Russian Markets Take A Dim View Of Mobilization

Russia’s Moscow Stock Exchange (MOEX) so far seems fairly gloomy about Putin’s mobilization order this week to raise 300,000 fresh troops for the war in Ukraine. Between the mobilization order itself and Russia’s plan to raise export tariffs on energy, the MOEX index dropped 14% on the week.

Russia’s key energy stocks—Gazprom, Rosneft, and Lukoil—led the decline, with Gazprom posting a year-to-date decline of 34.87%, Rosneft a year-to-date decline of 51.34%, and Lukoil sliding in at 42.56% for the year.

Russia’s energy companies are also being weighed down by the recently enacted increase in energy export tariffs to 50%.

The duty will amount to 30% if the gas price is below $300 per 1,000 cubic meters and 50% at a price above $300 per 1,000 cubic meters, the document says.

In 2023-2025, the government expects additional revenues to the federal budget thanks to the adoption of a number of other measures in the oil and gas industry. In particular, the authorities plan to increase the mineral extraction tax rate for natural gas "equivalent to an additional adjustment of gas tariffs by 3 percentage points annually in 2023 and 2024." Also, exporters of liquefied natural gas (LNG) will contribute to additional budget revenues.

According to Russian news media site Kommersant, the measures are anticipated to raise some 1.4 trillion rubles to cover a looming budget deficit (wars are expensive, after all).

According to Kommersant, to cover the budget deficit, the government wants to collect about 1.4 trillion rubles from raw material exporters. in 2023 by increasing export duties and MET rates. Among other things, it is proposed to increase the export duty on gas to 50%, introduce a duty or its equivalent for LNG exports, as well as raise gas prices within the Russian Federation and then withdraw this money from gas companies through an increase in the severance tax. Also discussed is an increase in the export duty on oil for 2023 and an extension of the adjusted damper for gasoline. The government will consider these measures, which in 2023-2025 can give the budget an additional more than 3 trillion rubles, on September 20.

Separately, the Russian government hopes to raise an additional 3 trillion rubles from increased or new taxes on oil and gas companies. An increase in taxes the export of coal and fertilizers is also being considered.

Intriguingly, forex markets have been generally positive to Russia’s Ukrainian war. The ruble is up approximately 7.5% against the Chinese yuan for the week, and the ruble, after posting an initial decline at the outset of the war, has actually improved overall against the dollar.

While the forex markets view the ruble as being relatively strong amid the world’s fiat currencies, the currency appreciation against the yuan in particular makes Russian exports that much more expensive. Coupled with the increased tariffs, China is going to be paying more for Russian oil and coal in 2023 (LNG from the Yamal terminal and natural gas from the Sakhalin-2 field are specifically exmpted from the tariff increases, as they are joint ventures with China).

While poor market performance is hardly an indication of military defeat on the battlefield, that Russia’s energy stocks in particular have languished around lows not seen since the height of the pandemic in 2020, and the MOEX index overall hovering around the lowest level in five years, is hardly a ringing endorsement of the war. Russia might yet win on the battlefield, but it has already paid a high economic price, and that price is only going to increase going forward.