Russia May Rely on Sovereign Wealth Fund to Cover War Expenses

Russia has revised its export outlook for the year downward, coupled with a reduction in oil price expectations. These changes may compel the government to tap into its national wealth fund to finance military expenditures. Since the onset of the conflict, Moscow has heavily relied on the reserves accumulated in the fund, which have now been depleted by approximately 60%.

The wealth fund was established in 2004 to safeguard against declining state revenues due to falling global oil prices, a consequence of the 1998 ruble crisis. However, recent forecasts from the Russian Ministry of Economic Development indicate a projected 5.3% decline in exports, bringing the total to 410.6 billion rubles (about $5 billion), down from an earlier estimate of 445 billion rubles, according to Interfax.

The updated macroeconomic outlook also includes a revised forecast for Urals oil prices, now estimated at $56 per barrel, significantly lower than the previous prediction of $69.70 per barrel. While this shift suggests reduced revenue from oil sales, it is expected not to critically undermine the Kremlin's capacity to fund its military operations.

In fact, increasing revenues from sectors outside of energy, along with substantial reserves designated for emergencies, are anticipated to offset the losses. The Russian national wealth fund maintains adequate resources to cover potential shortfalls in oil revenue for the next 18 to 24 months, even if the price of Russian crude falls to around $50 per barrel.

As of earlier this month, the Urals oil price had dropped to $52.76 per barrel at the Baltic Sea port of Primorsk, with data from Argus Media indicating it had recently dipped below $50 in June 2023. The Urals price is considered a benchmark for oil trading.

The Ministry also adjusted its forecast for Brent crude prices, now set at $68 per barrel, down from a previous estimate of $81.70. Earlier this month, Brent crude briefly fell to a four-year low of under $60 per barrel amid escalating trade tensions between China and the United States and an OPEC+ commitment to increase production next month.

Despite maintaining a growth forecast of 2.5% for 2025, the ministry has lowered its projection for 2026 from 2.6% to 2.4%. Officials acknowledged that, despite record-high interest rates, inflation is expected to rise, forecasting an end-of-year inflation rate of 7.6%, compared to the previously estimated 4.5%. The Central Bank has been striving for months to rein in rampant inflation, having set the interest rate at 21%, the highest level in over two decades.