremlin continues to ramp up spending on its war in Ukraine.

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The federal budget posted a deficit of 724 billion rubles ($8.8 billion) in July, following a surplus a month earlier, according to Bloomberg calculations based on Finance Ministry data. That brought the cumulative budget deficit for the first seven months of the year to 6.5 trillion rubles, or 2.8% of gross domestic product, the ministry said Tuesday.

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The deterioration was driven by continued growth in spending. The ministry said the government continued to make advance payments under state contracts, a practice that’s typically concentrated in the first months of the budget before tailing off as the year unfolds.

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Budget spending rose 6% from a year earlier in July, after increasing 13% the previous month, according to Bloomberg calculations. 

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Total outlays reached 28.6 trillion rubles in the first seven months of the year, with government procurement spending surging by 39% to 8.4 trillion rubles. That exceeds 80% of the full-year plan, Finance Ministry data show.

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Russia is stepping up spending on the war with Ukraine that’s in its fifth year, even as the economy has slowed sharply under the pressure of high interest rates aimed at curbing inflation.

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While Kyiv has increased the scale and range of drone strikes deep inside Russia targeting industrial and other facilities, the Kremlin has escalated its air attacks on Ukrainian infrastructure. Earlier, Russian lawmakers approved amendments allowing the government to increase spending without revising the fiscal law.

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The budget is traditionally revised in the second half of the year, and Finance Minister Anton Siluanov has already said the annual deficit target of 1.6% of gross domestic product will be raised despite the oil windfall linked to the US and Israeli war with Iran.

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At the same time, Russia’s total budget revenue rose 28% from a year earlier in July, according to Bloomberg calculations, supported by gains in both oil-and-gas and non-energy revenue.

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Total budget income from the oil and gas industry reached 934 billion rubles in July, according to the ministry. Tax revenue from oil alone jumped to a 15-month high, helped by higher crude prices following the Iran war and lower state payments to the country’s refiners, according to Bloomberg calculations.

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While prices for Urals, Russia’s key export blend, have declined amid on-and-off talks between the US and Iran to resolve the conflict, they remain above the average level assumed in this year’s budget.

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