The government put road construction under the knife after the collapse of budget revenues

For the first time, Russian authorities are cutting funding for one of the Kremlin’s biggest domestic projects in response to falling federal budget revenues that have lost half of oil and gas taxes.

The annual volume of investments in the national Safe High-Quality Roads (BKD) project, which by 2030 plans to repair 85% of the road network in cities and 60% in rural areas, fell by 4.1% to 451.9 billion rubles in the second quarter, according to Kommersant, citing Sherpa Group data.

Of the 6 sub-projects, the public transport development program underwent the most serious sequestration – 40.7 billion rubles were allocated to it, which is 12% less than last year. In financial terms, the Federal Backbone Network Development project lost the most – it was reduced by 10.3 billion rubles, to 202.3 billion rubles.

There have been delays in the financing of many state-ordered facilities, says Maria Jarmalczuk, general director of the National Association of Infrastructure Companies. Moreover, the reduction of spending on road construction is the first in the existence of national projects: even during the pandemic crisis (2020) and the first year of the war (2022), funds increased. It is possible that costs will be revised again in the third quarter, the CEO of Sherpa Group, Alexandra Galaktionova, fears.

This means that part of the work on the project is postponed, but the reduction by 4 percent. is not the worst option, because some items of the treasure are cut much more – says Mikhail Blinkin, scientific director of the Institute of Transport Economics of the Higher School of Economics.

Shocked by sanctions, war and the collapse of oil and gas revenues, the federal budget is bursting at the seams: in the first half of the year, its revenues fell by 12% (and raw materials by 47%), while spending increased by 20% and secrets increased almost 10-fold. As a result, by the end of June, a hole of 2.6 trillion rubles had formed in the treasury, which had increased to 3.6 trillion rubles as of July 18.

In order to cover the deficit, the government has announced a one-time tax for large enterprises (300 billion roubles), has changed the formula for taxing oil and is preparing to reduce subsidies for oil companies used to limit the increase in gasoline prices. In addition, the Ministry of Finance is launching a 10% frontal sequestration of interest on all “unsecured items” in Budget-24. However, its scale – 450 billion rubles a year – will not solve the problem, and the normalization of the budget balance may require an increase in the tax burden, says Natalia Orlova, Alfa Bank’s chief economist.

Reducing budget spending is bad news for an economy that is being kept afloat, including by budget injections. Thus, public consumption in the first quarter jumped by 13.1% – a record for almost 30 years of available statistics. And that was one of the reasons for the relatively moderate economic slowdown, points out Orłowa.