(Bloomberg) -- The Russian government’s oil and gas revenue slumped in January, contributing to the biggest budget deficit for the first month of the year since at least 1998. 

Tax revenue from oil and gas plunged 46% in January from a year ago, while there was a 59% increase in spending due to the war in Ukraine. The combination of those factors gave Russia a public deficit of 1.76 trillion rubles ($25 billion), the Finance Ministry said on Monday. 

The drop in oil and gas revenues follows Western sanctions on Russian exports, which now include a European Union’s ban on most seaborne imports of crude and refined fuels as well as the G-7 price cap. Due to those measures, Urals crude — Russia’s key export blend — trades at a significant discounts to benchmark prices. 

President Vladimir Putin, whose military aggression against Ukraine prompted the international sanctions, has demanded his government to come up with a plan on how to assess the price of Russian oil to offset the negative effect of sanctions on budget revenue by by March 1. Currently, the Finance Ministry taxes oil producers based on a monthly price assessment of Urals by Argus Media. The assessment includes freight and insurance costs for cargoes shipped to northwest Europe. 

Russia’s government is working on new approaches “to shift to alternative price indicators for tax purposes,” the Finance Ministry said. This is because “the representativeness of Urals quotations as an objective price indicator of export prices for Russian oil” has decreased, it said. 

In January, Urals averaged $49.48 a barrel, the lowest since December 2020, according to the Finance Ministry. That compares with the average Brent benchmark price of $77.82 a barrel last month.

Drop in Non-Energy Revenues

A decline in Russian gas exports also contributed to lower energy revenue after Gazprom PJSC cut the bulk of its shipments to Europe, once its biggest market. 

Non-energy revenues also dropped 28% in January, the ministry said, blaming in part a change in rules for the value added tax. 

“The decline in the budget’s oil revenue is expected, but the 30% drop in domestic consumption linked-taxes is ominous,” said Alex Isakov, an economist at Bloomberg Economics. “We expect oil revenue to continue to under-perform throughout the year bringing the deficit to 1.5% of GDP above government projections.”

In a separate statement, the Finance Ministry revealed that it sold 3.6 tons of gold as well as 2.3 billion yuan from the sovereign wealth fund in January to help cover the deficit. The bulk of Russia’s international reserves have been frozen by international sanctions. The ministry said it believes it can still meet its budget targets this year.

(Updates with details, analyst’s comment through the story)

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