President Vladimir Putin plans to spend more on the military over the next two years, as Russia budgets for the needs of a long and increasingly expensive war in Ukraine.
According to a three-year fiscal plan seen by Bloomberg, defense spending will now exceed early budget estimates for next year by more than 43%, while those in national security and law enforcement will increase by more than 40%.
Fiscal projections are in flux as priorities shift in favor of the military and away from areas like environmental protection. About 5 trillion rubles ($84 billion), or 3.3% of GDP, outlay on “national defense” now ranks second only to the government’s social programs as part of spending.
The Stockholm International Peace Research Institute, or SIPRI, estimates the “national defence” line in Russia’s budget at roughly three-quarters of its total military spending and calculates operating costs as well as funds on weapons purchases. .
In contrast, according to the document, the allocation of funds on education and culture is barely increasing for 2023. Expenditure on the environment will be about a quarter less than previously budgeted at 0.2% of GDP. The initial plan called for defense spending to fall to 2.4% of economic output next year, from an estimated 3.2% in 2022 and 2.6% a year earlier.
This change reflects a greater commitment to a war that has already come at a heavy cost of blood and treasure to Ukraine and Russia. The major setback on the battlefield saw Putin ramp up his efforts to gain some momentum this week when he announced a “partial mobilization” to draft 300,000 reservists.
The budget plan puts the cost of call-ups at about 16 billion rubles in 2023 and 16.5 billion rubles annually in 2024-2025. Most other details of military spending remain classified and only aggregate figures are made public.
According to SIPRI, which tracks the global arms industry, Russia was one of the world’s five biggest defense spenders last year. The think-tank estimates that the Kremlin will increase spending on the military by 2.9% to $65.9 billion in 2021, the third straight year of growth after a decline between 2016 and 2019.
What does Bloomberg Economics say…
“The impact of the first round of mobilization will be a one-off hit on output which will deepen this year’s contraction to -3.75% based on our calculations. The main channel is a reduced labor force, as the announcement would potentially trigger a wave of workforce brain-drain in neighboring countries and safe havens beyond – a repeat of the events in February.
The government approved the budget plan on Thursday, and the bill must now win the support of both houses of parliament and be signed by the president to become law. This is still subject to change but is unlikely to see major revisions to most assumptions.
Under the latest estimates, the budget deficit will increase from 0.9% in 2022 to 2% of GDP next year. The government will meet the shortfall mostly from debt and reserves. The plan also envisages borrowing up to $1 billion annually in foreign currencies.
Russia defaulted on its external sovereign bonds in late June, the result of international sanctions that have blocked payment channels to foreign creditors since the invasion of Ukraine in February.
Diversion of resources and manpower to the military would be a drain on an economy in recession, its labor market already at its lowest with poor demographics and unemployment.
It also threatens to put pressure on public finances, especially as Russia’s impasse on the supply of energy to Europe intensifies. According to the budget plan, annual pipeline gas exports are expected to decline by about 40% in 2023-2025, with a slight increase in crude shipments.
The government’s balance sheet has sustained well during the crisis, thanks to windfall income from higher cost of goods.
Nevertheless, withdrawals from the Sovereign Wealth Fund mean that it will contract by just over 3 trillion rubles in two years. The government will also need to compensate for higher expenses with rising taxes.
Fiscal projections ahead of next year show that Russia is nowhere close to making plans to move away from a war footing. Compared to earlier estimates, defense expenditure will increase by about 30% in 2024, but is still in line with previous assumptions for 2025.
Among other changes, the budget will allocate more money for “patriotic education,” a program that includes history exhibits, and increases in spending to equip schools with state symbols.