Russia’s budget deficit has surged. But economists say Moscow won’t drain its war chest any time soon
Men wearing military uniform walk along Red Square in front of St. Basil’s Cathedral in central Moscow on February 13, 2023.
Alexander Nemenov | Afp | Getty Images
The coming months will be critical in figuring out how Russia’s economy is holding up in the face of a new suite of sanctions, and for how long it can continue pouring money into its military assault on Ukraine.
Russia’s budget deficit hit a record 1.8 trillion Russian rubles ($24.4 million) in January, with spending growing by 58% from the previous year while revenues fell by more than a third.
Industrial production and retail sales in December fell to their worst year-on-year contractions since the onset of the Covid-19 pandemic in early 2020, with retail sales dropping by 10.5% year-on-year while industrial production shrank by 4.3%, compared to a 1.8% contraction in November.
Russia has yet to report its GDP growth figures for December, which are expected to be incorporated into full-year 2022 data slated for this Friday.
According to the World Bank, the International Monetary Fund and the OECD, Russian GDP dropped by at least 2.2% in a best-case scenario in 2022 and by up to 3.9%, and is widely expected to contract again in 2023.
However, both the Russian finance ministry and the central bank maintain that all of this is within their models.
Several unique circumstances and accounting technicalities go some way to explaining the scale of the January deficit figure, according to Chris Weafer, CEO of Moscow-based Macro Advisory.
The big drop in tax revenue was mostly accounted for by changes in the tax regime that kicked in at the beginning of January, the finance ministry claimed. Companies previously paid taxes twice per month, but now make one consolidated payment on the 28th of each month.
The finance ministry suggested most of the January tax payments had not yet been accounted for by Jan. 31 and will instead feed into the February and March figures.
Weafer also highlighted a change in the Russian oil tax maneuver that came into force in January and is expected to iron out in the coming months, while the nature of Russian public spending allocation means it is heavily concentrated at the end of the year, widening the fiscal deficit.
Christopher Granville, managing director of global political research at TS Lombard, noted two further factors distorting the most recent deficit figures.
Firstly, this was the first print since the sanctioning states’ embargo on Russian crude imports went into force on Dec. 5.
“Before that date, Europe had been loading up with Urals crude, then straight to zero, so the Russian seaborne export trade had to be re-routed overnight,” Granville told CNBC.
“Obviously a lot of preparations for that re-routing had been made (Russia buying up tankers, getting more access to the ‘shadow’ or ‘dark’ fleet etc), but the transition was bound to be bumpy.”
The actual Urals price dived as a result, averaging just $46.8 per barrel during the period from mid-December to mid-January, according to the Russian finance ministry. This was the tax base for much of January’s oil and gas-related federal budget revenues, which also suffered from the fading of a revenue windfall in the fourth quarter from a hike to the natural gas royalty tax.
The finance ministry also flagged massive advance payments for state procurement in January, which totaled five times those of January 2022.
“Although they don’t say what this is, the answer is perfectly obvious: pre-payment to the military industrial complex for weapons production for the war,” Granville said.
How long can the reserves last?
For the month of January as a whole, the average Urals price edged back up to $50 a barrel, and both Granville and Weafer said it would be important to gauge the impact on Urals price and Russian exports as the full impact of the latest round of sanctions becomes clearer.
Sanctioning countries extended bans to bar vessels from carrying Russian-originated petroleum products from Feb. 5, and the International Energy Agency expects Russian exports to plummet as it struggles to find alternative trading partners.
The export price for Russian crude is seen as a central determinant for how quickly Russia’s National Wealth Fund will be drawn down, most notably its key reserve buffer of 310 billion Chinese yuan ($45.5 billion), as of Jan. 1.
Russia has ramped up its sales of Chinese yuan as energy revenues have declined, and plans to sell a further 160.2 billion rubles’ worth of foreign currency between Feb. 7 and Mar. 6, almost three times its FX sales from the previous month.
However, Russia still has plenty in the tank, and Granville said the Kremlin would stop depleting its yuan reserves well before they were fully exhausted, instead resorting to other expedients.
