Putin Prepares 43% Defense Spending Increase in the Face of a Longer War

As Russia adjusts its budget to support a longer, more costly war in Ukraine, President Vladimir Putin plans to spend much more on the military over the next two years than originally planned.

According to Bloomberg’s three-year fiscal plan, defense expenditures are expected to surpass next year’s initial budget assumptions by more than 43%. Meanwhile, the related category of national safety and law enforcement will rise by over 40%.

As priorities shift in favour of the military over areas such as environmental protection, fiscal projections are constantly changing. Outlays for “national defense” now account for 3.3% of the gross domestic product at almost 5 trillion rubles (84 billion).

According to the Stockholm International Peace Research Institute (or SIPRI), Russia’s “national defense” budget accounts for approximately three-quarters of its total military spending. This includes funding for operational costs and arms procurement.

According to the document, however, the amount of money allocated for education and culture is not expected to increase in 2023. The environment spending will be approximately 25% less than the 0.2% GDP budget. From 3.2% in 2022, defense spending was to be reduced to 2.4% next year. This is compared to 2.6% last year.

This shift is a reflection of a greater commitment toward a war that has already cost Russia and Ukraine enormous blood and treasure. Putin’s major setbacks on the battlefield led to him stepping up his efforts to regain momentum. He announced a “partial mobilisation” to draft 300,000.

Budget plans put the cost of the call up at nearly 16 billion rubles in 2023, and 16.5 million rubles each year in 2024-2025. Other details about military spending are kept secret and only the overall numbers are public.

Russia was among the world’s five largest defense spenders in the last year according to SIPRI (which tracks the global arms industry). According to the think-tank, the Kremlin increased military expenditure by 2.9% to $65.9billion in 2021. This is the third consecutive year of growth after declines between 2016 & 2019.

Thursday’s budget plan was approved by the government. The bill now needs to be backed by both chambers of parliament and signed into law by the president. Although it is subject to revision, most assumptions will not be affected.

According to the latest projections, next year’s budget deficit will rise to 2% of GDP. It was 0.9% in 2022. The shortfall will be financed mainly by the government using debt and reserves. It also envisages borrowing up to $1 million annually in foreign currency.

Russia defaulted in June on its sovereign external bonds. This was due to international sanctions, which blocked payments to creditors overseas since February’s invasion of Ukraine.

In a country in recession and its labour market already stressed by low unemployment and poor demographics, the diversion of resources to the military will cause a significant drain on its economy.

It could also put pressure on the public finances, particularly as Russia’s energy supply to Europe is hampered. According to the budget plan, annual pipeline gas exports will drop by nearly 40% between 2023-2025 and crude shipments will increase slightly.

Due to the increased cost of commodities, windfall earnings and the government’s strong balance sheet, the government has managed to weather the crisis without any major problems.

However, the drawdowns to the sovereign wealth fund will mean that it will shrink by just over 3 trillion rubles within two years. In order to offset the rising costs, the government will need to increase taxes.

Russia appears to be far from abandoning its war footing, according to financial projections for the year beyond 2019. Comparatively to previous projections, defense spending will rise by nearly 30% in 2024, but it is still within the range of previous assumptions for 2025.

The budget will include other changes such as more money being allocated to “patriotic Education”, which includes history exhibits and factors in increased spending to equip schools equipped with state symbols.

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