Putin urged to save the budget from difficulties due to large discounts on oil

President Vladimir Putin has called for limiting the budgetary impact of the large discount Russian oil is being sold at. He instructed Deputy Prime Minister Alexander Novak to prepare relevant proposals.

“We need to look at this discount so that it does not create any problems with the budget. Discuss, then report your proposals to me separately, please,” Putin said (quote from Interfax).

During a meeting between the president and the government, Novak lamented the high price discount with which Russian oil has to be sold. According to him, now this is the main problem for oil.

According to the Ministry of Finance, in December the average price of the Russian grade of Urals oil fell to $50.5 per barrel from $66.5 (the average price in November).

At the same time, Brent crude oil traded on average at $81.58 per barrel in December. Thus, the average discount of Russian oil to Brent was about $31 or 38%. This is a record level of discount, which in previous years did not exceed $1-2 per barrel, BCS Express analysts pointed out.

The discount has to be made because of the high cost of freight, which increased after the introduction of the price ceiling, Novak said in a conversation with Putin. The Deputy Prime Minister acknowledged that oil carriers and counterparties risk falling under secondary sanctions due to the fact that they do not set a price ceiling.

The G7 countries, the EU and Australia introduced a $60 per barrel price cap for offshore oil from Russia on 5 December. On the same day, an embargo on Russian oil in the European Union began to operate.

The price ceiling was introduced in order to avoid a sharp jump in global oil prices. With its help, the US authorities intended to keep Russian oil on the market, but limit the ability of the Kremlin to finance the war in Ukraine.

Companies violating the price ceiling are deprived of access to European tankers, insurance and financing.

It became known yesterday that the government of India, which has become the largest buyer of Russian oil in recent months, is discussing the possibility of joining the price ceiling for Russian oil. According to Telegraph India sources in the country’s Ministry of Petroleum and Industry, this will happen if oil prices from Russia rise above $60 or if the EU starts imposing secondary sanctions for violating the price ceiling.

Due to sanctions and discounts, Russia’s oil and gas revenues are no longer enough to cover budget expenditures. In 2022, the deficit reached 3.3 trillion rubles.

At the same time, the difference between income and expenses turned out to be 400 billion rubles higher than the Ministry of Finance predicted just a few weeks ago. “To a large extent, this is a reflection of the situation with oil revenues, which, apparently, fell after the imposition of the embargo,” said Evgeny Suvorov, an economist at Centrocredit Bank.

In the budget for 2023, the Ministry of Finance has set the price of oil at $70 per barrel. A large gap between the real cost of oil and prices that balance the budget may force the government to increase taxes in 2023, analysts at Alfa-Bank suggest.

To cover the deficit, the authorities decided on January 13 to sell non-sanctioned foreign exchange reserves from the National Welfare Fund. Operations will be carried out by the Central Bank for the Ministry of Finance as part of the updated “budget rule”.

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