“A flavour of this is the idea floated by MinFin to benchmark oil taxation on Brent rather than Urals (i.e. a material hike in the tax burden on the Russian oil industry, which would then be expected to offset the blow by investing in logistics to narrow the deficit to Brent) or the proposal from First Deputy Prime Minister Andrey Belousov that major companies flush with 2022 profits should make a ‘voluntary contribution’ to the federal budget (mooted scale: Rb200-250bn),” Granville said.
Several reports last year suggested Moscow could invest in another wave of yuan and other “friendly” currency reserves if oil and gas revenues allow. Yet given the current fiscal situation, it may be unable to replenish its FX reserves for some time, according to Agathe Demarais, global forecasting director at the Economist Intelligence Unit.
“Statistics are state secrets these days in Russia especially regarding the reserves of the sovereign wealth funds — it’s very, very hard to know when this is going to happen, but everything that we’re seeing from the fiscal stance is that things are not going very well, and so it is clear that Russia must draw down from its reserves,” she told CNBC.
“Also, it has plans to issue debt, but this can only be done domestically so it’s like a closed circuit — Russian banks buying debt from the Russian state, etcetera etcetera. That’s not exactly the most efficient way to finance itself, and obviously if something falls down then the whole system falls down.”
Early rounds of sanctions following the invasion of Ukraine set out to ostracize Russia from the global financial system and freeze assets held in Western currencies, while barring investment into the country.
Sanctions not about ‘collapse’ of Russian economy
The unique makeup of the Russian economy — in particular the substantial portion of GDP that is generated by state-owned enterprises — is a key reason why Russian domestic life and the war effort appear, at least at face value, to be relatively unaffected by sanctions, according to Weafer.
“What that means is that, in times of difficulty, the state is able to put money into the state sectors, create stability and subsidies and keep those industries and services going,” he said.
“That provides a stabilizing factor for the economy, but equally, of course, in good times or in recovery times, that acts as an anchor.”
In the private sector, Weafer noted, there is far greater volatility, as evidenced by a recent plunge in activity in the Russian auto manufacturing sector.
However, he suggested that the government’s ability to subsidize key industries in the state sector has kept unemployment low, while parallel trading markets through countries such as India and Turkey have meant the lifestyles of Russian citizens have not been substantially impacted as yet.
“I think it’s increasingly dependent on how much money the government has to spend. If it has enough money to spend providing social supports and key industry supports, that situation can last for a very, very long time,” Weafer said.
“On the other hand, if the budget comes under strain and we know that the government can’t borrow money, that they’re going to have to start making cuts and making choices between military expenditure, key industry supports, social supports, and that’s what situation may change, but right now, they have enough money for the military, for key industry supports, for job subsidies and for social programs.”
As such, he suggested that there is little pressure on the Kremlin from the domestic economy or the population to change course in Ukraine for the time being.
Diminished technology access
Demarais, author of a book on the global impact of U.S. sanctions, reiterated that the most significant long-term damage will come from Russia’s receding access to technology and expertise, in turn causing a gradual attrition of its main economic cash cow — the energy sector.
The aim of the sanctions onslaught, she explained, was not a much-touted “collapse of the Russian economy” or regime change, but the slow and gradual attrition of Russia’s ability to wage war in Ukraine from a financial and technological perspective.
“The technology gap, those sectors of the economy that rely on accessing Western technology in particular, or Western expertise, in many areas are definitely going to degrade and the gap between them and the rest of the world is going to widen,” Weafer said.
The Russian government has begun a program of localization and import substitution alongside companies in so-called friendly countries, with a view to eventually creating a new technological infrastructure over the next several years.
“Even the optimists say that’s probably the end of the decade before that can be done, it’s not a quick fix,” Weafer explained.
“I think even government ministers are saying by the time you put everything in place with training and education, facilities etc., it’s a minimum five-year program and it’s probably more like seven or eight years before you can start to deliver engagement, if you get it right.”
A spokesperson for the Russian finance ministry was not immediately available for comment when contacted by CNBC.
