Iran-fuelled oil price rally not enough to balance russia's budget

Iran-Fuelled Oil Rally Fails to Balance Russia's Widening Budget Deficit

Impact of Oil Price Movements on Russia's Fiscal Health

Recent Oil Price Rally and Its Limitations

MOSCOW, March 3 (Reuters) - Global oil prices have rallied in the wake of U.S. and Israeli strikes against Iran to their highest since July 2024, but the rise still falls short of what is needed to balance the Russian budget, according to Reuters calculations.

Russia's Budget Deficit and Oil Revenue Shortfalls

Russia is running a federal budget deficit, which has been rising because of shortfalls in oil and gas revenue that make up nearly a quarter of budget proceeds. 

Discounted Russian Oil and Sanctions

While global crude prices vaulted above $83 per barrel on Tuesday, Russian oil is traded at a discount to the international Brent benchmark, contributing to the budget's woes. According to Reuters calculations, the discounts averaged $26.50 per barrel in February.

The Russian oil price is sold at a discount mainly due to the Western sanctions over the war in Ukraine, including the price cap, which the European Union lowered to $44.10 per barrel from February 1 to constrain Russia's oil revenue.

Increased Government Spending

State coffers have been drained by heavy defence and security spending since Russia began its military campaign in Ukraine in February 2022.

Required Oil Price and Currency Adjustments

Urals Oil Basket Price Requirements

According to Reuters calculations, the price of Russia's Urals oil basket would need to climb by more than 50% from 3,582 roubles ($46.13) per barrel , which was reached on March 2 in order to meet the budgeted levels.

Budget Assumptions for 2026

Russia's budget for 2026 assumes an oil price of 5,440 roubles per barrel, or $59, and a rouble rate of 92.2 per U.S. dollar.

Currency Devaluation Scenario

Conversely, assuming stable oil prices, the rouble should weaken to 117.5 per $1 for the budget to be balanced from around 77.65 currently.

Government and Central Bank Outlook

Central Bank's Position

Kirill Tremasov, adviser to the central bank governor, said on Saturday that the central bank did not expect the rouble to crumble, while the oil rally could be short-lived.

"Therefore, the government is focusing on a long-term forecast, not on what will happen in the next week or month," he told reporters.

Projected Deficit and Revenue Challenges

Potential for a Ballooning Deficit

Russia's public deficit could balloon to almost triple the official target by the end of this year as declining oil sales and deepening price discounts reduce revenues, while spending may exceed forecasts.

Oil and Gas Revenue Targets

The budget forecasts income of 8.92 trillion roubles from oil and gas sales this year, while the pace of proceeds is now behind this goal.

Exchange Rate Reference

($1 = 77.6500 roubles)

(Reporting by ReutersEditing by Tomasz Janowski)