Russian crucial oil and gas tax revenues plummeted to their lowest level since the COVID-19 outbreak in January, facing heavy pressure on its finances due to a new round of sanctions imposed by the US and the EU. The successful efforts of the Trump administration to persuade India to shift its energy procurement sources have further exacerbated the fiscal strain on Russia.
According to a report by the Associated Press on Tuesday (February 10th), the latest financial data reveals that Russia’s oil and gas tax revenues in January amounted to only 393 billion rubles (approximately $5.1 billion), a sharp decline of about 65% compared to the same period last year when it was 1.12 trillion rubles, marking a five-year low.
Production levels are also witnessing significant declines. Sources informed Bloomberg that Russia’s daily crude oil production in January dropped to 9.28 million barrels, a further reduction of 46,000 barrels per day from the already decreased output in December of the previous year, and approximately 300,000 barrels below the daily quota set by the OPEC+ agreement.
Currently, Russian crude oil is facing severe logistical and oversupply challenges in the international market. According to Bloomberg statistics, as of early February, the volume of Russian crude oil stranded on tankers at sea reached as high as 143 million barrels, nearly double the figure from the same period last year, with an increase of over a quarter since late November.
Buyers are demanding greater discounts on Russian crude oil due to concerns about violating US sanctions. In December of last year, the price of Russia’s main export crude oil, Urals blend, fell below $38 per barrel, while the international benchmark Brent crude was around $62.50 per barrel, widening Russia’s discount to approximately $25 per barrel.
Mark Esposito, an energy analyst at S&P Global, commented, “This has set off a chain reaction or domino effect.”
He noted that the sanctions covering diesel and gasoline constitute “a highly impactful package of sanctions, like a series of heavy blows, not only affecting the flow of crude oil but also the destination of these refined petroleum products.”
The current situation is closely intertwined with recent international geopolitical developments.
The Trump administration recently reached an agreement with India to reduce import tariffs on Indian goods from 50% to 18%, including the elimination of a 25% “punitive tariff” (imposed for purchasing Russian oil) and lowering the reciprocal tariff from 25% to 18%. This move has prompted India to stop buying Russian energy.
Furthermore, in November of last year, the United States imposed sanctions on Russia’s two largest oil companies, Rosneft and Lukoil, exposing any multinational corporations trading with them to the risk of being excluded from the US banking system.
As India reduces its purchases, some tankers carrying sanctioned crude oil are heading towards China. However, it remains unclear how much additional Russian oil Beijing is willing to absorb.
In response to budget shortfalls, the Kremlin has begun filling the void in the national treasury through increased taxes and domestic borrowing.
Russia has raised the value-added tax rate from 20% to 22% and imposed higher taxes on imported cars, tobacco, and alcohol, while significantly increasing borrowing from domestic banks.
Meanwhile, the economic boost from war-related expenditures is nearing its limit, with labor shortages constraining business expansion, and economic growth stalling. Russia’s domestic gross domestic product (GDP) increased by just 0.1% in the third quarter of last year. GDP growth forecasts for this year range between 0.6% and 0.9%, significantly lower than the over 4% growth rates seen in 2023 and 2024.
Although Russia still has the support of the National Wealth Fund for its budget, long-term fiscal risks are increasing with slowing economic growth and rising inflationary pressures.
Janis Kluge, an expert on Russian affairs at the German Institute for International and Security Affairs (SWP), told the Associated Press, “In another half year or a year, this could affect their thinking about the war. I don’t think they will seek a peace deal because of this, but they may want to reduce the intensity of the fighting.”
Last Friday, Ursula von der Leyen, President of the European Commission, stated that shipping services for Russian oil should be completely banned and that sanctions could be used as leverage to compel Russia to cease its invasion of Ukraine.
She emphasized, “We must be clear-eyed: it is only when under pressure that Russia will return to the negotiating table with genuine intent.”