Economy in Crisis?

If anyone questions whether global sanctions are having an effect on the Russian economy, they need look no further than a recent economic summary by the fine publication The Bell.

The Russian government’s forecasts when compiling its budget for 2025 were far too optimistic, The Bell said. Low oil prices, a strong ruble, and now an economic slowdown are reducing budget revenues. Combine that with crippling sanctions and Russia’s War on Ukraine, and a storm is brewing.

The government did a bit of accounting slight of hand in August to make the numbers look better, but, The Bell said, “the main trends have not changed: oil and gas revenues in August were more than a third lower than last year… and the growth in revenues from VAT — the tax that best characterizes economic growth – was only 6%, which is lower than inflation.”

The planned budget deficit for the year was R3.8 trillion (1.7% of GDP, or $45.6 billion), but it now stands at R4.19 trillion, and could reach R5 trillion rubles or more. This at a time when the Central Bank’s key lending rate is 17% (dropped by 1% last Friday in some strange attempt to free up money supply?).

Falling oil prices has required Finance Minister Anton Siluyanov to reduce the estimated price per barrel from $66 down to $59, an 11% decrease in one of the economy’s most important revenue sources. And the fact that the government shows no sign of a reduction in military expenditures in response to revenue declines, has some thinking that the government is planning a tax increase. Which could spiral into more inflation.

“Three officials familiar with the discussions,” The Bell said, “confirmed that an increase in VAT is being discussed, with exceptions possibly being made for socially significant goods. One of them mentioned a figure — from 20% to 22%.”

VAT is key for Russia’s federal budget. “Together with the mineral extraction tax (MET),” The Bell noted, “it provided 70% of budget revenues in 2024.” It would require a 2 percentage point bump in the VAT to bring the budget back into line, which sellers will surely pass on to buyers, fueling inflation.

The Bell's sources also said that an increase in income taxes are also being considered (the current rate jumped from 20 to 25% last year on businesses and the highest rate for individuals reached 22%. Last summer the Ministry of Finance said it would not touch direct taxes.

Meanwhile, reserves from the National Wealth Fund are being depleted by high current spending and inflation. The Bell predicted that the Fund be dry by the middle of next year.

“If it is not possible to sufficiently reduce spending and increase revenues,” The Bell wrote, “the government will have to borrow more. On the one hand, [Russia’s] total debt-to-GDP ratio (14.5% of GDP) is small, especially compared to Western countries. However, due to sanctions, Russia does not have access to global capital, and the ruble is only partially convertible, so there is no point in comparing it to the US or Japan. In addition, with borrowing rates still in double digits, the government will have to spend more on debt servicing… It is likely that debt payments will amount to 2% of GDP by the end of the year. If the government does not balance the budget with higher taxes or lower spending, Russia may end up like Greece, which spends 2.5% of GDP on debt servicing.”