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OPINION

Bleeding Russia dry: How Putin's inflated war budget will lead to economic ruin

The federal budget proposal for the years 2024-2026 provides deeper insights into the situation in Russia and Putin's intentions than might be initially apparent. Here are some reflections derived from an in-depth analysis that goes beyond what the media headlines convey.

Certainly, the primary focus has been on the unprecedented surge in military spending outlined in the draft budget. In 2024, there is a proposed increase to nearly 11 trillion rubles ($111 billion), which is almost three and a half times the pre-war level of just over three trillion in 2021. Furthermore, extremely elevated military expenditures are expected to persist in 2025 and 2026—8.5 ($85 billion) and 7.4 trillion ($74 billion) respectively. This surpasses the average multi-year level by more than twofold. Putin evidently not only envisions a prolonged war but also intends to alter its trajectory through a sharp escalation in financial support.

In 2024, military expenditures are set to increase nearly three and a half times compared to the 2021 level

How will the inflated military budget be spent?

A significant 84% of the military spending for 2024 is classified, making it challenging to ascertain precisely where the additional funds will be allocated. It's highly probable that the majority will go to arms and ammunition manufacturers. Apart from this, such a substantial budget would enable Putin to tackle a range of systemic issues related to the underfunding of army provisions and guarantee an elevated level of remuneration for servicemen. Nevertheless, given the actual circumstances and past experiences, it's not very plausible that a sudden surge in funding will be beneficial.

The most proficient and well-prepared military personnel were decimated during the initial one and a half years of the full-scale invasion of Ukraine, and training replacements will be time-consuming, even with augmented allocations of funds. Considering the massive departure of skilled personnel from the country, it's uncertain whether the requisite number of people for critical military specialties can be located.

How Putin plans to address the issues of subpar operational command within the troops and the low morale of the army with additional funding remains unclear. The unwieldy, ineffective, monopolistic, and corrupt military-industrial complex is also likely to simply consume the assigned funds, as has occurred numerous times in the past.

The monopolistic, and corrupt military-industrial complex is also likely to simply consume the assigned funds

Indulging every whim at people's expense

It is evident that, for Putin, military spending takes precedence at present. However, the question remains: where will he obtain the additional funding? Many have already observed the planned reduction in expenditure for the economy, housing, communal services, as well as the notable absence of substantial increases in allocations for education, healthcare, and transfers to regions—all of which will be compromised for the sake of the war.

Nonetheless, the primary expected source of supplementary revenue lies in the genuinely remarkable growth integrated into the budget. Strangely, federal budget revenues are projected to surge by an astonishing 22%, exceeding 6 trillion rubles ($60 billion). According to the government's projections, oil and gas revenues are expected to escalate by a remarkable 30%, while non-oil and gas revenues will increase by 19%.

It's evident that achieving such a sharp upswing in revenue will necessitate a sustained increase in world oil prices, surpassing $100 per barrel (although this hasn't been predicted, and the budget is based on a price of oil slightly above $70), as well as robust growth in the Russian economy. Even if we assume it will grow at the envisaged rate of slightly over 2% annually, this falls short of guaranteeing the planned almost 20% increase in non-oil and gas revenues. The explanatory note accompanying the budget project indicates that revenue growth will be driven by higher taxes on the raw materials sector, and in 2024, a series of “one-time” revenues to the budget are anticipated (essentially—an additional increase in the tax burden).

The growth in revenue will be driven by higher taxes on the raw materials sector

The increase in the tax burden, coupled with the recently announced «prolonged period of strict monetary policy» by Elvira Nabiullina, has the potential to completely erode any hopes for economic recovery, which the authorities are banking on. Major businesses under Putin's leadership have already expressed concerns about yet another tax overhaul. The most recent economic data clearly illustrates that, given the current conditions, there is no room for production growth; in fact, it is already on the decline, as evident, for instance, in Rosstat's chart provided here. The infamous Asia won't come to our rescue—recently, Sergey Sobyanin candidly stated what many are already aware of: the East, seizing the opportunity, is extracting every possible benefit from Russia, preventing us from gaining investments or profits and effectively engaging in an «economic war» against Russia.

In turn, the deteriorating economic scenario will significantly hinder efforts to maintain a balanced budget and allocate funds for military expenses. For those seeking insight into this cycle, Yegor Gaidar's book “Collapse of an Empire” offers a comprehensive account. It meticulously chronicles the overconfidence of Soviet leadership, who persisted in their unrealistic plans amidst drastically worsening economic conditions (a parallel observed in today's circumstances).

“The speeches of [Soviet] leaders during 1985-1986 displayed unwavering confidence in their ability to rejuvenate the Soviet economy, accelerate economic growth, and bridge the gap with the most advanced nations… The leadership failed to perceive the true nature and scale of the looming threat.”

Drawing historical parallels, one can also reflect on the budget crisis faced by the Russian Empire during the First World War. Indeed, the historical narrative of Russian authoritarian rulers echoes a lack of learning from past events.

A final blow to the economy

Certainly, the Ministry of Finance and the government are aware that the anticipated sharp surge in revenues detailed in the budget is a mere illusion crafted to satisfy a single inadequate client desperately looking for any chance to avoid losing the war he initiated. On the other hand, if genuinely severe measures resembling economic mobilization (forcibly extracting several trillion rubles from the economy at once) are taken to generate revenue, it will deliver a dual blow to economic activity amidst escalating inflation and stringent monetary policies.

As expected, the markets reacted unfavorably to the news of the extended war and heightened military expenditures: investments have become uncertain, a definite rise in the tax load is foreseen, and perhaps most worrisome, Putin's unwavering commitment to a prolonged war might result in abrupt and adverse consequences of various kinds. There's a widespread skepticism that merely augmenting expenditures can secure victory in the war. Even Anton Siluanov, the Minister of Finance, did not convey much optimism during his recent address at the Moscow Financial Forum, reiterating the well-rehearsed mantra, «our focus is all for the front, all for victory.»

The markets reacted unfavorably to the news of the extended war and heightened military expenditures

The conclusions are straightforward: in his stubborn pursuit to regain the initiative on the frontlines, Putin has compelled the Ministry of Finance and the government to craft an utterly unrealistic budget, one that will be implemented through methods reminiscent of the 1920s and 1930s commissar era, effectively dashing the authorities' hopes for economic recovery. Moreover, military expenditures, on their own, do not generate significant economic multiplier effects. Up until 2024, up to 70% of the military budget was allocated to the defense industry, which cannot produce competitive civilian goods. Therefore, all these funds go towards the production of weapons and ammunition, which are being quickly depleted during the war in Ukraine and do not contribute additional value to the economy. In the 2024 budget, the share of expenditures on the defense industry may be even higher.

Putin had a choice: to attempt to negotiate some “peace talks,” buy time and resources to stabilize the economy. However, his obstinacy knows no bounds—he has decided to wring the last drops from the Russian economy to continue the insane and senseless war.

Putin has decided to wring the last drops from the Russian economy

Pay close attention: this entire saga will go down in textbooks as a glaring instance of monumental failure in profoundly inefficient and illogical governance. Do what you can, wherever you are, to resist this madness and hasten its conclusion.

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