"The Budget Is Torn To Shreds."

The Russian Ministry of Finance reported on the "hole" in the treasury.

The collapse of raw material rents and economic slowdown continue to "eat up" the revenues of the Russian budget, which this year will have to spend every third ruble on the army and war.

At the end of January-February the federal treasury received 3.449 trillion rubles of deficit - almost 1.5 times more than in the same period a year earlier, reported the Russian Finance Ministry.

Oil and gas revenues collapsed by half (to 826 billion rubles) after Russian oil prices fell and oil companies were forced to cut production. Non-commodity revenues grew by only 4.1% (to Br3.94 trillion), while in real terms - adjusted for inflation - they fell by 1.6%.

As a result, the budget spent almost twice as much as it collected in taxes - Br8.21 trillion versus Br4.76 trillion. And its deficit for two months came close to the plan for the whole year (Br3.78 trillion).

"Only two months have passed since the beginning of the year, and the budget has already been torn to shreds," says Alexander Kolyandr, a senior researcher at the Center for European Policy Analysis (CEPA). Despite the increase in VAT and taxes on small businesses, the authorities already recognized in February that it will be impossible to fulfill all budgetary obligations this year, as evidenced by plans to change the budgetary rule, Kolyandr points out.

The idea is to lower the oil price target, at which the depleted National Welfare Fund is used to cover budget holes, which will simultaneously lead to sequestration of some expenditures. Given that cutting military spending is unrealistic, funding for the already stagnant civilian economy is likely to go under the knife, Kolyandr notes.

The war in Iran, which briefly raised the price of Brent oil above $100 a barrel, may help the Russian budget, although it all depends on how long the conflict will last, points out Petras Katinas, an expert at the Royal United Services Institute in London. If it ends in a few weeks, the effect will be minimal, but if the war drags on, the Russian economy could get a more substantial injection, Katinas argues.

"If oil prices don't stay high for long and the ruble doesn't weaken, the Kremlin's budget problems aren't going anywhere," Koliandr agrees. Calculations to raise more money from the non-resource economy are unlikely to come to fruition, he warns, as the government prepares to cut its already dire growth forecast for this year - from 1.3% - to 0.7-1%.

Additional oil revenue from the war in Iran is likely to be used to finance the war with Ukraine, says Jame Henderson of the Oxford Institute for Energy Studies. "No one would be surprised if military spending increases as a result of this," he says. - There will be more money, which means, by default, more money will be allocated to the military. That is certainly an unintended consequence."

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