Sergei Guriev is the provost of the Paris Institute of Political Studies, the former chief economist at the European Bank for Reconstruction and Development, and the former rector of the New Economic School in Moscow. As Guriev explains, most of the bounty has two sources: oil sales—including record amounts to U.S. allies like India—and steep inflation, which lifted Moscow’s tax receipts along with domestic prices and business revenues.

Neither of which, Guriev says, can reliably protect the Kremlin from major financial peril, meaning a significant threat to its ability to pay for the war in Ukraine. Even with its soaring revenues last year, the Kremlin’s budget ran a deficit of some $40 billion, and its budget calls for even higher defense spending this year. Meanwhile, Moscow is running out of ways to cover the shortfall. Guriev thinks it has enough hard assets—in reserve currencies, like the euro or the U.S. dollar, or gold—to pay off its debts in 2024. But those hard assets could run out in early 2025. And borrowing or printing more rubles will only drive inflation even higher—further antagonizing a Russian public already discontent about rising prices.

Second, Moscow’s non-oil revenues went up thanks to the depreciation of the Russian ruble and inflation. In the summer of 2022, the ruble was worth two U.S. cents; but by the summer of 2023, it was down to one cent. This depreciation was accompanied by high inflation. And together, paradoxically, these were very good news for the Russian budget.

Because of inflation, business revenues in rubles are higher, so the government is collecting a lot more money in taxes. And when they convert oil and gas revenues from foreign currencies into rubles, they have a lot more money from that, as well. Now, depreciation and inflation are making the regime much less popular in Russia—but they really help the budget.

Bluhm: What’s the Kremlin’s overall financial picture look like?

Guriev: Very complex, for the long term. Even with its record revenues last year, the Russian government still ran a budget deficit of 2 percent of GDP—which is a non-trivial amount. It’s about $40 billion. Only the ruble’s depreciation prevented the budget deficit from being even higher.

Russia is cut off from global financial markets, meanwhile, and can’t borrow money to finance its debts. It can spend its remaining foreign reserves—and that’s what it is doing now.

The decisive assets, in my view, are the cash and other liquid assets in Russia’s sovereign wealth fund, which is where the country used to deposit some of its revenues from the sales of oil and natural gas. Today, the liquid part of that fund is roughly $55 billion, split about evenly between Chinese yuan and gold. This $55 billion amounts to about 2.5 percent of Russia’s GDP. Which means Moscow has the hard assets to continue running a deficit this large for another year—but not for much longer.

“The decisive assets, in my view, are the cash and other liquid assets in Russia’s sovereign wealth fund, which is where the country used to deposit some of its revenues from the sales of oil and natural gas. Today, the liquid part of that fund is roughly $55 billion, split about evenly between Chinese yuan and gold. This $55 billion amounts to about 2.5 percent of Russia’s GDP. Which means Moscow has the hard assets to continue running a deficit this large for another year—but not for much longer.”

“Putin should be concerned about the budget’s assumptions about the Russian economy. Right now, it’s facing enormous inflationary pressure. Putin is spending a tremendous amount of money on the military—and he plans to raise the share of defense spending this year from 4 percent of GDP to 6 percent, which is a massive increase. And it’s an increase that could have profound—and profoundly negative—economic and political effects. All this spending amounts essentially just to pouring cash into the economy, which will only add to inflationary pressures.”

“Persistent inflation is forcing the Russian Central Bank to consider raising interest rates even higher. Last July, the central bank’s main interest rate was already 7.5 percent—and now it’s 16 percent. This means the cost of capital keeps rising and rising, which is very hard on the civilian economy. And a weaker economy hurts the budget: It means less revenue; less revenue could easily lead the government to devalue the ruble even further; and that would make the Russian public even more unhappy.”

Algorithmic Life