Increased Defense Spending Seen Leaving Russia ‘without Missiles or a Fleet’

November 6, 2015
The structure of the Russian state budget, calculated by the Higher School of Economics Centerfor Development, based on data from the Ministry of Finance. National defense and security are green and olive green; national economy, housing and environment are in blue, dark blue and light blue; education, culture and health are orange, red and dark red; social policy and pensions are in light blue and darker blue; sports is in green; media is in light organge; debt service and interbudget transfers are in dark and light gray.

Staunton, November 5 Moscow’s revised budget, one that provides for large increases in spending for the military and government structures along with reductions in investment in human capital, means that Russia could soon find itself “both without scholars and without missiles or a fleet,” according to a study by Moscow’s Higher School of Economics.”

Yaroslav Kuzminov, the rector of that school, says that “the main macro-economic problem of the formation of the federal budget is the balancing of income and expenditures under conditions of the sharp decline of oil prices.” But the draft budget shows the government has not faced up to this challenge.

Basing his conclusion on research and analysis carried out by various sectors of his institution, the rector says that it is clear that “time for resolution of the problem no longer exists.” Moreover, by putting off hard decisions, the government has only ensured that it will have to make them “in still less favorable conditions.”

Moreover, he suggests, the government remains a prisoner of short-term and narrow thinking. It does not recognize that the launch of cruise missiles from the Caspian and reduction in spending on science and education are connected. If Moscow keeps cutting the latter, it will not be able to do the former.

In addition to science and education, the new draft budget calls for significant cuts in general education and health care, with spending for higher education some 20 percent less in 2016 than it was in 2012 and funds for pre-school and vocational training, for which the regions are responsible, cut even more with little hope Moscow will make up the difference.

At the same time, Kuzminov continues, spending on defense, state administration, and for secret accounts is growing, with defense up six percent in real terms and 72 percent in nominal terms, and spending for the rest of the government bureaucracy going up as well. Some of this money will boost industrial production, but far from all, he says.

Higher School of Economics experts said they were not able to analyze all of this sector because so many of the accounts have been classified. As a result, they implied, the situation may be even worse than the one they have painted.

But they were unanimous on one point: relying in the future on income from the sale of oil or taxes on oil extractors will not work for very long. They suggested that this was sustainable only for a year or two because expanded production will occur only in places where the cost of extraction is far higher than in current fields.

What the Russian government will have to do given this crisis, Kuzminov concluded, is not something it is prepared to do now. Consequently, all these issues have been kicked down the road for next year’s budgeteers when the situation may be far worse for them than the one they now face.