Slipping oil prices
Russia amends its 2025 federal budget
Hello from the Bear Market Brief.
This week in the news:
President Putin signed amendments to Russia’s 2025 federal budget that increase the expected deficit by more than two trillion rubles.
NATO member states met for a summit in The Hague, during which they agreed to increase their defense spending to 5% of GDP by 2035.
Protests against municipal reforms continue in the Russian regions, where locals fear that government services and key institutions will be affected.
— Sara Ashbaugh, Editor in Chief
Adjusting plans
President Vladimir Putin signed into law amendments to Russia’s 2025 federal budget this week. According to the amendments, expected revenues are lowered by 1.789 trillion rubles, while expenditures are increased by 829.2 billion, inflating the yearly expected deficit by 2.6 trillion rubles to 3.792 trillion. The amendments reflect Russia’s worsening economic and fiscal situation: the average expected oil price for 2025 was lowered from $69.70 to $56 per barrel, while inflation is now expected to be 7.6% instead of 4.5% (even though as of June yearly inflation stood at 9.6%). Rosneft’s chief, Igor Sechin, said last week that his company was forecasting an oil price of $45 per barrel for this year and $42-43 for the next, albeit with a high degree of uncertainty.
In spite of the amendments, Finance Minister Anton Siluanov, speaking at the St. Petersburg International Economic Forum (SPIEF) last week, claimed that the government was not planning to raise taxes further. However, he complained about a “bad coordination” of fiscal and monetary policy, hinting at the Central Bank’s tight monetary policy. Putin himself called the prospect of the Russian economy sliding into stagnation or recession—a risk many highlighted at the forum—unacceptable, but he offered little guidance on how to prevent this.
In his plenary speech at SPIEF, Putin simply went through a relatively old wishlist for the economy: higher-paying, knowledge-based jobs, technological sovereignty, less than 5% of Russians living below the federal poverty threshold, wider use of the digital ruble, and so on, most of which are going to be difficult to achieve while the war is ongoing. Putin also called for a closer integration of the defense industry with civilian sectors, de facto acknowledging that defense plants are currently the only significant drivers of economic growth in the country.
Another déjà vu moment was the President denying that the authorities are pursuing a nationalization campaign. Putin talked about this in relation to last week’s court decision to take Moscow’s Domodedovo Airport into state ownership (former Deputy Finance Minister Andrei Ivanov was appointed the new head of the company this week). Putin dismissed this as merely the result of a long-ongoing ownership dispute, similar to how he talked down the nationalization of major companies in previous years. The legal environment of doing business in Russia, however, has clearly deteriorated: according to figures published by UNCTAD last week, 2024 saw the lowest level of foreign investment since 2001, and the Russian Central Bank has recorded a 57% decline over the past three years.
— Andras Toth-Czifra
Russia and Ukraine completed another prisoner swap on Thursday, the latest in a series of exchanges that began after negotiations in Istanbul earlier this month. This time, according to President Zelenskyy, Ukraine received prisoners of war from the Armed Forces, the National Guard, and the State Border Guard Service, some of whom had been in captivity since 2022. A Russian source quoted by TASS reported that the swap was equal, although neither side has disclosed how many POWs were involved. Last week, Ukraine and Russia completed their exchange of the bodies of dead servicemen, with Ukraine receiving 6,057 bodies and Russia receiving 78. However, in the days since, Kyiv has accused Moscow of “not checking” which bodies they were sending, claiming that not all of the deceased soldiers they received are Ukrainian. (photo: @ZelenskyyUa)
NATO Summit
NATO member states met for a brief summit in The Hague this week, during which the allies agreed to ramp up defense spending to 5% of GDP by 2035. Much of the two-day summit seemed designed to appeal to U.S. President Donald Trump, whose statements ahead of the meeting cast doubt on his commitment to NATO’s collective defense. When asked by reporters on his way to The Hague if he would abide by the Article 5 agreement, he replied, “depends on your definition.” By the end of the summit, however, Trump had changed his tune, calling the increase in defense spending a “big win” and speaking warmly about the U.S.’s NATO allies. “I left here differently. I left here saying that these people really love their countries. It’s not a rip-off,” he said during a press conference on Wednesday.
