Russia's Economy Ravaged by War as Budget Surplus Completely Wiped Out

Russia's budget surplus more than halved last month in a sign of the impact Vladimir Putin's invasion of Ukraine is having on his country's public finances.

Preliminary data from Russia's Finance Ministry showed that the country's fiscal surplus shrank to 55 billion rubles ($860 million) in the first nine months of the year, down from 137 billion roubles ($2.15 billion), Bloomberg reported.

Public finances have been strained as the Russian government supports the economy during a recession and spends more to meet the needs of the military, the financial news outlet reported.

Expenditures in 2022 have surged by 19 percent compared with the same period last year and nearly double the pace of growth in budget revenue.

"Non-oil tax collection has improved, as VAT collection normalized," Russian economist Alexander Isakov told Bloomberg. "The Russian budget deficit will total 2.6 trillion rubles this year or 2 percent of GDP, provided non-oil revenues remain robust."

Olga Bychkova, an economist at Moody's Analytics, told Newsweek that the Russian government surplus is 30 times lower, when compared to the same period last year.

"Unfortunately, the Ministry of Finance hasn't published the details of the expenditures distribution since February, thus, we can't say with certainty which ministries or parts of the economy are financed more now," she told Newsweek.

"Nevertheless, we estimate that expenses on national defense, support of the economy amidst mounting international sanctions, and social transfers to cover for high inflation play the biggest role."

She predicted the government budget would post a modest surplus of 0.6 percent in 2022 on high energy prices but flip to a deep deficit of around nine percent in 2023 due to limited growth, imports, and the opportunity to spend oil and gas revenues.

"Due to significantly contracted opportunities for borrowing from financial markets, the budget deficit will be financed largely by accumulated reserves in the National Wealth Fund, bal­ances of budget funds in the Single Treasury Account, and commercial banks," she said.

Russia's finances have also been hit by less income from shipments of energy, its chief export earner. This followed Moscow's decision to cut back gas supplies to Europe and sell oil at a discount to Asia, in particular to China and India.

Russian gas flows to Europe are about one-fifth of pre-invasion deliveries and Moscow has said it would keep Nord Stream 1, which runs under the Baltic Sea to Germany, shut unless the West lifted sanctions.

The International Monetary Fund (IMF) estimated that Russia's economy will contract by 2.3 percent next year, the third worst performance in the world and that Russia's public finances would remain in deficit until 2026.

It comes as a European Union Commission report said this week that sanctions imposed on Moscow were "melting away" Russia's ability to finance the war.

"Markets are already turning away from trading Russian oil, months before the EU import ban kicks in," the report said, according to EUobserver.

While there was a brief rise in energy prices earlier this year, "oil production is down by 10 percent, and gas production declined by 22 percent year-on-year in August," according to the EU.

A partial mobilization announced last month to replenish troop numbers in Putin's invasion has brought uncertainty to businesses that had already been hit by sanctions and were recovering from the fallout of the pandemic, Agence France-Presse reported.

Sofya Donets, chief economist for Russia at Renaissance Capital, said that Russians will be careful about their outgoings.

"People are looking to put their money aside," she told the agency, "They're not going to overspend."

Update 10/14/22, 12:p.m. ET: This article has been updated with comment from Moody's economist Olga Bychkova.