Top Russian economist: Moscow can’t maintain current levels of military spending for much longer

The state-of-the art Russian T-14 Armata tank stalled in the middle of the Red Square during a preparation for general rehearsal for the Victory Day military parade, would not restart, and had to be towed. Moscow, Russia, Thursday, May 7, 2015. (AP Photo/Alexander Zemlianichenko)

The state-of-the art Russian T-14 Armata tank stalled in the middle of the Red Square during a preparation for general rehearsal for the Victory Day military parade, would not restart, and had to be towed. Moscow, Russia, Thursday, May 7, 2015. (AP Photo/Alexander Zemlianichenko) 

2015/05/24 • Analysis & Opinion, Politics, Russia, War in the Donbas

The Russian government cannot afford to maintain its current levels of military spending for long because its shift of resources to the military sector is threatening the rest of the Russian economy and because its reserve fund will be insufficient to pay for this spending for more than another year or two, according to Sergey Guriev.

Sergey Guriev, currently professor at the Sciences Po (Paris), formerly the rector of the Russian School of Economics (Moscow)

Sergey Guriev, currently professor at the Sciences Po (Paris), formerly the rector of the Russian School of Economics (Moscow)

Guriev, currently an economics professor at the Sciences Po in Paris and earlier the rector of the Russian School of Economics in Moscow, says that experts have known this for some time but that the Kremlin has gone ahead anyway, something that opens the way for radical shocks ahead.

The Russian government’s original budget for 2015 was based on the assumption that oil would be US $100 a barrel, that Russia’s GDP would grow two percent, and that inflation would not exceed five percent, he notes. None of those things has proven to be the case; and the government has cut overall spending by approximately eight percent.

“Nevertheless,” he continues, that has not prevented the government deficit from ballooning from 0.5 percent of GDP to 3.7 percent, “a serious problem” even though Russia’s sovereign debt forms “only 13 percent of GDP” because the Ukrainian war has increased spending and Western sanctions have made it harder to borrow.

As a result, Moscow has been forced to dip into its reserve fund. That fund currently amounts to six percent of GDP. Consequently, if the deficit continues at 3.7 percent, the Russian government will run out of money in about two years, forcing it either to withdraw from Ukraine in order to end the sanctions regime or change its budgets in fundamental ways.

Both steps would entail “major political risks for Putin,” Guriev says.

But in fact, the economist continues, that kind of train wreck may happen far sooner. During the first three months of this year, he point out, Russia’s military spending exceeded nine percent of GDP – or “twice more than planned.” If that level of spending continues, Russia’s reserve fund will be “exhausted before the end of the year.”

That military spending is eating up the reserve fund is the result of Russian decisions made four years ago, Guriev says. At that time, the government proposed increasing defense spending from three to more than four percent of GDP, something Finance Minister Aleksey Kudrin suggested was impossible. He was summarily fired and that is what the Kremlin seeks.

According to Guriev, “the goal of the Kremlin turned out to be unbelievably ambitious both by Russian and by world standards.” Most European countries are not spending more than two percent of GDP on defense; the US spends 3.5 percent, and only nine countries in the entire world are now spending more than four percent.

Russia “simply is not in a position” to spend that way for long, the economist says. Moreover, its defense industry isn’t capable of modernizing that quickly. And that suggests that the Kremlin is less interested in that than in supplying its forces in Ukraine, something that could set the stage for a new attack in the coming months.

Or alternatively, Guriyev continues, it could simply be an indication that the Ukrainian war is costing Putin far more than he counted on and that he will have to find a way out.

Whatever proves to be the case, he concludes, “Kudrin’s economic logic today is even more just than it was on the day he was fired. If Russia in favorable times couldn’t allow itself to spend up to four percent of GDP on defense,” then it certainly can’t at a time when oil prices have collapsed and Western sanctions have been imposed.

Edited by: A. N.

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  • Dagwood Bumstead

    It doesn’t matter to Dwarf 2 whether Kudrin was/is right or not. The money for the armed forces and security services wil be found by hook or crook regardless of the long-term consequences for the country. To me it suggests that he is getting desperate and will go over to the offensive in the Donbass and elsewhere (Crimea, Kharkiv?) soon. Time is slowly running out.
    In November 2016 a new US president will be elected and regardless of who is elected none of the most likely candidates- Hillary, Cruz etc will be soft on Russia. Obama’s “no weapons for Kyiv” will quickly end up in the dustbin. With four countries already helping the Ukrainian army with improved training it will only become a tougher nut to crack with every passing month.
    One source of cash could be Proffessor Viktor, Azarov and Co. I wouldn’t put it past Dwarf 2 to tell them “Cough up some of the billions you stole from the Ukrainian state or I’ll ship you back to Kyiv PDQ”. But even those funds will only go so far.

