Russia will be able to continue waging war in Ukraine for up to three years provided there is no dramatic reduction in the Kremlin's oil revenues, according to a Bloomberg report citing internal analysts and Citigroup Inc.
The publication noted that Russia has a sizable safety cushion, largely due to the remaining Russian reserves denominated in the Chinese yuan, which are not subject to Western sanctions and are still available to the Russian authorities. Recently, Russia’s Ministry of Finance and Central Bank announced they would start selling the yuan as part of the country’s budget rule, plugging the budget deficit caused by the collapse of oil and gas revenues.
Analysts at Bloomberg Economics forecast that preserving the current status quo, with Urals-grade Russian oil trading at around $50 a barrel, will allow the Russian authorities to continue the war effort for up to three years, covering the budget deficit from existing sources. Citigroup issued a slightly more measured forecast, seeing the stash depleted in 2.5 years with Urals – the brand used to price the Russian export oil mixture – at that price level.
Natalia Lavrova of BCS Financial Group pointed out that a fall in the export price of oil below $50 per barrel would increase Russia’s budget deficit by another 2.5 trillion roubles ($36bn), forcing the Kremlin to ramp up monthly yuan sales. Russia’s yuan reserves are nevertheless limited, totaling close to $45 billion.
“Russia might not want to run yuan reserves all the way down to zero, which could mean that FX sales will slow as reserves dip. In any case, these FX sales might buy authorities enough time to adjust to permanently lower energy-export revenues,” said Alexander Isakov, Russia economist at Bloomberg Economics.
Bloomberg analysts believe that the country’s yuan reserves may run out in 2023 only if the average price of Russian oil drops to $25 a barrel or lower. Citigroup, however, sees Russia burning through its yuan reserves in 2023 at an average annual oil price of $35.
Both pools of experts agreed that if Urals stays within the $35-$50 range, the Russian government will be able to get through the year relatively unscathed. An oil price above $60 would even allow the government to start adding to its yuan reserves.
The publication admitted that its forecast does not take into account the Russian authorities financing the budget deficit by other means – which could potentially include new taxes on Russian business, including one-time payments to the budget, and the ability of the Finance Ministry to borrow money on the domestic market. The Insider earlier reported that Russia’s domestic debt market can finance the budget by an amount equaling close to 10 trillion roubles (approximately $145 billion) – however, issuing a high volume of state-backed securities would affect their profitability and the stability of the current budget system.
Russia’s budget for 2023 is based on an average annual oil price of $70 per barrel. According to Bloomberg, the country's budget “hasn’t been so reliant on high oil prices for about a decade.”
Russia “needed Urals to average $104 to balance the books last year and the break-even will decline to $90 in 2023 only if the government avoids spending increases,” the publication noted.
The current price of Russian oil on foreign markets is $47.