Russia’s budget hole is growing larger, and the Kremlin has limited ability to borrow money, as it is highly reliant on oil and gas for its budget, which has seen a sharp reversal in prices downward.
Brent crude fell 1.6 percent to $63.70 a barrel on the ICE exchange in London on Tuesday, marking the second day of rapid declines after more than 3 percent on Monday. Last week’s rebound thus proved temporary.
Barclays analysts on Monday cut their 2025 Brent price forecast by $4 to $70 a barrel, citing rising trade tensions and a shift in OPEC+’s production strategy as factors in a 1 million barrel-a-day surplus of crude supply this year. Downward pressure was also put on refineries on the Iberian Peninsula due to a major power outage, Reuters reports.
Meanwhile, several members of OPEC+, which includes the Organization of the Petroleum Exporting Countries and its allies, will suggest accelerating production increases for the second year in a row in June, sources told Reuters last week. Prices are falling, and their budgets need money too, and they see that production caps aren’t getting them the money.
Russia’s taxes on oil are decreasing
The discount at which Russia sells its Urals oil has recently exceeded $13, so at a Brent price of $63.70, that means about $50 per barrel of Urals oil that Russian oil companies actually get. These are critical levels for the Kremlin’s budget and for Russian oil producers, whose extraction costs were estimated at $42 per barrel from onshore sources a few years ago.
The tax base for the domestic oil and gas sector is the monthly export price of Russian oil, calculated by the government in dollars. The drop in oil prices registered in April will therefore not be felt by the state until May.
Oil in Russia is subject to a 30 percent export tax on the Brent price, but with a discount set by the government. In July 2023, this discount was $25, so with such a discount and at a Brent price of $64, the tax per barrel would be only $11.70. CIT revenues would probably drop to a minimum because oil companies sell oil for $50, and since their extraction costs are on average around $42, there may be no profit with the export tax.
On the other hand, the cost of extraction in the main deposits is lower than $42 and is only $15, so it is always possible to close down deposits with a higher unit cost. However, this means a decrease in total sales and therefore in revenues to the Russian budget.
Not only that, gas prices in Europe are falling, which, despite the embargo on gas from pipelines, has continued to make abundant use of liquefied gas recently, especially France. The price of May gas contracts fell by over 2 percent on Tuesday, and the price went down to as much as €31.21 per megawatt-hour. The last time it was this cheap was exactly one year ago, on April 29, 2024. Let us recall that at the end of February, the European price even exceeded €57.
But oil is key to Russia’s budget. The Russian Economy Ministry lowered its Brent price forecast for 2025 from $81.7 to $68 per barrel last week, the Russian news agency TASS reported a few days ago. The forecast for the price of Russian Urals oil is $56 per barrel.
Russia’s budget revenues from taxes on oil and gas were already 17 percent lower year-on-year in March, but May will be critical.
According to TASS, Dmitry Kasatkin, a partner at Kasatkin Consulting, believes that amid rising OPEC+ production and trade wars, there could be a “perfect storm” on the market that could push oil prices down to $20-30 per barrel. However, trade tariffs are likely to be eased, and OPEC+, which monitors the demand situation for oil, will take action to prevent prices from falling below $45-50 per barrel, he added.
Tax increases
One of the effects of falling oil prices on Russia is the pressure to raise taxes other than the export tax on hydrocarbons. In order not to eat up the remnants of the National Welfare Fund (money from oil and gas exports, which were supposed to be spent on improving the standard of living of Russians, but from 2022 will go to Putin’s war), the Kremlin announced a “reform of budget regulations.”
The “limit price” below which the authorities will “unseal the fund” may fall from the current $60/barrel to $50. In fact, this means a reduction in budget expenditure by 1.5-1.8 trillion rubles (PLN 67-80 billion), predict Alfa Bank and VTB, quoted by Polish media outlet Rzeczpospolita. And this leads to cuts in spending on social purposes, health care, education, social assistance.