    • Czech Friend

      plus Putler can go totally rough full on criminal mode in the end and refuse to pay any debt or obligation. And that will mean only one thing: war. War that is taking place for over a year now and a war our political leadership is utterly clueless to stop just like their Chamberlain predecessors.

      • Dagwood Bumstead

        Such a move would be absolutely daft even for Dwarf 2. It would lead to seizure of Russian assets plus a total boycott of Russian oil, which is far more easily replaced than Russian gas. Russia is extremely vulnerable economically as the sharp drop in oil and gas prices has shown. Refusing to pay would mean a default and technicaly Russia being considered bankrupt.
        More interestingly, what will Russia’s pensioners do when they realise that Dwarf 2 has squandered the reserve funds and that they are left out in the cold- literally? They are among his biggest supporters because of the increases i pensions in recent years. Their support will vanish just as the funds did. They will probably take to the streets and I don’t see the army or even the FSB shooting at people who could well be their parents or grandparents.

        • Czech Friend

          when dwarf goes rough no pensioner or any one else for that matter will be releavant any more. It will be a brutal oppressive state in the inside threatening us with open war, possibly nuclear.

        • Jack McColley

          And when all the reserves are gone within 18 months……watch out. It is now in the end game for Putin. They have so little money, they are now going to use prison labor to prepare for the World Cup.

          • Dagwood Bumstead

            I had noticed the use of prison labour for the Soccer World Championship, but linked it to a return to Putin’s neo-Stalinism rather than cash running out. Would it save much cash, though? The main problem with such projects in Russia is the huge corruption, witness the costs for the 2014 Sochi Winter Olympic Games. In comparison wages would really be peanuts.
            It would explain the rumours of next-of-kin of Russian soldiers killed in the Donbass no longer being paid the customary compensation, and the abandonment of Russian soldiers captured by Ukrainian forces. The recent abandonment of two GRU members by the Russian government apparently affected the rest of the unit so badly that it had to be withdrawn from the Donbass. Not the way to motivate the troops to fight for Novorossiya, methinks.

      • Jack McColley

        Putin may be in a reality all his own, but he is shrewd enough to understand war with the west could not be helpful for Russia. He will continue to pick and choose small fights, little by little building his new “empire” and keeping the sheep at home happy. Unfortunately for him the territories he has “conquered” are wastelands that do little more than put a drain on his limited resources.

        • Czech Friend

          I do not consider war in Eastern Ukraine a small fight but that just me. Your polished prgmatic assessment is right about the outcomes but overlooks Putin’s unstable persona which is there in the open. If we’d only saw a “few” violent swings so far doesn’t guarantee there will be more in the future.

          I mean to say that underestimating him could lead to a catastrophe even though his grandiose plans have been one huge failure.

          But hey, he got Crimea!

          • Dagwood Bumstead

            I suspect that the few level-headed persons in Moscow realise by now that they are in a maze with no way out. Simply giving up and abandoning the LNR and DNR is not an option for Dwarf 2- people such as Zhirinovsky, Aleksandr Dugin and Tamara Guzenkova will crucify him for “abandoning our Russian brothers” if he did. The status quo will slowly but surely strangle the Russian economy- the sanctions, paltry as they are, are doing what the British blockade of Germany did in WW1. Going over to the offensive will cost more cash, cause heavy casualties among Russian soldiers, result in more destruction and make every square mile taken worthless. Moscow has little to fear from further EU sanctions- Merkel will see to that- but they won’t be relaxed either.

            What to do? There’s also the “small” problem of Kadyrov…..

          • Jack McColley

            Truthfully, he can have Crimea. For the last 20 plus years it has been a burden for Ukraine. The only sad thing about it is the Tartars who don’t deserve to be placed back in the clutches of the Russian monsters.

          • Dagwood Bumstead

            Nor do the ethnic Ukrainians and other minorities. Together with the Tartars they form over 40% of the Crimea’s population. The ethnic Ukrainians are also targeted by Aksyonov’s thugs, although not to the same extent as the Tartars are…. not yet, anyway.
            The Crimea is not so much valuable in itself, but for the waters around it which are thought to contain huge quantities of oil and gas. Yanukovich had signed contracts with Exxon and Shell to explore the waters. Any oil and gas found would clearly reduce Kyiv’s dependency on Moscow, something Dwarf 2 clearly can’t accept. This is probably the real reason behind his invasion. Ditto for the Donbass, which provided Kyiv with much of its coal, even though it, like the Crimea, was a financial drain for the Ukrainian government.