Tesla released its larger, six-seat Model Y L in China one week ago, and now we’re starting to get an idea of what it’s capable of from the earliest reviews.
Here at Electrek, we usually prefer to conduct our own reviews for cars, rather than reporting on the reviews of others. However, the Model Y L is out in China, and we’re not in China right now, so… this is what we get.
And, heck, we may not even ever get a chance to look at it in the US, given that Tesla CEO Elon Musk recently said that the Model Y L might never come to the US because of autonomy (huh?)… though frankly, that seems more of an effort for Tesla not to Osborne effect itself, causing consumers to delay purchases until the Y L comes out, when the company is already struggling with sales.
So, what are they saying about the new Model Y L in China? Well, there are a few points that seem to be coming together so far.
Namely, even though the main feature of the new model is a third row with two seats, those seats seem rather compromised when it comes to holding adults.
A number of Chinese media have visited Tesla showrooms to try out the seats in the new model, and while they can squeeze into the back, it’s a little bit tight for a grown adult.
One of the earliest showroom visits said that “the third row cannot be the new selling point of Model Y” (article in Chinese; quote was machine-translated).
The reviewer is 170cm, or 5’7″ tall, which is not all that tall, particularly from a Western perspective. While he had reasonable knee space in the back (where foot room is somewhat cramped due to the floor being about 10cm/4in higher in the third row), he was concerned about his head being quite close to the glass when sitting up, potentially causing a strike if riding on a bumpy road.
Also, while this test happened inside a showroom, having a window right over your head could be uncomfortable on a sunny day, even through Tesla’s UV- and infrared-resistant glass.
The apparent lack of rear seat headroom is notable given that the one real visual difference between the Y and Y L is that the rear looks much taller in the Y L – and yet, the headroom is still iffy for even a not-particularly-tall adult.
Other reviews concur that while knee room seems okay in the third row, the raised floor means little to no thigh support for adult passengers, and little headroom as well.
That said, reviews state that the seats are nicer than in the original Model Y, with more comfortable seat cushions, adjustable headrests, extendable thigh cushions, 2nd row adjustable armrests, seat heaters for all three rows and ventilators for the first two, and air vents in each row.
So, it seems like the general consensus is that the third row will mostly be used in emergencies, or for kids, or for short trips, but that the car is nice for a family – as long as those kids aren’t too big. Though to be fair, that is the case with many third rows.
Rear trunk space seems… fine, but there’s only so much room you can expect when you’ve crammed another row into the vehicle. And both the second and third row fold down, with the third row offering a relatively flat floor when folded down, though the second row has gaps and bumps and does not offer a flat floor when folded.
For comparison, the Model Y L is 180mm, or about 7 inches, longer than the regular Model Y – and a seat is a lot longer than 7 inches, so something has to give. The rear trunk area still has Tesla’s traditional under-floor storage space, which seems quite ample, and the “frunk” area is also similarly deep to the Model Y.
When compared to direct competitors available in China, the competition tends to be larger and have more third row space. For example, the Onvo L90 is $8,000 cheaper but larger and more comfortable in the third row. The Model Y L is in fact the smallest vehicle among its direct competitors, which I actually admire Tesla for doing (cars are just too big). But this does make the vehicle feel like a bit of a compromise.
It’s also missing some of the newer features that Chinese consumers have gotten used to, like a fridge, large rear-seat TV or seat massagers. Which makes the Model Y L seem a little dated for the Chinese market – but compared to what the rest of the world is used to, it seems quite nice. Such is the pace of innovation driving the EV market in China right now, while we in the rest of the world actively try to send ourselves back to the stone age.
And yet, despite it comparing less favorably on features to its Chinese competitors, and comparing more favorably to those cars outside of China, Musk still claims it won’t come to the US. He’s just so full of good ideas lately.
Beyond the issue of third-row space, the first driving dynamic test we saw seems quite positive. Youtube channel GeekLaii goes over the tests, where the car did quite well despite being fully loaded with adults, adding 500kg (1,102lbs) worth of human cargo.
