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Russia’s first-half budget deficit hits 5.7 trillion rubles as oil revenue shortfalls persist

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Russia’s federal budget deficit narrowed to 5.7 trillion rubles, or 2.5% of gross domestic product (GDP), during the January–June period of 2026, according to preliminary budget execution data released by the Ministry of Finance on July 9. This contraction marks the first decline in the fiscal deficit since the beginning of the year. In June, the gap between expenditures and revenues decreased by approximately 5% month-on-month, shrinking by about 279 billion rubles. Despite this marginal improvement, the deficit remains 2.3 trillion rubles higher than the level recorded during the same period last year and stands roughly 50% above the 3.78 trillion ruble target projected for the full year of 2026.

Emil Ablayev, an expert at the Center for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP), told the Vedomosti newspaper that the narrowing of the deficit was driven by the gradual fading of the front-loaded advance spending outlays made at the start of the year.

Budget expenditures rose to 3.56 trillion rubles in June, representing a 17.13% increase. Total spending in the first six months of the year reached 24.35 trillion rubles, up 16.1% compared to the same period last year.

The Ministry of Finance reiterated that the accelerated pace of spending was attributable to the early signing of contracts and advance payments made under specific budget items.

In contrast, budget revenues experienced a more subdued increase compared to expenditures. Total revenues in the first half of the year rose by 5.8% year-on-year to reach 18.6 trillion rubles. In June, however, revenues surged by 25.85% year-on-year to 3.82 trillion rubles.

Non-oil tax revenues accelerate

Ablayev noted that the acceleration of non-oil and gas revenues played a key role in narrowing the budget deficit. The year-on-year growth rate for these revenues rose from just over 12% in the January–May period to 16.3% in the January–June period. Non-oil and gas revenues reached 14.96 trillion rubles in the first half of the year. In June, these revenues increased by 26.75% year-on-year to 3.1 trillion rubles.

According to Natalya Milchakova, Chief Analyst at Freedom Global, this growth was driven by the increase in the VAT rate effective January 1, along with prior hikes in personal income tax for high-income brackets and corporate income taxes. VAT revenues rose by 22.6% to 8.58 trillion rubles in the first six months of the year.

Ablayev pointed out that VAT is the tax category most sensitive to domestic demand, consumption, and imports, indicating that the increase reflects sustained domestic demand.

Ablayev also stated that improvements in tax administration and a reduction in the shadow economy supported this positive trend. He added that due to the strong performance of the ruble in the second quarter of 2025, import-related VAT revenues had a more limited negative impact on a year-on-year basis.

According to experts, the trajectory of non-oil and gas revenues in the second half of the year will depend on a slowdown in consumer demand, import volumes, the ruble exchange rate, and the tax performance of non-oil exporters.

Sergey Klisenko, General Director of the NRA Rating Service, projected that the growth rate of non-oil and gas revenues could slow from the 16% level recorded in the first half to a range of 12% to 14%. However, he noted that this would still be sufficient to meet or even exceed the targets set for 2026.

Oil revenues recovered in June

According to Klisenko, the budget surplus in June stood at approximately 280 billion rubles, largely driven by the strong performance of oil and gas revenues.

These revenues rose roughly 65% above the January–February average. The analyst attributed this increase primarily to the elevated level of Russian oil prices in May.

Oil and gas revenues in June rose by 4.7 billion rubles compared to May, reaching 683.6 billion rubles. However, the cumulative total for the first half of the year remained at 3.66 trillion rubles, representing a 22.7% decline compared to the same period last year.

Ablayev stated that the primary reasons for the first-half decline were a strong ruble, delayed tax collection effects, and the structural composition of the revenues.

Klisenko calculated that while the budget projections assumed an average exchange rate of 92.2 rubles per US dollar, the actual average for the first half of the year remained at 77.2 rubles, depriving the budget of 1.5 trillion to 2 trillion rubles in oil and gas revenues.

Oil and gas prices, which had spiked in the spring due to the conflict between the US and Iran and the subsequent closure of the Strait of Hormuz, declined again during the summer months.

According to Ministry of Economic Development data, the average price of Urals crude was $44.59 per barrel in February, rose to $94.87 in April, fell to $86.52 in May, and dropped to $63.52 in June.

Ablayev noted that oil and gas revenues could show a noticeable improvement in July as additional income tax from the second quarter is reflected in the budget. Nonetheless, he cautioned that year-end performance would depend on oil discount levels, demand for Russian crude, the ruble exchange rate, and developments in the domestic fuel market, adding that rising refinery subsidies and damper payments could limit revenue growth. The expert expects year-end oil and gas revenues to exceed 2025 levels but remain below budget targets.