        • Dagwood Bumstead

          Precisely. The Crimea is already costing the state coffers some 20 billion annually. What does Moscow get for that money? A naval base it doesn’t even need, given that it already has Novorossiisk.
          With Kyiv flatly refusing to cough up for the so-called LNR and DNR as long as it does not fully control them, the costs will inevitably have to be borne by Moscow. And what does Moscow get for the expenditure? A wasteland, with factories and mines which are either destroyed or have been stripped of anything useful for Russia. Unemployment was already 30-50% pre-war, will now be more like 80-90% thanks to Moscow’s aggression. Sooner or later even the thickest Donbass citizen will realise that Moscow can’t and/or won’t support the LNR and DNR financially. Then what?

    • Ciprian L

      Couldn’t China just lend them the necessary funds?

      • Dagwood Bumstead

        China COULD…. but there would be strings attached, strings that Moscow would not like. In ANY partnership with Peking, Moscow will be very much the junior partner. China is an economic giant, Russia a midget. To quote Bill Clinton, “It’s the economy, stupid!” Kudrin realises that only too well, I suspect that Medvedev does too to a certain extent, but Dwarf 2 doesn’t and is not likely to given his KGB background and world view.
        Don’t forget that it will be Moscow knocking on Peking’s door, cap in hand- not the other way round. Chinese are the toughest negotiators around and Peking will press home its advantage ruthlessly. Furthermore, Peking has made considerable investments in the Ukraine which it won’t risk by supporting Moscow waging war on Kyiv. In short, why would Peking help Moscow wage a senseless war?

        • Ciprian L

          Why would Peking choose to help Moscow? I couldn’t say for certain that they would do such a thing. But maybe some Chinese decision-maker happens to read one of Czech Friend’s posts on this very thread, that reads:

          “China is another problem of our civilization after the Russian criminal
          dwarf is burried six feet under and his country either contained,
          dismembered or integrated into EU.”

          There is an old political maxim that says that the enemy of my enemy is my friend. Then again, maybe I’m totally wrong, and people just don’t care about Realpolitik and reaching a balance of power anymore. It’s not like we’re talking here about the possibility of nuclear war.

      • Jack McColley

        China is not stupid.

        • Michel Cloarec

          China would want a psychiatric report before lending money , not a chance he would accept , considering the risk he would not past the test .

      • Michel Cloarec

        probably , but China is not stupid, it will want guarantee , and the chance for RF to get a security loan from IMF is mini mini little.

  • Michel Cloarec

    Putin´s reserves of funds are in the pensions . That means the pensioners are going to suffer. Some small revolutions will appear there and there. How to stop that ? Simple : New laws against NGO like Human rights, Amnesty International, Transparency International/Forbes . The fascist system will be more repressive and more totalitarian without the posibilities for the people to react against oppression.
    RF will be a closed society again !

    • Czech Friend

      it is happening as we speak. The transformation into the fully fledged totalitarian fascist state has already begun. Those auxiliary citizen police forces made up by “loyal” street thugs is nothing more than reincarnation of SA in nazi Germany.

      • Dagwood Bumstead

        Dutchman Derk Sauer, who founded a media business in Russia in the 90s, called Nashi, the pro-Putin youth movement, the Putin Jugend, a clear reference to the Hitler Jugend. Personally I think it’s more a mix of the HJ and the SA in that it both indoctrinates Russia’s youth and uses physical violence against Dwarf 2’s opponents.

  • Rods

    Like previous Soviet dictators I’m sure Putin will continue with his arms before butter policy and also like Brezhnev who made the terminal mistake for the Soviet empire of his Afghanistan adventure, I’m certain Putin is now doing the same with Ukraine.

    Putin has made the fatal mistake of thinking that his easy occupation and victory in Crimea, when the newly formed Ukrainian transitional government were in no position to respond, would lead to a further walk in the park in the Donbas region. With little interest and support from the Ukrainian people for the irregular Russian Donbass invasion of drunks, criminals and misfits, Putin has been on his back foot there pretty much from the word ‘go’. Only a surge and further invasion of regular troops in August 2014, stopped the total defeat of his ragtag group of Russian mercenaries and terrorists against the brave Ukrainian army.

    In war, when you are running out of time and money, it is very easy to think one more push will achieve victory, with the result being the exact opposite as it just accelerates losses and the domestic collapse. Russia and the world at large won’t miss Putin and the rest of his criminal ruling class. Ukrainian forces are getting stronger from better training and equipment, with any major push by the Russian forces likely to lead to more sanctions, the supply of defensive weapons and major Russian monetary and human costs.

    We state money being withdrawn from the Russian regions is an attempt to keep more immediates in Moscow happy, we are likely to see nationalists coming more to the fore especially in places like Siberia. The question now is: Are we going to see on or before the 100th anniversary of the 1917 revolution a repeat for Putin? The likely answer is yes.

