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Vladimir Putin’s cabinet is turning to increasingly irregular revenue-raising measures to fund rapid growth in defense spending, which has tripled since Russia’s full-scale invasion of Ukraine.
The Russian government said next year’s defense spending plan will be as high as 10.8 trillion rupees ($108 billion), three times the allocation for 2021, the last year before the invasion, and 70% more than this year’s plan.
To cobble together the money, the cabinet relies more heavily on informal revenue generated from one-time taxes and levies, including “voluntary contributions” that Western businesses must pay when they leave Russia.
Russian Finance Minister Anton Siluanov said on Tuesday, using the Kremlin’s euphemism for the war in Ukraine, that the defense budget “will enable us to fully support the mission of special military operations.” He said the increase in military spending was “critical to achieving our main objective: ensuring that we win”.
Russia’s record Rbs36.6tn budget for next year will take defense spending to 6% of gross domestic product, exceeding social benefits for the first time and requiring the Kremlin to tap more revenue sources than before.
“Putin has two priorities: war and power,” said Konstantin Sonin, an economist and professor at the University of Chicago. “That’s why the way the budget process works now is that policymakers first make sure the junta gets the resources it needs for the war and then tackle the rest of the budget. . . . To do all this, they’re constantly looking for new sources to scrape together the money. “
As part of the 2024 financing package, informal budget revenue will jump to Rs 2.52 Cr, a record high. In comparison, such revenue this year was only Rs 745 billion.
The bulk of next year’s one-time revenue is social contributions worth 800 billion rupees, which Russian companies were supposed to pay in 2022 but were postponed to 2024.
Another 2 billion rupees is expected to come from new export tariffs linked to the exchange rate, “voluntary donations” from Western companies as they leave Russia, tax increases and subsidy cuts for energy producers and higher utility tariffs.
The measures come after Russia imposed a windfall tax of 300 billion rupees this year on “excess profits” from commodity companies, particularly in the metals industry, more taxes on the energy sector and 114 billion rupees on Western companies. Next year, “voluntary contributions” will increase from 10% to 15% of the sale value of its Russian business.
Another source of revenue will come from excise taxes on alcohol and tobacco, which will triple by 2024. Some of the new revenue will bypass the budget entirely, meaning overall informal state revenue is likely to be higher.
Still, analysts remain skeptical that the Kremlin will be able to secure all the additional revenue it claims it needs.
“There is a risk that Russia will not receive about 1 trillion rupees of expected revenue because the budget is based on overly optimistic economic forecasts,” said Sofia Donets, a former central banker and chief economist at Renaissance Capital.
In this case, the Russian government may impose more one-time tariffs as it has done in the past, she added.
Donets said cutting spending in areas other than defense was a “last resort”, adding that Moscow could also tap into excess revenue from energy sales, which currently must be saved rather than spent.
Russia’s war spending exceeds the defense expenditures specified in the budget line.
Pavel Luzin, a non-resident senior fellow at the European Policy Center, said half of the national security and law enforcement budget is also war-related, as it includes payments to Russian security forces and an analysis of defense industry modernization plans.
Financing challenges for Russia also include the billions of rubles needed to “reconstruct” and annex territory in southeastern Ukraine that Russia has occupied since the start of the war.
The search for new funds is a wake-up call for Russian oligarchs, who are already feeling the pinch from Western sanctions and government attempts to prop up the ruble.
“Our priority is to have a sovereign economy and improve the welfare of our citizens, but only in the center of Moscow and on television,” oligarch Oleg Deripaska wrote last week. He said the new floating export tax would wipe out much of Siberian companies’ profits. “They definitely want to drive everyone completely crazy in the new year.”
Svlook
