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.
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.