    Will all this military spending save Putin? In a word no. The Soviets had the biggest conventional army, with the most equipment at the time of the general’s coup against Gorbachev, but the army refused to shoot at their own people. The same will happen again.

    When the Soviet empire collapsed and many satellite regions took the opportunity to become independent nations, so we are likely to see the same again, so the Russian Federation becomes an even smaller shadow of its former self.

    When history is written it won’t be kind to that evil little dictator Putin and the disaster he has bestowed on the Russian people.

  • John Shirley

    I’m getting older now, and my health could be better, but I hope I live long enough to see China and it’s 1.3 billion people expanding into at least Siberia and all Russian lands North and East. And who will stop them? Don’t kid yourself by thinking that China isn’t already thinking along these lines. Why do you think China is “budding up” and lending money to Russia. I wonder how the Russians will feel when they lose 1/3 of their country to invaders.

    • Czech Friend

      China is another problem of our civilization after the Russian criminal dwarf is burried six feet under and his country either contained, dismembered or integrated into EU. Interesting years and decades ahead that is for sure…

    • Jack McColley

      Russia’s east is quite full of Chinese. In fact, soon they will be a majority. Russia will have no chance to hold on to these lands.

      • Jack McColley

        Read the new article just posted on this. My sentiment exactly. Russia is China!!!!!!!!!!!!

    • Michel Cloarec

      You only have to survive 1 or 2 years more to see the fireworks on chinese national day on RF land . Keep strong ! It will be fun !

      • Jack McColley

        It will only be fun if China is satisfied with owning Russia. I think the vast uninhabited lands of eastern Russia will satisfy them for a century.

        • Jack McColley

          One will be required to have type B Blood to be a Russian citizen.

    • Dagwood Bumstead

      The Tsarist Empire seized Chinese territories in 1856 and 1860 and it’s no secret that Peking wants them back. I expect that before 2020 Peking will send its “polite gleen men” across the Amur and Ussuri “to plotect Chinese citizens”, hold a “lefelendum” and annex the territories. China abstained when the UN General Assembly voted on Moscow’s seizure of the Crimea because it wants its hands free to do the same.
      The Ukrainian army isn’t strong enough to clobber the Russians- but China’s army is. So what can Moscow do when Peking decides that it’s time to take back its lost territories? Short of nuclear war, very little. I suspect that SOME people in Moscow see the danger, but given his obsession with subduing Kyiv that Dwarf 2 isn’t one of them.
      Chinese New Year in Vladivostok, Khabarovsk or Chita, anyone?

  • Vol Ya

    Without their energy exports russia would be a third world country. They can’t even build a decent car in rusia. Have you seen the Lada, it is a joke. Europe and Ukraine need to stop buying natural gas from russia. This is crazy. It is just feeding their enemy by giving Russia hard currency. Boycott russia and russian products. Let the russians drown in their worthless rubles and vodka.

    • Dagwood Bumstead

      Poland and the Baltics have LNG terminals now and they will be buying less gas from Gazprom. Hungary, Slovakia and other countries don’t have alternatives, though they could reduce consumption by increasing their energy efficiency. This is something they must do in any case, as do the Ukrainians. If there is one thing the Ukrainians can rightly blame Yushchenko and Yulia for, it is for not starting to increase Ukrainian energy efficiency on their watch, thus reducing gas consumption and dependency on Russian gas. To be fair, this also goes for Kuchma and Proffessor Viktor.
      Given the state of Russia’s economy, it’s more likely Russians will be drowning in samogon, even though Dwarf 2 has refused to increase the price of vodka.

      • Jack McColley

        In fact the Dwarf has decreased the price of vodka (bad water in Russian) and cigarettes. It is in the national interest: people die younger. Lower costs for pensions. They also refuse to treat anyone over 70 in their hospitals or even transport them to the hospital. The quote is: “You have lived long enough. Medical care is for younger people who can work.”

        • John Shirley

          I guess I better stay here in the US then, unless I want to commit suicide

    • Jack McColley

      When I first went to Ukraine in 2001, I experienced one of those cars. The owner told me that during the USSR’s existence, the Russians tried to build a super car. They failed and resorted to copying American cars, but also failed in this. Their cars are junk.

      • John Shirley

        Funny, I think it was James Bond, Golden Eye where Joe Don Baker picks up Pierce Brosnan at a Russian airport and to get the car to crank over he wacks the engine with a big hammer.

  • Murf

    If this gentleman’s numbers are correct then the situation is far worse than I thought.
    The world bank estimated that Russia’s GDP would decline by 3.5% this year. But it has already declined by 1.7% in the first quarter alone.
    IF that rate continues we are looking at 6.1%
    Worse than Ukraine’s projected decline of 5.5%.