- Purchases of foreign currency to resume as early as this month
- Russia has sold from its wealth fund in 2023 to cover spending
According to Bloomberg article published on May 2, 2023, Russia is likely to resume buying foreign currency for its reserves as soon as this month as rising oil earnings stabilize public finances despite US and European efforts to squeeze Kremlin income.
With energy revenues now close to exceeding their target level, purchases are possible already in May, according to Bloomberg Economics, which estimates initial volumes could amount to the equivalent of around $200 million in yuan per month. The Chinese currency is the main asset Russia can still use to conduct transactions for its $154 billion wealth fund because of sanctions.
An announcement from the Finance Ministry is due later this week. It’s already been reducing yuan sales, used for covering the budget deficit, during the last two months and cut April’s total to near half the figure for February.
“It will be important for the market that the state is starting to accumulate reserves again instead of spending them,”said Natalia Milchakova, an analyst at Freedom Holding Corp. “This may even positively affect the ruble.”
Since purchases were halted in late January 2022, followed by the program’s suspension after the invasion of Ukraine the following month, the Finance Ministry has only sold foreign currency this year under a revamped budgetary mechanism designed to insulate the economy from the volatility of commodity markets. Russia gets around a third of its budget revenues from the oil and gas industry.
What Bloomberg Economics Says...
“The volumes of FX purchases will be small initially, but highly symbolic as they will show that the country instead of eating through reserves is building them.” Alexander Isakov, Russia economist.
A turnaround now would underscore Russia’s ability to keep up the flow of petrodollars in the face of sanctions and the price cap imposed for buyers by Group of Seven industrialized nations and their partners in the European Union. Though strained by military spending and still running an unprecedented deficit, the budget is on the mend thanks in part to changes in the way the government calculates some oil taxes.
The base price used in the oil-output and profit-based tax calculations for crude producers is calculated at a discount of the nation’s flagship Urals crude to international benchmark Brent — set at $34 a barrel for April before gradually narrowing to $25 from July.
Although the price cap reduced the price of the nation’s oil, Russia has managed to cope by implementing the Urals discount to Brent and forcing producers to pay more taxes. A weaker ruble this year has also benefited a government that collects much of its revenue from energy taxes denominated in foreign currency but spends in rubles.
The eventual timing of restarting the purchases is in dispute among economists since the decision also depends on factors ranging from a volatile ruble and possible changes to the discount in the tax formula to any deviation in actual energy revenues relative to the amount expected in April.
Rosbank economist Evgeny Koshelev sees a range of scenarios that include currency purchases brought forward to May or alternatively delayed to June or even July.
In the first quarter, contributions from oil and gas to the Russian budget were down by 45% from a year earlier to 1.64 trillion rubles. The fiscal shortfall as of late April already far exceeds the Finance Ministry’s full-year target for 2023.
The outlook is shifting as a result of the rising export prices of Russia’s crude and changes in the tax formula that the Finance Ministry expects will deliver some 600 billion rubles of additional budget income.
Though Bloomberg Economics is certain Russia will start currency purchases within the next three months, it puts the probability of their resumption at 65% in May and 80% in June since a decline in oil output adds some uncertainty.
Projections for Urals prices by BCS Financial Group, however, show Russia may only start buying in the third quarter at the earliest.
“In May and subsequent months, as the oil price recovers, the volume of resources drawn from the wealth fund will gradually decrease,” said Natalia Lavrova, chief economist at BCS.
