No, Russia isn’t about to run out of money
Hello! Welcome to your weekly guide to the Russian economy — written by Alexandra Prokopenko and Alexander Kolyandr and brought to you by The Bell. This week we look at whether Russia’s National Wealth Fund is in danger of running dry, and what it would mean if it did. We also analyse last month’s inflation data to see if price growth is slowing.
Depleted National Wealth Fund is still well-paced to continue to fund Russia’s war
One of Russian President Vladimir Putin’s trump cards in ceasefire talks is his stated willingness to keep fighting the war in Ukraine until the West offers him the right terms. But has Russia got the money to sustain the fighting? One key measure of Russia’s ability to continue its war effort is the amount of cash in its rainy day National Welfare Fund (NWF). The liquid part of the fund is currently at its lowest level since 2019, having halved over three years of war.
What’s going on?
The liquid part of the NWF (i.e. its resources in yuan, gold, and rubles) was worth 3.39 trillion rubles ($39 billion) on March 1. That is less than half the level of before the full-scale invasion of Ukraine when the NWF’s liquid funds stood at 8.8 trillion rubles ($102 billion).
The steady fall has led to predictions about the imminent exhaustion of Russia’s war chest, and the subsequent bankruptcy of the Russian state. However, without denying the increased risks that are facing the Russian economy, it’s not reasonable to talk about a crisis based on data from the NWF alone. There are two main reasons for this:
- Firstly, from a purely financial point of view, the situation is not critical. Indeed, the liquid part of the NWF should increase by 50% thanks to an injection of about 1.4 trillion rubles ($16 billion) in oil-and-gas revenues due to arrive in the summer.
- Secondly, the NWF is not used for government spending (although there are some exceptions). Its main role is to help balance the impact of the government’s fiscal policy, and provide a financial cushion in an unexpected crisis (like a long-term drop in oil prices, or a sudden, inescapable hike in spending).
How does it work?
Before the war in Ukraine, Russia’s finances were built around the so-called budget rules, which limited state spending in years of plenty, and allowed it to be maintained in leaner times.
The rules divided revenue into “oil-and-gas” revenue, which was subject to price fluctuations, and “non-oil-and-gas” revenue, which depended on economic growth. When planning the budget for the following year, the volume of oil-and-gas revenue was determined by a “cut-off” price. In the last pre-war application of the budget rules, this was $44.2 per barrel of Urals crude. Any oil-and-gas revenue received above that level was counted as excess income, converted into foreign currency on the market, and moved to the NWF. In this way, the authorities stopped the ruble from strengthening too rapidly, and removed a chunk of money from the budget, restraining the appetites of officials keen to raise spending.
The rule also worked in the other direction – when oil prices fell and revenue dropped, the authorities would remove foreign currency from the NWF and buy rubles – helping prop up the Russian currency, and replacing the “missing” oil-and-gas income. NWF funds were not allowed to be used to cover the budget deficit (but they could be invested).
However, everything changed with the full-scale invasion when the budget rules were scrapped. Instead, excess oil-and-gas revenues were used to finance an increase in war-related spending. There was a lot of additional revenue in 2022 (due to high oil prices), but in 2023 and 2024 the NWF funneled 4.5 trillion rubles extra to the budget.
What now?
Russia’s 2025 budget was calculated assuming an average price of $70 for a barrel of Urals crude and 96.5 rubles to the dollar exchange rate, generating some 11 trillion rubles in oil-and-gas revenues, of which about 1.8 trillion would be additional income destined for the NWF. The current oil price is $60 and the exchange rate is 86 rubles to the dollar, which, if it stays at that level, means a shortfall of about 2 trillion rubles. In that case, the NWF won’t be replenished at all.
But even if the government chooses to go ahead and invest 1 trillion rubles (as was planned in the budget), there will still be significant liquidity left in the NWF. Indeed, even if the entire NWF was spent it would not mean the Russian economy was bankrupt – the budget deficit could easily be covered by borrowing.
