Military spending rises sharply: Putin’s new budget is riddled with question marks

The war causes massive costs in Russia. Equipment, material and soldiers have to be paid for. Compensation for fallen troops and reconstruction programs for occupied territories too – and soon without the EU as an oil and gas customer. In the budget for the next few years, however, these problems hardly ever arise.

A few weeks ago, Russia presented its draft budget for the next three years. A focus should 2023, 2024 and 2025 be the “reconstruction of the new regions”, as Finance Minister Anton Siluanov explained. The budget provides the necessary funds for this.

The “new regions” mean the annexed areas of Ukraine: Kherson, Donetsk, Luhansk and Zaporizhia. In fact, unlike Crimea, not a single word is mentioned in the Russian budget. Because the draft was drawn up before Russia declared the areas its property, in violation of international law.

An expensive reconstruction program holds up Janis Kluge not only because of this improbable. “Of course there will be costs, but martial law prevails in these areas,” says the economics and Russia expert from the German Science and Politics Foundation (SWP) in the ntv podcast “Learned again.” “Russia will not pump in billions to build up the regions. Perhaps a road will be built symbolically in order to be able to give the annexations something factual.”

It is unclear whether Russia will even get around to presenting itself with infrastructure projects in the Ukrainian areas. The Russian army has withdrawn from the regional capital of the same name, Cherson. There are currently no signs that Ukraine will halt its offensives in the east and south of the country. But even without a multi-billion dollar reconstruction program in the budget, the draft for the coming years shows that war is expensive.

Military spending increases significantly

Already this year, the Russian attack on Ukraine is swallowing up significantly more money than planned. The Ministry of Finance in Moscow subsequently increased defense spending by a third to 4.7 trillion rubles. That’s the equivalent of 76 billion euros.

But the real cost explosion will not come until next year. Then defense spending increases again a good 43 percent. In the post “National Security” gives Russia almost 50 percent more out than planned. Adding up these expenses, according to the Bank of Finland, the Kremlin will need to find the equivalent of about $110 billion more for its military this year and the next three — possibly much more.

In Russia, budget plans are constantly being adjusted afterwards. “The draft is not very binding,” says SWP researcher Kluge. He believes it is possible that the Russian government is already planning much higher costs, which are, however, being concealed. Because with many items in the household it is not clear what exactly the money is actually intended for.

“For example, there is the category ‘national economy’,” explains the economist. “These could be subsidies or attempts to cushion sanctions. But it could also be money that goes to the armaments industry to build up capacities. Then it also serves the war.”

Dead soldiers cost a lot

Another major cost burden on the Russian budget, but is not mentioned like a possible reconstruction: mobilization. A good 300,000 other reservists are said to be fighting for Putin at the front. They get paid for their work, but they also need and use expensive materials and equipment.

In other words, as long as the men are fighting at the front, they are a burden on the Russian economy. Because during this time they are missing as workers. If they are fatally injured, they are no longer taxpayers. In this case, their families will also receive compensation for their death. In view of the number of victims so far, this can be a huge sum.

“If a Russian soldier dies, the family is entitled to a one-off payment of 7 million rubles, which is the equivalent of almost 112,000 euros. If you assume 50,000 dead Russian soldiers, that’s 350 billion rubles,” calculates SWP researcher Kluge. “That would be almost 10 percent of the military spending originally planned for this year just for this item. We haven’t even talked about soldiers who become disabled.”

Just as little as the more than 700,000 rather young and productive men who have fled abroad for fear of mobilization and are also missing as workers and taxpayers. “That will have massive negative effects on the economy,” says Alexander Libman at “Learned Again”. The political scientist from the Free University of Berlin estimates the effects “in the short term to be even stronger than those of the sanctions.” It is a “self inflicted wound” and Moscow has harmed itself.

The best customer is gone

Despite this, the Kremlin is planning only one for the next three years minimal deficit. Next year, new debt should be 2 percent of gross domestic product (GDP). That would be 2.9 trillion rubles or around 46.5 billion euros, which Russia has to raise through new debt, for example. The Russian Ministry of Finance expects revenues to increase again as early as 2024, causing the deficit to shrink slightly to 1.4 percent. In 2025, the budget should be almost balanced again with a deficit of 0.7 percent. In total, a deficit of only 120 billion euros is planned by 2025.

A very optimistic estimate, because the war is not only causing a massive increase in expenditure. At the same time, economists expect that the sanctions will also “slump dramatically” in revenues from the important oil and gas business. In the past, the EU was primarily responsible for this income: this year, Russia has had around 216 billion euros earned from exports of oil and natural gas, estimates the Center for Research on Energy and Clean Air (CREA). Around half of the money came from Europe.

Currently, the EU countries only obtain gas from Russia via pipelines that transport gas via Belarus, Turkey and Ukraine one-fifth of the gas volumes, which they obtained from Russia over a year ago. In a few weeks, after many months of waiting, the European oil embargo will also come into force. Nevertheless, the Russian Ministry of Finance assumes that revenues will fall by only 6 percent in the coming year.

Lots of question marks

“Plans are still being made with large revenues from oil and gas exports,” explains political scientist Libman, who, however, sees many question marks: “What can Asian countries buy? Europe will import less gas from Russia, but will buy the international market empty That means Asian countries need alternatives. If Russia is available as a supplier, that’s great, but how is Russia supposed to deliver the gas? Russia has traditionally focused on pipelines – but so far only one goes to Asia.”

SWP researcher Kluge is also skeptical that the Russian plan can work, considering that the oil and gas revenues already lower than before the war – which means that tax revenues are also falling. And all this despite high inflation of 12.6 percent, which means that significantly less money is available in real terms. A deficit of just 2 percent of GDP next year therefore seems strange to him. Especially since it was significantly larger just a few years ago.

“For example, after the slump in oil prices in 2014, and especially in 2016, we had a budget deficit of 3 to 4 percent of GDP, which was quite large by Russian standards,” says the economist. “That is not included in the current plans, although – and this is the big difference – there is a significant increase in military spending and security spending.”

Cuts in the environment and pensions

Attacking Ukraine will not ruin Russia. But it is quite certain that it will leave a much deeper mark on public finances than the Treasury Ministry admits in its budget draft – and the public will not miss it either.

where does the money come from The Treasury can issue new bonds domestically. Also, before the war, there were reserves of about $200 billion in the national welfare fund that can be tapped. But it is also clear that Russia has already cut pension increases and other social benefits. And investments in infrastructure projects, new roads and environmental protection.