Experts expect year-end deficit to exceed targets

Ablayev stated that budget execution remains under pressure, with expenditures running significantly higher than last year and the deficit exceeding initial forecasts. He estimated that the year-end deficit could reach 3% to 3.5% of GDP, or approximately 6.5 trillion to 7.5 trillion rubles, which would require deviations from the fiscal rule and increased borrowing.

Rodion Latypov, Chief Economist at VTB Group, projected that the main reasons for exceeding the planned 3.8 trillion ruble deficit would be an estimated 1.5 trillion ruble shortfall in oil and gas revenues due to the strong ruble, alongside potential spending overruns. Excluding potential additional spending increases, Latypov expects the year-end deficit to be around 5 trillion rubles.

Milchakova stated that the budget deficit at the end of the year would most likely remain around 2.5% of GDP, driven primarily by weak oil and gas revenues and anticipated increases in public spending—particularly due to the fuel crisis, refinery subsidies, and damper payments.

Klisenko, meanwhile, estimated that the deficit would reach 2.5% to 3% of GDP, amounting to approximately 6 trillion to 7 trillion rubles.

Ablayev noted that a high budget deficit supports domestic demand, making a rapid slowdown in inflation more difficult, though certain mechanisms, such as damper payments, limit price pressures specifically within the fuel market.

Klisenko remarked that the rise in the budget deficit from 1.6% to 2.5% of GDP is not critical and that its impact on inflation does not exceed 1 percentage point.

Latypov argued that the budget’s impact on the money supply and total nominal demand is more accurately measured by the change in net claims on public administration, rather than the federal budget deficit itself.

He highlighted that this indicator has increased by approximately 3 trillion rubles since the beginning of the year, remaining significantly lower than the accumulated budget deficit.

Russia

US raises NATO-style guarantees for Kyiv ahead of Abu Dhabi talks

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US President Donald Trump’s administration has asked the Russian side whether Moscow objects to granting Ukraine security guarantees akin to NATO’s Article 5 on collective defence, and to having such guarantees provided directly by the alliance itself.

According to a Financial Times report citing a US official, the final decision on the nature of the US security guarantees will be made by US President Donald Trump.

The US official said the White House is seeking Russia’s consent for multilateral negotiations that would also include European representatives.

“At this stage, we firmly believe Europe must be part of the negotiations to end the war,” the official said on the matter.

According to the report, prior to the trilateral talks, Trump’s special envoy Steve Witkoff and his son-in-law Jared Kushner will hold consultations with representatives from Ukraine, the European Union, NATO, Germany, France, the United Kingdom, and Italy.

Rustem Umerov, representing the Ukrainian delegation, also confirmed that Kyiv will hold separate coordination meetings with European partners in Abu Dhabi to align positions and subsequent steps.

The newspaper reported that while European diplomats are sceptical about the prospects of a breakthrough in the Abu Dhabi talks, they consider participation in the diplomatic process essential to support Ukraine and prevent broader European security issues from being addressed without their involvement.

Ukrainian President Volodymyr Zelenskyy stated in late October that talks held in Oslo between Ukraine, EU countries, and US representatives discussed granting Kyiv security guarantees similar to the provisions of NATO’s Article 5 collective defence clause.

In February, Zelenskyy described credible guarantees for Kyiv as the “only real basis” for peace.

The issue of security guarantees will form one of the agenda items at the trilateral negotiations between Russia, the US, and Ukraine, scheduled for 10-11 November in Abu Dhabi.

These contacts mark the first trilateral meeting in roughly nine months, following the previous round held in Geneva in February.

Presidential Aide Vladimir Medinsky will head the Russian delegation at the talks, while the US side will be represented by the president’s special envoys Steve Witkoff and Jared Kushner.

Rustem Umerov will lead the Ukrainian delegation.

Moscow insists that the future security guarantees slated for discussion at the meetings must also cover Russia.

Kremlin spokesman Dmitry Peskov noted that guarantees can only be mutual.

At the beginning of the year, Russian Deputy Foreign Minister Aleksandr Grushko stated that security guarantees for Russia are an essential component in reaching a peace agreement on Ukraine.

“We accept that a peaceful settlement in Ukraine must take Ukraine’s security interests into account, but the key issue is, of course, Russia’s security interests,” Grushko said.

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Putin proposes Arctic energy cooperation to US to ease gas sanctions

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Following a diesel arrangement with the US and the prospect of expanding Russian fertiliser shipments, Moscow is offering Washington joint cooperation in the Arctic.

Russian President Vladimir Putin announced that Moscow is considering the possibility of working together with US partners in the Arctic region.

Speaking at the Gas Exporting Countries Forum (GECF) summit, Putin described the regional situation:

“We are actively working in the Arctic, which I mentioned, with many countries around the world, and we are interested in joint work. Until very recently, our European partners and our Chinese partners were working alongside us at our fields. Now we are considering the possibility of joint work with American partners.”