The car did well in this impromptu “moose test,” a type of test that analyzes a vehicle’s ability to swerve around a sudden obstacle in the road at high speed. Despite being filled with people and having quite a lot of body sway, the car remained stable. This was likely helped by the Model Y L’s relatively low weight compared to the competition, which helps driving dynamics significantly.
And even after the sway, the car settled itself relatively well, likely due to the addition of CDC active dampers to the suspension system (this is adjustable through the touchscreen, with “balance” and “rear seat comfort” settings). The new suspension system also gave improved speed bump comfort.
Although, the car’s longer length, and lack of rear-wheel steering (which the Cybertruck has, for example), mean quite a large turning circle. And braking performance was good, but got worse when the car was loaded with people (as you’d expect).
All in all, it seems like the vehicle is a competent step forward with a lot of improvements, but that it might fall short when compared to the rest of the market in China, particularly in terms of third-row usability. But it still maintains the good driving dynamics that someone would expect from a Tesla.
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Car dealers, who have long been a roadblock in the rollout of EVs in the US, are continuing with their old tricks and filing lawsuits against new spinoff EV brands, like Sony Honda’s Afeela and VW’s Scout, which had hoped to extricate themselves from the dealership model.
Ever since the beginning of the EV revolution in the US, car dealerships have been a thorn in the side of progress.
Across the US, there are laws requiring automakers to sell cars through franchised dealerships. These laws originate from the early days of the automotive industry, when they also allowed car companies to scale their sales networks much more rapidly in the early days of the car boom in the US. And after setting up these franchises, it wouldn’t be particularly fair for automakers to be able to come in and undercut them, so the cat is sort of out of the bag at this point.
In their most optimistic portrayal, they also ensure that repairs are readily available across the country, that competition for sales helps keep prices down, and that manufacturers can’t throw their weight around and unfairly control the market.
But as is the case with most legislatively mandated middle-men, it hasn’t all been rosy. Every American knows that the car purchasing process is time consuming, hostile, full of tricks and of dealership personnel who have much more interest in earning a commission than in providing accurate information about the model you’ve come in asking questions about. Car dealers are routinely ranked as among the least-trusted profession in America (with the second-lowest positive trust rating, behind lobbyists, in this year’s Gallup survey).
Worse, when it comes to EVs, car dealers are often ignorant or outright hostile, and this pattern has been consistent (though slowly improving) for the more than a decade since EVs have been available to the US car buying public. Many EV purchasers have permanently sworn off dealers as a result of the comparatively better experience they’ve gotten when purchasing vehicles from one of the EV startups like, Tesla, Rivian or Lucid.
But the dealer lobby has long caused difficulty for these startups. Despite each of these being new companies with no franchised dealers, certain states have laws disallowing them from selling car on their own. They need to seek loopholes or ship in cars from out of state in order to sell cars over the internet, and dealerships keep lobbying to change laws to make it more difficult for new companies. There is a long and complicated history of these disputes.
And just like every objectively good thing in today’s world, the EV/dealership battle has taken on a political angle, with the party that’s only interested in doing bad things unsurprisingly choosing to do bad things in this case as well. (And, oddly enough, the bad CEO of the largest EV company in America gave hundreds of millions of dollars in bribes to the party which wants to eliminate EVs – and which is allied with the Tesla’s most significant enemy over its history: the auto dealers).
But the dealerships’ opposition doesn’t just end at startup EV brands – they’re now voicing their opposition to EVs from large manufacturers’ new spinoff brands, and the opposition might end up being even more fervent in this case.
Dealers take legal action against spinoff EV brands
Recently, both Honda and VW have come out with spinoff EV brands which they hope will help them attract the EV consumer who has realized the benefits of internet purchasing and isn’t interested in going back to a dealership. These brands, Sony Honda’s Afeela and VW’s Scout, have both announced they’ll be building their own sales networks.
