A gas station masquerading as a country
The Russian Ministry of Finance released the March numbers for the federal government’s budget. These are the first budget numbers to be released since the invasion of Ukraine at the end of February.1 As a result, they can help to give us a sense of how the sanctions are impacting the government’s ability to fund Putin’s war.
Oil & gas revenue in March is up more than 100% year-over-year. The Russian government reported oil & gas revenue of $16.50 billion in March, compared to total revenue of $40.5 billion. In March of last year, they only earned $8 billion in oil and gas revenue, less than half of the March 2022 number. The spike in oil and gas prices has provided the government with a revenue windfall. Oil & gas revenue accounted for 40% of overall government revenue in March of this year.
In spite of the war in Ukraine, the Russian government is actually on track to run a large budget surplus. The cumulative budget surplus realized so far this year is $ 15.7 billion. That’s a large surplus. Without oil and gas revenue, this surplus would have turned into a cumulative deficit of $24.9 billion. The difference is $40.66 billion in cumulative oil & gas revenue earned since the start of 2022, most of it from oil and gas exports to the European Union.
Overall, last year, the government earned $123 billion in oil and gas revenue, 35% of total revenue. In 2022, they seem to be on track to exceed that number unless stringent new sanctions are imposed.
The loss in revenue from an energy embargo, even if only partial, would be hard to make up elsewhere. The government’s other sources of revenue are likely to decline substantially as the Russian economy enters a deep recession. The Russian government has a narrow tax base. Income taxes only account for a tiny sliver of revenue. Without oil and gas revenue, the Russian government would have trouble paying its bills. Any persistent deficits would probably have to be monetized or financed by some form of financial repression, given that the Russian government has effectively lost access to international capital markets. And monetization would result in even higher inflation. It’s critically important to force the government to run deficits in order to impair Putin’s ability to wage a long war.
Clearly, the Russian government depends on energy revenue. Russia really is a gas station masquerading as a country, as John McCain put it. Or, to be more precise, the Russian federal government is running a huge gas station. European politicians, especially those in charge in Germany, often claim that an embargo on oil and gas would not impact Russia's ability to wage a long war. Based on these numbers, that claim is hard to defend, just like it’s hard to argue that an oil embargo would not dent the lifestyle of the Saudi royal family.
These numbers may be manipulated by the Russian government.