Russia is selling the equivalent of £100m worth of foreign currency a day, cuts oil production

Russia is selling foreign currency worth approximately £100m each day in an effort to balance its books while coping with towering spending and plummeting energy revenue due to the ongoing war in Ukraine.

Moscow’s finance ministry has committed to maintaining a budget deficit of no more than 2% of the gross domestic product (GDP) this year, even though its spending exceeded income by almost $25bn (£21bn) in January.

However, analysts had predicted that Russia’s deficit, which is equivalent to 3.8% of GDP, would widen to 5.5 trillion roubles ($73.2bn, £61.4bn) unless oil prices rebound, given the drop in oil and gas revenues that are vital to Russia’s economy.

To manage the deficit, Russia is selling foreign currency worth 8.9 billion roubles (£100m) per day, and the government intends to impose a one-off “voluntary” tax on large corporations.

Finance Minister Anton Siluanov stated in an interview with state-owned Rossiya 24 that the primary focus is on maintaining the budget balance, which should be established at the end of the year, while the government plans to sustain the 2% of GDP target.

Economists predict that Russia will reduce its oil output by an extra 200,000 barrels per day later this year as the country faces challenges in finding buyers due to Western sanctions.

Last week, Moscow disclosed that it would decrease production by 500,000 barrels per day from March, leading to a rise in oil prices. Capital Economics believes that this cut could indicate that Russia is apprehensive about maintaining its output capacity.

Bill Weatherburn, a commodities economist, suggested that Russia may have been worried about the difficulty in selling its petroleum products after the European Union’s import ban and Western price cap became effective on February 5.

Since the EU accounted for a more significant portion of Russia’s product exports than its crude exports, Russia may have pre-emptively cut its oil production to avoid appearing to struggle to sell petroleum products. Moreover, with limited crude oil and product storage facilities, Russia may have wanted to avoid the risk of being seen to have difficulty selling petroleum products.

The country was also aware that pre-announced output cuts generally boost prices. Capital Economics expects that Russia’s crude oil production will drop by a further 200,000 barrels per day to 400,000 barrels per day by the end of this year.

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