In a strategic move with far-reaching implications, Russia has unveiled ambitious plans to increase state spending in 2024 by more than 25% compared to the current year. These financial maneuvers come against the backdrop of mounting expectations that the Kremlin is gearing up to allocate substantial resources for President Vladimir Putin’s ongoing invasion of Ukraine.
Prime Minister Mikhail Mishustin presented the draft budget, amounting to a formidable Rbs36.6tn ($383bn), on Friday. Among its notable priorities, the budget places a strong emphasis on “strengthening the country’s defense potential” and “integrating the new regions,” which were partially annexed from Ukraine in the previous year.
Moreover, the budget underscores a commitment to “social support for the most vulnerable.” This signals the Kremlin’s intention to bolster spending on pensions and welfare, setting the stage for next March’s presidential election. It is widely anticipated that Vladimir Putin, who has held the reins of power as either president or prime minister for an astounding 24 years, will secure a victory, extending his rule until at least 2030.
While specific details about the allocation of the budget remain undisclosed, particularly with regard to military spending, the magnitude of the increase is noteworthy. Alexandra Prokopenko, a former Russian central bank official, pointed out that “there hasn’t been such huge defense spending in the whole modern history of Russia.” She further elaborated that the Kremlin’s clear priorities are centered around the ongoing war, followed by social spending and internal security. In essence, Putin’s strategy appears to be heavily reliant on a sustained state of conflict, which has become pivotal not only for the regime but also for the economy.
According to Bloomberg reports, Russia is planning to elevate defense spending to nearly 6% of its gross domestic product (GDP). This marks a significant increase from 3.9% in the current year and a mere 2.7% in 2021, the year preceding Putin’s directive to invade Ukraine. Russia’s finance ministry refrained from commenting on this development.
The budget legislation presentation also underscored the additional spending that could be attributed to Putin’s plans for social expenditure, some of which were directly linked to the ongoing conflict. Notably, the budget will provide support for a foundation aimed at assisting individuals involved in Russia’s “special military operation” and their families. Additionally, it covers classified payouts to injured soldiers and the relatives of those who have made the ultimate sacrifice on the battlefield.
However, Russia’s economic outlook appears increasingly grim due to Western sanctions that have severed its ties with global markets and constrained its capacity to export energy. Despite Putin’s recent claim that Russia has overcome Western sanctions following its emergence from a recession last year, the Cabinet’s cautious projections for the weak rouble and vague explanations regarding funding sources for substantial spending increases paint a bleak picture of Russia’s economy, which has been grappling with the repercussions of the conflict for over a year and a half.
The draft budget anticipates that Russia will run a deficit of Rbs1.6tn in 2024, and the Cabinet openly acknowledges that there are no expectations of a surplus in the coming years, forecasting a deficit that extends through 2026.
Furthermore, the budget forecasts an increase in budget revenues, projecting Rbs35tn, which represents a nearly 15% rise from the current budget for 2024, approved in the previous year. Prime Minister Mishustin explained, “We tried to keep the deficit down as much as possible and foresaw that it will mostly be covered through borrowing.”
Nevertheless, former central bank officials are skeptical about the precise means by which Russia intends to finance this surge in spending, particularly as Western sanctions continue to bite into energy exports. Sofia Donets, a former central bank official and chief economist at Renaissance Capital, raised questions about the simultaneous increase in income, stating, “It’s hard to explain this uptick in income solely by what’s already been disclosed.” The intricate financial strategies underpinning this budget raise critical concerns about Russia’s economic future amidst ongoing geopolitical challenges.