The 32 member states released a short Summit Declaration following the conference, which contained much softer language towards Russia compared to previous declarations. Although the document acknowledged Russia as a “long-term threat” to Euro-Atlantic security, it did not denounce Russia’s invasion of Ukraine nor make any mention of potential NATO membership for Ukraine. The wording of the document was also likely an attempt to appeal to Trump, who boasts a close relationship with Russian President Vladimir Putin. According to reporting by The Washington Post, during the summit, Trump claimed that Russia would not attack any NATO countries as long as he was president.
Ukrainian President Volodymyr Zelenskyy traveled to the Netherlands for the summit, attending the alliance’s dinner on Tuesday night ahead of its main meeting on Wednesday. He also met with President Trump for almost an hour on Wednesday afternoon—the pair’s third face-to-face meeting since the beginning of the war. Both leaders spoke positively about the discussion, with Zelenskyy calling it “long and meaningful” and Trump telling reporters “it couldn’t have gone better.” In a press conference later that day, Trump indicated that he was considering sending Ukraine more Patriot missile defense systems to combat Russian strikes. “We are going to see if we can make some of them available,” he said. Zelenskyy posted about the meeting on X, mentioning that the pair also discussed the potential co-production of drones. “We can strengthen each other,” he wrote, adding, “Putin is definitely not winning.”
— Sara Ashbaugh
Following the NATO Summit, President Zelenskyy headed to France to meet with the Council of Europe, the human rights organization that oversees the European Court of Human Rights (ECHR). While there, Zelenskyy and Alain Berset, the Council’s Secretary General, signed an agreement to establish a special tribunal for “the crime of aggression against Ukraine.” The tribunal will investigate Russian senior political and military leaders for their roles in planning, preparing, and executing the war in Ukraine. “This historic signature reminds us that international law must apply to all—with no exceptions, and with no double standards,” Berset said. The Russian Foreign Ministry, however, was dismissive of the agreement. “The work and decisions of this body will be meaningless to us,” Foreign Ministry spokesperson Maria Zakharova said. (photo: Council of Europe)
Backlash against municipal reforms
Protests continued in the Siberian Republic of Altai against the scrapping of lower-level municipalities, part of a reform introduced by Governor Andrey Turchak in line with Russia’s reform of municipal administrations that was adopted in March (the federal law came into force on June 19). Up to 4,000 people participated in a protest on June 21 in the region’s capital—a very significant turnout in the small republic—not only against the reform, but also against Turchak and the new head of the regional Council of Ministers, Alexander Prokopiev. Apart from the negative effects of the liquidation of municipalities, protesters and local elites also fear that the Republic of Altai could eventually be merged with the neighboring Altai Territory and that Turchak, a former General Secretary of the governing United Russia party, would facilitate selling out the region’s assets to business interests from outside the region.
The region’s parliament adopted the reform despite the protests, but notably with a significantly smaller majority than the United Russia party has in the chamber. This suggests that many deputies even within the local chapter of the ruling party wanted to express their disapproval (Turchak’s predecessor, Oleg Khorokhordin, also saw similar revolts by local elites). Protests against the law have continued after the vote.
The Krasnoyarsk Territory also saw significant protests both from residents and local officials in May, and Alexey Aksyutenko, a local political strategist who was detained during the protests, filed a lawsuit against the region’s parliament and government. Aksyutenko is arguing, similarly to the Altai protesters, that the region’s municipal reform was adopted unlawfully. In Khakassia, where the dispute over the reform became yet another field of confrontation between United Russia and the region’s Communist Governor Valentin Konovalov, the governor also accused regional deputies of “deceiving” people. In the Far Eastern Transbaikal Territory, which finished adopting its reform last week, the local Communist opposition accused the regional administration of putting pressure on municipal deputies. Following the backlash against the municipal reforms in Siberia, the government of Tuva, another small Siberian region, announced that they would slow down the adoption of the reform locally and hold public hearings with residents.