So, which fields could a partnership between the two countries in the Arctic encompass, and what could Moscow offer Washington in exchange for lifting sanctions on Russian gas? Liquefied natural gas (LNG) projects stand at the heart of the matter.

European companies pulled out of Russian gas projects such as Yamal LNG and Arctic LNG 2 due to sanctions imposed on Russia after 2022.

According to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund (NESF) who spoke to the Vzglyad newspaper, cooperation with Chinese companies moved to a new dimension following the departure of the Europeans.

Two Chinese shareholders, CNPC and CNOOC, are involved in the Arctic LNG 2 project. Initially, both companies froze their participation out of concern over US sanctions targeting the venture.

Mikhail Vakilyan, an expert at the Institute for the Development of Fuel and Energy Complex Technologies, told Vzglyad that Beijing did not alter its policy, but rather that Chinese firms CNPC and CNOOC simply did not want to risk their access to the US dollar.

Yet, a year and a half later, the picture shifted entirely. In the second half of 2025, China began purchasing gas from the sanctioned Arctic LNG 2 facility and dedicated a standalone terminal to the project.

Furthermore, it opened a second terminal this year serving exclusively Russian LNG.

China even resumed module deliveries needed to complete the third train of Arctic LNG 2, despite having halted shipments previously.

Moscow seeks markets and turbines, offering technology for Alaska

Despite all these developments, Russia’s expectations from the US in the Arctic remain clear. Mikhail Vakilyan summarised this requirement:

“Russia needs two things: first, markets; and second, hardware. Lifting sanctions on Arctic LNG 2 and its gas carriers will bring back buyers in Japan, India, and South East Asia, eliminating the discount currently enjoyed by China as the sole customer. As for hardware, the turbines driving the liquefaction compressors at Yamal LNG and Arctic LNG 2 are manufactured by the US company Baker Hughes. Maintenance, spare parts, and modernization for these machines are blocked by US export bans.”

Igor Yushkov viewed the process through the lens of a political and economic trade-off:

“The exact same scheme seen in the diesel agreement is operating here. In exchange for easing anti-Russian sanctions and putting pressure on Ukraine, we are offering the US mutually beneficial projects and broader economic cooperation. We are showing that this cooperation can be versatile across various fields such as diesel, fertilisers, LNG, and similar sectors.”

The tangible offer Russia could present to the US in the LNG sector in exchange for sanctions relief is technological support for an LNG plant to be built in Alaska, referring to the $25 billion Polar LNG project.

Yushkov explained the card held by Russian energy company Novatek:

“Novatek possesses a technological solution applied at Arctic LNG 2 that would also suit the LNG project in Alaska. These are reinforced concrete gravity-based structures carrying liquefaction equipment; essentially floating LNG factories. Novatek has already built two such platforms alongside their equipment and established an offshore super-structure construction centre in Belokamenka. The issue is that both this centre and the Arctic LNG 2 plant itself fell under US sanctions. Therefore, in exchange for lifting sanctions at least on the super-structure construction centre, we could build such a facility for Alaska.”

According to the expert, Russia could cast the reinforced concrete platform at this centre in Belokamenka, install the LNG plant atop it, and tow it to Alaska once completed.

Because building from scratch in the Arctic itself is both costly and creates constraints regarding time and equipment transport, this method offers a much simpler solution.

Nevertheless, Yushkov warned that the plan is not finalised:

“Owing to numerous sanctions-related issues and questions surrounding the project’s economics, it is not certain this scenario will materialize; however, the Americans are still interested in our technologies for Alaska, and Russia is stating it can capitalize on this and deliver it.”

Conversely, Yushkov recalled that Russia remains the primary rival to the US, particularly in the gas sector, and that the US administration has systematically squeezed Russian gas out of the European market in recent years.

According to the expert, helping US LNG capture the market share lost by Russia is hardly a brilliant idea.

Europe’s 2027 ban, China price talks, and rare earth metals

Arctic LNG 2 is not the only Russian project that could benefit from potential cooperation with the US; a new opening could also emerge for Yamal LNG, which is unaffected by US sanctions.

The crux here is not sanctions, but the European Union’s upcoming ban on all Russian LNG shipments starting from 1 January 2027.

Vakilyan explained the approaching risk and a potential solution using figures:

“In the first half of the year, Europe took nearly the entire output of the plant, amounting to 9.89 million tonnes. In two months, these volumes will need a new route and a new buyer; a US trading company appears very well suited for this role.”

Another winner in the equation could be Gazprom, which is conducting negotiations with China for the Power of Baikal pipeline, formerly known as Power of Siberia 2.

Vakilyan said: “Cooperation with the US is Russia’s trump card in price negotiations. China has long negotiated with Gazprom assuming Russian gas has nowhere else to go; an American company in the Arctic would disrupt that calculation.”

