Russia’s federal budget deficit widened sharply in the first quarter as oil and gas revenues fell steeply, with economists warning that a price surge linked to the Iran conflict has yet to feed through into state finances. (chart)

The Ministry of Finance reported that oil and gas revenues dropped by 45.4% y/y to RUB1.44 trillion ($15.8bn), “primarily due to lower oil prices”, according to an official assessment of budget execution. Total revenues declined by 8.2% to RUB8.31 trillion ($91.4bn), while expenditures rose 17% to RUB12.89 trillion ($141.8bn).

The resulting deficit reached RUB4.58 trillion ($50.4bn), equivalent to 1.9% of GDP, nearly double the level recorded in the same period last year. The shortfall also exceeded the full-year budget target of RUB3.79 trillion ($41.7bn), or 1.6% of GDP.

The finance ministry attributed the widening gap “primarily to the advanced financing of expenditures”, as spending accelerated markedly in March. Data showed that expenditure growth in January and February had been relatively modest at 5.8% y/y, before surging later in the quarter.

Bloomberg reported that Russian authorities had deliberately increased spending in March by as much as 44%, anticipating a rebound in oil-related revenues tied to the US-Iran conflict, which is expected to affect inflows from April.

Economists caution, however, that reliance on volatile oil markets carries significant risks. Analysts at Alfa Bank said the potential windfall in April could approach RUB0.9 trillion ($9.9bn), although this estimate does not account for constraints on physical exports.

“The windfall from the price spike in oil from Iran war has not yet reached the budget and won’t show up until April,” economists said, highlighting a timing mismatch between revenue expectations and fiscal outflows.

Even if higher oil prices bolster revenues, the Ministry of Finance may need to increase borrowing to cover the shortfall and could consider revising its fiscal rule or reintroducing spending cuts. “Closing this gap with the oil market is, in principle, possible, but it is too volatile,” Alfa Bank analysts said.