This Article is From Mar 28, 2023

War Expenses, Secretive Spending Eating Away Russia's Budget

A surge in spending is driven by purchases of military equipment, mobilized Russians' salaries and a push to complete some of the signature infrastructure projects before next March.

War Expenses, Secretive Spending Eating Away Russia's Budget

Russia is keeping an unprecedented one-third of its budget spending out of public eye. (File)

Russia is keeping an unprecedented one-third of its budget spending out of the public eye, a stark measure of how a year of war against Ukraine has redrawn government finances and economic priorities.

Classified or unspecified expenditure through March 24 has surged to 2.4 trillion rubles ($31 billion), Finance Ministry data show, more than double the level in the same period a year ago, according to Bloomberg Economics's estimates. Plans set out for 2023 envisaged the budget's secret share at almost a quarter, Bloomberg calculations show.

The increase in classified spending indicates war-related expenses are rising, said Alexandra Suslina, an independent Russian economist. "It is logical to assume that the costs of new territories are included there as well," she said, referring to parts of eastern and southern Ukraine annexed by President Vladimir Putin last September and that Ukrainian forces have vowed to retake.

As spending on Russia's military increases sharply, defense - together with the related category of national security - is now second only to the government's social programs as a proportion of spending.

The secrecy around the single biggest-ticket item speaks to the scale of the fiscal commitment to the war effort that President Putin promised will have "no limitations." Clandestine spending previously peaked around 21% in 2015, a year after Russia's annexation of Crimea from Ukraine.

Under Russia's budget law, the president determines which secret programs will be adopted and allocated as part of various spending plans. Lawmakers convene closed legislative sessions to consider outlays where the public has no oversight.

What Bloomberg Economics Says...

"A surge in spending is driven by purchases of military equipment, mobilized Russians' salaries and a push to complete some of the signature infrastructure projects before the end of the current presidential term next March. The late stage of the electoral cycle is also a reason we think the government will remain mindful of risks of spurring inflation and will try to keep the budget deficit below 4% of gross domestic product."

-Alexander Isakov, Russia economist.

A snapshot of Russia's fiscal performance is available on the so-called "joint budget system portal" maintained by the Finance Ministry and the Treasury. The figures capture daily changes in the execution of public spending - even as increasingly more money is no longer subject to public scrutiny.

Expenditures on "national defense" reached 531 billion rubles as of March 24, doubling from last year, and another 379 billion rubles were spent on security and law enforcement.

Besides the sheer burden of the war on Russia's public finances, what the statistics also capture appears to contradict comments made by officials after data for January and February showed Russia was running a record budget deficit.

Finance Minister Anton Siluanov and others have said that a key reason why the budget was so deep in the red is because of advance payments made to help support businesses and the economy.

But the data indicate the biggest increase went toward defense spending, followed by transfers to the regions. The categories of education and health-care show slight gains compared to the previous year, according to the figures, while spending on the economy and social programs remains in line over the same period.

At 2.58 trillion rubles, the shortfall just in the first two months approached its planned level for the year as a whole, which the Finance Ministry expected at 2.93 trillion rubles. Bloomberg Economics predicts the federal budget will run a deficit of 3%-4% of gross domestic product this year.

The strain on the budget isn't surprising given Russia's invasion of Ukraine has triggered the biggest conflict in Europe since World War II. In 2022, the government was budgeting for a massive increase in spending on the military, with defense expenditure set to exceed this year's initial budget assumptions by more than 43%.

But the accelerated spending on classified needs and the military may reflect the urgency facing the Kremlin as it confronts a coalition of countries backing Ukraine that includes many of the world's biggest economies. Dmitry Medvedev, the former president who's now deputy head of Russia's Security Council, has said Russia plans to manufacture 1,500 tanks this year, which would be over six times the number the defense industry produced for the military in 2021.

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The shift in spending priorities risks becoming entrenched over time. The Defense Ministry has ordered a doubling of production of key weapons and parliament introduced a draft law to expand the age of eligibility for army service, as the government looks to expand the size of the military to 1.5 million from 1.15 million.

"The 2022 sanctions have so far not restricted the Russian government's military expenditure," Susanne Oxenstierna and Emil Wannheden, analysts at the Swedish Defense Research Agency, said in a report. "Instead, the government has raised military spending even higher to finance its war effort in Ukraine."

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