1/ With a lot of discussion of the oil price cap many forget to think about what it means for Russia's fiscal accounts. Can Russia 🇷🇺afford to wait it out? The short answer is yes. A thread 🧵
2/ The purpose of the oil price cap is to give an exit valve for Russian oil (to bring more Russian oil to the market, not less) at a lower price, as concern was that the EU oil embargo to come on in early 2023 will be too binding. Here are the scenarios.
3/ With the Ruble that is way too high (the extreme scenario of the Ruble at $50), Russia can reduce oil export volume by 10% and face the oil price of $75, and lose about 3.2% of GDP in fiscal revenues. This means its deficit would be roughly 3.2pp higher up to 6% of GDP.
4/ With the Ruble weakening to as much as $150, Russia might gain should it cut oil exports by 10% and face an oil price of $75, as its revenues would be higher than otherwise.
5/ I do not mean to say Russia is immune, not at all; without oil and gas revenues, Russia would have been in consistently large fiscal deficits over the last decade. However, using oil and gas revenues is more akin to "dissaving" or living off selling your parents' apartment.
6/ Russia is aware of the risk and attempted to save for the rainy day ~10% of GDP at end-2021. However, ~34% of it is already committed to spending, and possibly >21% were arrested with frozen reserves, leaving only ~ 4% of GDP by the end-2023.
7/ Russia itself expects its Revenues to go down 25% over the next 3 years because of the EU's pivot away from Russia's energy and a fall in global commodity prices. It can cut spending, as it has done post-2014.
8/ Russia also can lean on the banks. After all, Russia’s financial sector is dominated by public banks (accounting for more than two-thirds of total assets) that have room to increase their holdings. But who will then finance the grand reverse structural transformation?
9/ To sum up Russia is far from suffering enough from the sanctions. The oil price cap gives it an out to sell more oil. With oil price, volumes, and Ruble moving is hard to generate a painful fiscal scenario.
Permanently moving away from Russia's energy is what will hurt Russia
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2/ Federal budget is back to a large deficit in April. A deficit of 3.4 trillion for the first four months of 2023—already 17% above the full-year budget target.
3/ War is expensive. Expenditure continued to trend up in April despite the stories of pre-payment that would have explained Jan-Feb pick-up. Revenues continue to underperform (-22% vs. 2022M1-4) but as big of a problem are soaring expenditures (+26%)
3/ Effect of export controls on Russia, now China and others are stepping in to save the day. Chips, drones and overall trade, recommendations how to strengthen implementation and enforcement.
1/ Russia substantially increased chip imports in 2022, past the pre-war peak. The value of chip imports is up from $1,8 bn recorded for Jan-Sept 2021 to $2,45 bn over the same period in 2022.
2/ China has stepped in to support Russia's access to chips.
3/ China and HK support can be quantified by the value of shipments as well as the number of transactions (exports of chips to Russia). Others, like the US, Germany, and the UK have scaled back.
2/ Russia's export of crude and products is sharply up and behind Russia's large current account surplus.
3/ The sharp increase in oil price is the main driver behind Russia's higher export revenues in 2022; despite the war, it will have a record current account surplus, more than double the previous highest value.
1/ Semiconductors are essential for Russia's weapons used in Ukraine. This is what happened to the transactions with countries that used to be Russia's top suppliers in 2021. Note not all semiconductors are under sanctions. w/@mironov_fm
2/ New friends that export semiconductors to Russia, top suppliers in 2022.
New top suppliers (by the number of transactions0: China, HK, Estonia (?), and a few other surprising new entrants to the top.
3/ A similar story of “friends” in 2022 for electronic integrated circuits. Russian imports, number of transactions by country in thousands.
1/ With Russia 🇷🇺 1%-2% of revenues due to lower oil prices (and the oil cap) set at $60, what are other sources of revenues of the Federal budget? The most important revenues are VAT, profit taxes, and excises.
2/ The MinFin lacked creativity forecasting taxes as a constant to GDP. VAT is Russia's second most important tax after oil and gas; it depends on domestic consumption and imports. Profit taxes depend on the domestic economy and dividends, with Gazprom being the largest payer
3/ How is Russia preparing to square the circle and live with lower oil and gas revenues (with or without the cap as their assumed price goes down to $65 by 2025)? As Russia has done before, with cuts in spending.