Russia's budget deficit. Has it started?

16 February, 12:46 PM

The Ministry of Finance of the Russian Federation scared all residents of the Kremlin and the surrounding area about the deficit of the Russian budget. That’s not a joke: in January it amounted to 1.6 trillion rubles, which is equal to 60% of the annual deficit plan.

Although markets are still staying in a positive mood, they were reduced by 100 points on the S&P 500 index according to the results of the week: the index will open on Friday morning at 4,081. The main loser of the week was Google, which became a victim of the new fashion for artificial intelligence. However, as with non-artificial intelligence, what appears to be intelligence and behaves intelligently does not always turn out to be really intelligence. The example of many Russians is illustrative here. And we should not forget about some residents of the Bangkok boiler. This is about a new fad, a toy which captivated the younger generation, and considering all that, it makes the flocks of retail investors who still own a significant financial asset called ChatGPT run in droves. Google didn't build its AI as well, and became a victim of sales because of that.

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Over the past few years, there have already been several hobbies like that. Is it worth mentioning, for example, how they reinvented the radio with the name Clubhouse, which everyone carried around like a fool in a writing bag for several months. And now it is even difficult to remember the name of this application, in which, surprisingly, you could listen to someone and where only the chosen ones were allowed. One way or another, but instantly Google was recognized as unfashionable. And such movements show once again that the cleaning of the markets has not happened yet; retail is still very active and is able to inflate bubbles and beat normal businesses, which makes us doubt the thesis that the worst for the markets is behind us – even though the news coming from the U.S. Fed is increasingly pleasant for investors and speculators. One more bit of good news came this week from the Russian side, where the local Ministry of Finance scared all the residents of the Kremlin and the surrounding area and quite amused Ukrainians, and not only with its data on the Russian budget deficit. Just imagine, in January it amounted to 1.6 trillion rubles, which is equal to 60% of the annual deficit plan and a quarter of the remaining stockpile.

That’s a good refutation of the thesis which is very actively spread by Russian propaganda, especially in Europe, that sanctions do not work– which made many Ukrainians declare: "Well, finally, it has begun." Moreover, the Russian government came to business, of course Russian business, with a persistent request to give them 200 billion rubles. However, perhaps it is still not as bad as we would like, and it is possible that we will not see such a deficit in the coming months, despite even the launch of very painful sanctions against Russian oil products. In the holistic view, a number of technical factors combined to inflate the budget deficit in such a scale. On the expenditure side, it is a prepayment of a year's worth of orders for the army, where, as Russians said, they paid 70% of the required amount already in January. And there will be no more such payments, therefore expenses in February 2023 will no longer increase as much as in February 2022. On the other side of incomes that have fallen sharply, there is a stable part: oil and gas revenues that have fallen and will continue to decrease. Thanks to this, we can count on a much deeper black hole in the Russian budget than the one which was laid by the Russian Ministry of Finance, which calculated the estimate based on a review of the price of selling Russian oil at $70 [per barrel] and the full sale of gas by Gazprom in Europe. At the same time, the sharp drop of non-oil and gas revenues which we saw in January may not be repeated, because it was caused by the technicalities of Russia's murky new tax schemes.

The Ukrainian Eurobond market moved along with developing markets, but not very actively and without special ideas. Naftogaz, which is starting another attempt to agree with investors about restructuring, has fallen into this position once more. Let's see if they succeed this time. Anyway, it's been a long time. The company has been in default for a very long time, while other quasi-sovereign borrowers have closed their issues with investors. On the domestic market, the Ministry of Finance continues to collect tribute from banks which are continuing collecting the required amount of government bonds under the new regulation. And the trend of increasing deposit rates is even beginning to be seen, something the National Bank has been pushing financial institutions to do for a long time.

The regulator reported about an increase in reserves again. It is not a joke – now the reserves of the National Bank are higher than they were on the day the war started. It is not surprising that the hryvnia continues being strong and has strengthened slightly in the cash market over the past week. Now, the gray (black) market rate is UAH 39.9 per dollar. The national currency saw a slight seasonal weakening in the context of budget expenditures. Inflation was also relatively encouraging. The latest data shows that it slowed from 26.6% to 26%year-on-year. Such a small thing, but nice. The worldwide reduction in prices also helps, in particular, on energy distributors. Can you imagine, in January in Ukraine, the price of gasoline decreased –which, however, a lot of people did not notice.

P.S. Happiness is not something you postpone for the future; it is something you design for the present.

Jim Rohn

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