Car dealers aren’t happy with this. The National Automobile Dealers Association (NADA) said it would challenge VW in court over the decision to sell Scout vehicles directly to consumers. And the California New Car Dealers’ Association (CNCDA, also the source of Electrek’s favorite quarterly EV sales breakdown) sent a cease-and-desist letter to Honda in May, and has now filed a formal lawsuit against Honda seeking to block sale of its upcoming Afeela vehicle, which will be available in California (only) starting next year.
CNCDA’s complaint says that not only does the decision to go direct to consumer violate the trust between Honda and its dealers, but that it also violates a new 2024 California law, which was sponsored by the CNCDA and opposed by Honda, which CNCDA says stops automakers “from using affiliated brands to compete with their own franchised dealers.” CNCDA says that the Sony Honda Mobility joint venture should count as an affiliated brand of Honda.
The argument may be stronger in this case than it is against the startups. EV startups never had a franchised dealer network to begin with, so they aren’t unfairly competing against dealerships that they had previously granted a license to.
But that’s not the case for VW and Honda. Both of these car companies have franchised dealers, and now a subsidiary of theirs, or a joint venture, or whatever-you-want-to-call-it, wants to compete against those dealers.
Well, sort of, anyway. They wouldn’t be selling the same car as those other dealers, as the Afeela and Scout would only be available in direct-to-consumer form, and presumably other VW and Honda vehicles will still exist and be sold at dealerships.
We’ll have to see if that argument works in front of the courts. But it looks like we’re in for many more years of the same sort of legal wrangling we’ve seen from dealerships – instead of any sort of effort to improve the EV buying experience on their part.
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Is Toyota’s new 2026 C-HR the affordable electric SUV we’ve been waiting for? The revamped EV SUV was spotted with a stylish new look while filming a commercial.
Toyota’s new C-HR EV SUV is launching in 2026
Toyota’s compact crossover SUV is returning in all-electric form, and it’s already apparently a movie star. We got our first look at the 2026 C-HR+ in March after Toyota unveiled a trio of new electric SUVs set to launch in Europe.
The US model, revealed a few months later, looks nearly identical to the EU version, but drops the “+” at the end of the name.
You can see right off the bat that it’s an immediate upgrade from the gas-powered C-HR, which was discontinued in 2022 in favor of the more efficient Corolla Cross Hybrid.
The new 2026 C-HR looks sharp, featuring Toyota’s updated design, with elements like its “hammerhead front end” borrowed from the new Crown and Corolla models. In a way, it almost looks like the Prius, but as a higher-riding crossover SUV.
It looks like Toyota’s new EV SUV is already drawing attention. The 2026 C-HR was spotted on set in Austin, Texas, filming a commercial.
The image from Kindelauto is one of the closest looks at the new electric SUV so far, revealing the new front-end design.
At 177.9″ long, 73.6″ wide, and 63.8″ tall, the new C-HR is smaller than bZ, Toyota’s other electric SUV (formerly known as the bZ4X). It’s about the size of the Kia Niro EV (174″ long, 72″ wide, and 62″ tall).
The new crossover SUV will be available with all-electric (EV), Hybrid, Plug-in Hybrid (PHEV), and Fuel Cell powertrains.
Powered by a 74.7 kWh battery, Toyota anticipates the 2026 C-HR EV will offer a range of up to 290 miles. It will come with standard AWD with an electric motor at the front and rear eAxles.
It will also feature a built-in NACS port, enabling you to recharge at Tesla Superchargers. Toyota said the electric SUV can recharge from 10% to 80% in about 30 minutes.
Inside, the updated SUV includes a “high-tech cabin that is stylish and functional.” A 14″ infotainment system sits at the center with Toyota’s Audio Multimedia System and Wireless Apple CarPlay and Android Auto support.
Toyota’s new EV SUV will begin arriving at dealerships in 2026. Although prices have yet to be revealed, given the outgoing model started at under $25,000, the electric version is expected to launch with a low starting price tag of around $30,000.
Last week, we learned the 2026 Toyota bZ will be one of the few EVs in the US with prices starting under $35,000. Since the C-HR is smaller, it could be even more affordable.
What do you think of the new C-HR? Do you like Toyota’s new style? Drop us a comment below and let us know your thoughts.
Source: Kindelauto
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