Russia's Reserves Significantly Shrink by a Factor of Three, Yet War Financing Capacity Persists - Assessment by Ukraine's National Bank
Russia's Fiscal Woes Amid Ongoing War Effort
Russia is steadily depleting its economic reserves, particularly its Russian National Wealth Fund (NWF), yet still possesses the potential to continue funding the conflict. The Russian budget, which traditionally ran a surplus for three consecutive years, is now facing a deficit.
In April, the projected deficit for 2025 was raised to 1.7% of GDP (from 0.5% of GDP). This increase is primarily due to decreases in oil and gas revenues.
The National Bank of Ukraine has stated that Russia has significantly drained essential macroeconomic reserves, hence limiting its political flexibility in the coming years to finance its war and maintain low energy prices.
As of 1st April, the liquid part of the Russian NWF decreased threefold since 2022 — by 66%. It primarily consists of yuan-denominated assets (58%) and gold (42%). The Russian government plans to take an additional RUB 447 billion (US$5.1 billion) from the NWF in 2025, accounting for approximately 14% of its liquid assets, to cover the budget deficit caused by the war and lower energy prices.
To finance the budget deficit between 2022 and 2023, the government has been forced to resort to issuing domestic debt, with Russian banks being the sole buyers of federal loan bonds. The share of assets owned by non-residents has decreased by 69% since January 2022, representing only 4% of the maturing bond market.
Russia's economy is slowing down, with high inflation and rate hikes anticipated. The country's GDP is predicted to grow by 1-2% in 2025 and by 1% in 2026. The National Bank of Ukraine emphasizes continued efforts to increase sanctions pressure on Russia.
Ekonomichna Pravda sought advice from the National Bank on what additional sanctions could further constrain the Russian government's capacity to finance its aggression against Ukraine.
The National Bank highlighted that the NWF is already subject to Western sanctions. The US, EU, Canada, and other countries have restricted the fund's assets. Given the decline in Russia's oil and gas revenues, and the fact that oil and gas revenues constitute the main source of the National Wealth Fund, the steps to further suppress it may involve targeted information about the sanctions imposed and cooperating with third countries to counter sanctions evasion.
Another potential blow to Russia's financial cushion is the reduction of the price list for Russian oil from the current $60 per barrel to $45 per barrel. There's still a slight chance that this measure will be part of new restrictions against Russia.
Furthermore, the National Bank suggests applying personal sanctions to companies and institutions that cooperate or receive investments from the National Wealth Fund.
Additional Measures Targeting the Russian National Wealth Fund:
- Freezing or seizing assets held within the National Wealth Fund abroad: Prohibiting Russia's access to its key financial reserves held abroad, thereby blocking its access to vital financial reserves that serve as a cushion for budget shortfalls.
- Expanding bans on Russian banks and sovereign wealth fund-related transactions: Restricting Russia’s ability to move or invest assets internationally.
- Preventing investment in Russian sovereign debt or securities issued under the fund: Cutting off fundraising avenues and limiting Russia's capacity to leverage the fund for economic support.
- Intensifying price caps, import bans, and investment restrictions in the energy sector: Reducing inflows into the fund.
- Targeting financial intermediaries and countries that might assist Russia in circumventing sanctions: Closing loopholes that enable fund assets to be used despite sanctions.
- Restricting financial flows from the fund into Kremlin-directed infrastructure and bailout projects: Specifically targeting projects that are currently accelerating fund depletion.
These measures are aimed at expediting the depletion of Russia’s financial buffer and reducing its ability to sustain the war effort. Targeting the NWF could significantly impact Russia's ability to fund its aggressions against Ukraine.
- The ongoing war effort by Russia is causing significant financial strain, with the government having to resort to withdrawing funds from the Russian National Wealth Fund (NWF) to cover budget deficits.
- With the Russian economy slowing down and the budget now facing a deficit, investors may want to reconsider their current investing strategies in light of the financial instability in Russia.
- The National Bank of Ukraine has suggested additional measures to further constrain Russia's capacity to finance its aggression against Ukraine, including freezing or seizing assets held within the NWF abroad and preventing investment in Russian sovereign debt or securities issued under the fund.
- As the war in Ukraine continues, political analysts might want to watch the development of these measures as they could significantly impact Russia’s ability to sustain its war efforts and, in turn, influence the broader geopolitical landscape.