Nevertheless, it would be awkward for the Kremlin to lose the NWF entirely. Along with the budget rules, operations using NWF liquid assets are the only tool the authorities have to influence the – politically sensitive – ruble exchange rate. Of course, Russia could just abandon its more-or-less market-based approach to determining the value of the ruble. But there is no evidence anyone in Moscow is considering this at the moment (the current approach is credited with helping to keep the financial system stable despite the turbulence of the war in Ukraine).
Even if oil-and-gas revenues did suffer a prolonged and significant slump, the authorities have other means of topping up the NWF. For example, they could sell some of the fund’s non-liquid assets, which include a controlling stake in state-owned lender Sberbank. This would reduce the overall worth of the fund on paper, but preserve a tool to influence exchange rates. A simpler step would be to transfer part of Russia’s gold and foreign currency reserves to the NWF. Even excluding the assets currently frozen in the West, these reserves amount to some 30 trillion rubles ($350 billion), or almost 10 times the current value of the NWF. That would enable Russia to keep smoothing over revenue fluctuations, and currency peaks and troughs.
Why the world should care
Speculation about the NWF running dry and a subsequent financial crisis in Russia is overblown. All things being equal, the NWF will last for several more years, and, even if it runs dry, it wouldn’t spell immediate disaster. Instead, the real threats to Russia’s finances and its economy lie in sudden, unpredictable events – as well as a long-term slump in oil prices or sustained high-levels of spending that are not supported by revenue.
Is inflation really on the brink of slowing?
In both January and February prices rose significantly, and there remains a question mark over whether the slowdown in inflation is sustainable. Despite a reduction in borrowing, demand remains high, Central Bank analysts noted in recent analysis. The money supply is still growing rapidly as a result of credit growth and the large budget deficit; and there is an ongoing consumer boom in most regions fuelled by increased salaries and bonuses. Public expectations of inflation have dipped, but remain high.
- At the start of the year, inflation slowed to about 10% year-on-year. Prices for animal products – meat, dairy, and fish – have slowed, and fruit and vegetable prices are increasing more slowly than would be usually expected.
- Public inflation expectations in February, as well as the price expectations of manufacturers, fell for the first time since September. Nonetheless, both expectations remain high, increasing risk of price growth via inertia.
- A sudden hike in wages has spurred consumer demand and savings. In addition, a stronger ruble, driven by seasonal factors, as well as increased hopes of a geopolitical détente, has further improved consumer sentiment.
Why the world should care
Data from February confirms that inflation in Russia is slowing – at last. But it is premature to talk of a stable de-inflationary trend. To achieve this, strict monetary conditions must continue – in other words, it’s likely too early for the Central Bank to lower interest rates.
Figures of the Week
For the first time in Russian history, in 2024, the state received more from personal income tax than corporate tax, the Federal Tax Service said in a press release last month. Income tax returns amounted to 8.4 trillion rubles last year, against 8.1 trillion rubles in tax from corporations. Previously, business had always made the bigger contribution. The increase in income tax returns comes against a background of significant salary rises — in 2024, the average monthly wage went up 19.3% to 87,952 rubles. Taking into account allowances and bonuses, the figure was 128,665 rubles. This year, corporate tax rates are due to rise to 25%, and Russia will introduce a progressive income tax of up to 22%.
Between March 4 and March 10, weekly inflation slowed from 0.15% to 0.11%. In the food sector, price growth was 0.18%. Annual inflation fell very slightly from 10.07% to 10.06%. The Central Bank indicated that inflation in the first quarter could reach 10.2%.
Russia’s second biggest state-owned bank, VTB, expects to receive a subordinated deposit of 93 billion rubles in the coming weeks. The money will be taken from the National Welfare Fund through 2049 to finance a high-speed Moscow – St. Petersburg railway line, the bank’s Deputy Chairman Dmitry Pyanov told journalists.
Further reading
What happens if Putin rejects ceasefire? Trump’s options are limited
What Incentives Are There for Russia to Agree to a Ceasefire in Ukraine?