For the Kremlin and Kremlin-appointed governors, the reforms serve the purpose of hardening the vertical of power. However, experience from past years has shown that local residents bring up issues that directly affect their quality of life: in vast and sparsely populated regions with poor infrastructure, eliminating local government services matters a lot. At the same time, neither residents nor local elites have reason to trust the Kremlin’s assurances that key institutions will be maintained. In a previous public administration reform carried out in 2005-2008, such assurances ultimately amounted to nothing in practice. While protests against the reforms have so far remained localized, they can add to pre-existing resentment against Moscow-backed authorities and can complicate life for officials entrusted with managing the federal government’s machinery of power in the regions.
— Andras Toth-Czifra
Report in Short: The War’s Impact on Russia’s Regional Power Dynamics
This week on Report in Short, Aaron Schwartzbaum speaks with András Tóth-Czifra about his recent report, “The Kremlin’s Balancing Act: The War’s Impact On Regional Power Dynamics.” In the report, Tóth-Czifra explains the shift of government control, highlights instances of pushback, and identifies limitations on the Kremlin's strategy going forward.
Quickfire: Regions
Russian Railways (RZhD) may further postpone the third stage of the extension of its Far Eastern mainlines, usually referred to as “Eastern Polygon,” a vital transit artery towards Asian markets and Russia’s Far Eastern seaports. According to RZhD Deputy CEO Andrey Makarov, speaking at last week’s St. Petersburg International Economic Forum (SPIEF), given that the company had to cut its investments into increasing the carrying capacity of both the so-called Baikal-Amur Mainline and the Krasnoyarsk Line, the works, which were due to start in 2024, could be put off for another one or two years. The company had to cut its investment program significantly between 2024 and 2025 due to borrowing limitations introduced by the government and falling profits resulting from a number of factors, ranging from the ineffective organization of cargo transportation to the government forcing RZhD to subsidize low-value coal exports at the expense of transporting higher-value cargo. The delays also show how the rapid restructuring of Russia’s economy, forced by the war and international sanctions, is impacting infrastructure development. As Makarov pointed out, the postponement may also have negative effects on the budgets of the regions along the railway line, as they will not realize planned fiscal income.
The Federal Antimonopoly Service proposed another full gasoline export ban after wholesale domestic gasoline prices reached a two-year high earlier this month. Currently, restrictions only affect resellers, but, over the past couple of years, the Russian government has repeatedly used export restrictions to prevent or mitigate fuel shortages. The current price hike—25% since the beginning of the year—is mostly due to repairs on major oil refineries according to industry experts, all while gasoline exports also dropped in recent months. The Energy Ministry is “monitoring the situation,” but does not foresee significantly higher prices or shortages in the summer months.
Vyacheslav Gladkov, head of the Belgorod Region bordering Ukraine, requested closer cooperation between the regional government, the police, and the Federal Security Service to increase control over the spending of regional budgetary funds. Following the failure of defensive structures in the neighboring Kursk Region (which led to several high-profile arrests, including that of former Governor Alexey Smirnov), Gladkov promptly identified the misallocation of 109 million rubles in his region’s spending on similar structures. One purpose of the tighter involvement of security and law enforcement personnel is likely to demonstrate a commitment to reducing corruption affecting defense spending, all while maintaining local control over the matter. Gladkov may also be interested in using scrutiny to force out officials appointed under his predecessor. At the same time, the region’s budget is also in a tight spot; according to Gladkov, corporate tax receipts are severely lagging behind plans. From August on, the regional government is phasing out support to refugees from war-affected border regions in several districts.
— Andras Toth-Czifra