Viewed from a wider perspective, Russia and the US share two additional points of contact: oil projects and rare earth metals.

The Vostok Oil project, which awaits the lifting of sanctions on Rosneft, is the first among them.

Vakilyan listed the other areas:

“It is impossible to make headway on the Pobeda shelf, which could not be developed since 2014, without the Americans; that site requires subsea production complexes and drilling services in icy seas, where US companies are strongest. Another issue not apparent at first glance is rare metals. The Trump administration is seeking them across the globe, and Tomtor, one of the largest rare earth metal deposits, lies in the Arctic region of Yakutia.”

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US and Russia weigh energy deals and corporate return in peace talks

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Russia and the US are discussing wide-ranging economic topics as part of efforts to find a solution to the war in Ukraine, including the return of American companies to the Russian oil sector.

According to a report in the British newspaper Financial Times, which cited sources familiar with the matter, joint energy projects and pipelines rank first among the plans projected to take effect once hostilities end.

One of the primary scenarios on the table involves American energy giants re-entering the offshore Sakhalin joint project after the war and contributing to the resumption of Russian oil deliveries to Europe via the Druzhba pipeline.

ExxonMobil was previously the only American company involved in the Sakhalin-1 project.

Objecting to the Russian authorities’ decision to transfer the company’s 30% stake in the project to state ownership, ExxonMobil announced last year that it was conducting negotiations with Russia, but stated it had no plans to resume operations in the country.

The discussions are not limited to the oil sector. Sources speaking to the Financial Times report that steps such as reopening Russian airspace to transit US flights and reviving cooperation in titanium production and supply are also under consideration.

Other striking items on the agenda include the potential sale of LUKOIL’s international assets to investors close to the White House, the participation of Russian gas producer NOVATEK in a liquefied natural gas (LNG) project in Alaska, and the restoration of gas flows to Europe via the intact line of the Nord Stream 2 pipeline.

Reuters also previously reported that the two countries were holding contacts regarding the attraction of investors to the Nord Stream pipelines.

One of the most sensitive items in the talks involves the Zaporizhzhia Nuclear Power Plant. According to the report, the parties discussed transferring the plant’s management to an American entity and sharing the generated electricity between Ukraine and Russia.

Russian President Vladimir Putin did not rule out an option in September last year under which Moscow could cooperate with Washington on the safety and operation of the Zaporizhzhia plant.

However, the Russian Foreign Ministry maintained that there is no precedent in the world for joint nuclear power plant operation, while Alexey Likhachev, the head of Russian state nuclear energy corporation Rosatom, described the idea of transferring the facility’s management to the US as a product of fantasy.

A US official speaking to the Financial Times said the Donald Trump administration is evaluating economic proposals extensively with both sides of the conflict.

The official emphasized that the negotiations cover post-war economic foundations that would create long-term growth and investment opportunities for Ukraine, as well as potential post-war economic cooperation opportunities with Russia.

Underlining that nothing has been finalized yet, the US official stated that economic agreements would be integrated into a comprehensive peace framework.

Kremlin spokesman Dmitry Peskov stated at the beginning of October that Russia and the US were negotiating a series of mutually beneficial joint projects in the economic sphere.

Vladimir Putin also stated that the two sides were considering the possibility of joint work on natural gas in the Arctic.

Kirill Dmitriev, the head of the Russian Direct Investment Fund (RDIF) and the Russian President’s special representative for investment and economic cooperation with foreign countries, noted that the energy sector and data centres are among the joint projects.

Dmitriev shared the view that cooperation between Moscow and Washington would generate significant synergy in the Arctic region, in the LNG sector, and across other energy branches.

Numerous major American companies halted their operations in Russia in 2022, when hostilities began in Ukraine.

ExxonMobil withdrew from the Sakhalin-1 project, where it held a 30% stake, while oilfield services providers Halliburton and Baker Hughes sold their commercial assets in Russia.

Putin signed a decree in August 2025 setting the conditions for foreign investors to return to the Sakhalin-1 project. Under the decree, foreign partners must spearhead the lifting of sanctions obstructing the project and secure the necessary equipment supplies. In December of the same year, the sale period for ExxonMobil’s untransferred stake was extended to 1 January 2027.

A notable tangible step in energy traffic was taken regarding diesel supplies. US President Donald Trump announced on 9 October 2026 that an agreement had been reached with Putin on supplying Russian diesel products to the American market and global markets.

Trump said Russia would deliver more than 1.8 million tonnes of fuel in several phases, after which it could send an additional 3 million tonnes.

On the same day, the US Department of the Treasury issued a special licence covering transactions involving Russian diesel products and their importation into the US.

The waiver in question remains valid until 7 April 2027.

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