Russia’s military spending is getting out of control.
The Kremlin has been in the middle of an intense military build up over the last few months against the backdrop of a deteriorating economy.
Even with the Kremlin’s revised budget plan in April (which assumes an average exchange rate of 61.5 rubles to the dollar), Russia is spending more on its military than it can afford to, according to Russian economist and former rector of the New Economic School in Moscow Sergei Guriev.
Guriev points out that recently published budget data for the first three months of 2015 shows that although non-defence spending was at 16.5% of the quarterly GDP as planned, military expenditure was more than double the budgeted amount at over 9% of the quarterly GDP.
“In other words, Russia has already spent more than half of its total military budget for 2015. At this rate, its reserve fund will be emptied before the end of the year,” Guriev writes.
Money for Russia’s budget is coming out of the Kremlin’s rainy day reserve fund, which is technically designed to soften the blow of economic setbacks.
The on-going Western sanctions prevent Russia from borrowing on the global markets, so Moscow has had to tap into this fund to finance its deficit, which has increased to 3.7% from 0.5% of GDP following lower oil prices and the economic contraction, according to Guriev.
In the best case scenario, according to Guriev, “Russia can maintain a 3.7% deficit for less than two years before it either has to withdraw from Ukraine to gain relief from Western sanctions, or undertake a major — and for Putin, politically dangerous — fiscal adjustment.”
However, “even this scenario may be too optimistic” that Russia spend more than twice the budgeted amount on military in the first quarter, according to Guriev.
“Russia simply cannot sustain the allocation of such a large share of its budget to defence spending. Moreover, its defence industry lacks the capacity to produce modern equipment as quickly as the plan anticipated,” he adds.
Since 2011, there’s been debate in the Kremlin whether or not Russia should increase military spending, which ended with then-finance minister Alexei Kudrin (who was against increased spending) getting sacked.
“Against this background, Russia’s recent military spending binge is all the more notable for its suggests that the government, desperate to retain popular support amid declining economic performance, is less interested in investing in the most modern equipment than in showing its support for the rebels in eastern Ukraine, even at the price of further economic hardship,” writes Guriev.
“If Russia could not afford a 4%-of-GDP defence budget in good times, it cannot possibly manage such a high rate of military spending now, when it confronts rock-bottom oil prices, Western sanctions, and economic recession.”