Russia Considers Austerity Measures as Oil Prices Plummet and Budget Deficit Widen

Russian officials are weighing the possibility of enforced reductions in federal expenditure as diminishing oil prices threaten the reserves necessary to finance the ongoing conflict in Ukraine, according to a report by Bloomberg on Tuesday, which cited an unnamed source with knowledge of preliminary discussions.

The government is said to be considering adjustments to its budget rule, which regulates the allocation of funds from the National Wealth Fund (NWF).

Currently, the Finance Ministry utilizes the NWF to compensate for losses in oil and gas revenues when the price of Urals crude falls below $60 per barrel. The source mentioned by Bloomberg indicated that this threshold might be decreased to $50 starting next year if oil prices continue to remain low.

However, implementing this adjustment would mean limited access to the NWF, compelling the government to reduce expenditures in other sectors.

The draft budget for Russia in 2025 had projected an average price for Urals oil at $69.70 per barrel—yet by March, it had dropped below $60. It recorded an average of just $54 in April and further declined to $49 in early May.

Consequently, tax revenues from natural resources in the first quarter were 10% lower than anticipated.

In light of this, the Economic Development Ministry has lowered its oil price forecast for 2025 to $56 per barrel, while the Finance Ministry adjusted its budget estimates, predicting that oil and gas revenues would fall short by 2.6 trillion rubles ($32 billion). This would result in a budget deficit of 3.8 trillion rubles ($46.8 billion)—the highest level since the onset of the pandemic.

Adjusting the fiscal rule threshold to $50 could necessitate spending cuts of 1.5 trillion to 1.6 trillion rubles ($18.4 billion to $19.7 billion), according to Natalia Orlova, chief economist at Alfa Bank. She cautioned that any decision to reduce spending would significantly impact recipients of the budget.

«Geopolitical objectives still take precedence,» she remarked.

One of the primary challenges is military expenditure.

This year, the Russian government plans to allocate around 30% of the national budget, equating to approximately 13.2 trillion rubles ($162.6 billion), towards military and defense procurement—the largest share since the Soviet period.

Cuts to military spending are unlikely. Instead, civilian programs, which have already seen reductions in funding, are expected to bear the brunt of any budgetary constraints, according to Dmitry Polevoy, chief investment officer at Astra Asset Management.

However, the Kremlin’s options are restricted.

“The Finance Ministry recognizes that there aren’t sufficient reserves to sustain an extended period of low prices,” Polevoy stated.

Since the onset of the Ukraine invasion, officials have utilized two-thirds of the NWF’s liquid assets to cover budget gaps and support state corporations. The fund had only $39.5 billion in liquid assets in April, the lowest since it was established in 2008.

If the budget rule remains unchanged, the Finance Ministry anticipates spending at least 800 billion rubles ($9.8 billion) from the NWF this year to counterbalance lost oil revenues. Additionally, around 1 trillion rubles ($12.3 billion) is allocated annually for large infrastructure projects and support of state-owned enterprises.

Analysts at Gazprombank project that the NWF’s assets could deplete within two years if oil prices hover around $50 per barrel, and in just over a year if prices fall to $40.

The increasing strain on state finances may heighten the possibility of new tax increases unrelated to oil, Polevoy warned.