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Guns instead of butter: Does Moscow have enough money for aggression

Author : Serhiy Aleksashenko

10:04, 13 January 2017
Guns instead of butter: Does Moscow have enough money for aggression

Author : Serhiy Aleksashenko

We should not seriously expect that the current budget problems would somehow affect the combat capability of the Russian army

10:04, 13 January 2017

Read the original text at epravda.com.ua.

TUVAONLINE.RU

Russian economist Andrei Movchan stated that Moscow was planning to reduce the defense spending. Ukraine perceived it as a signal that Russia is finally "on the verge of collapse;" Kremlin would inevitably weaken its the aggressive first nor second idea are not the case.

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Let's start with the economy. Since the summer of 2016, the Russian economy ceased to fall and went into a state of stagnation.

According to the experts (in the spring of 2016, Rosstat stopped publishing the dynamics of the GDP data quarter of the previous quarter), in the third quarter, the Russian economy even showed weak growth, which was largely caused by market factors: a good harvest, increasing of the gas supply in Europe, coal export (at the background of high world prices). This is what does not allow to assess this as a sustainable growth.

The stagnation of the economy does not mean its total freeze - some indicators show an improvement, but some still continue to deteriorate. Dynamics of the same sector can show growth for a couple of months, followed by a recession could follow.

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If we compare the third quarter of 2016 and the third quarter of 2015, only agriculture and fisheries, mining and resources (gas, electricity, water) industry showed significant growth. All other sectors of the GDP fell slowly. 

The gradual increase in world oil prices throughout 2016 - from 30 dollars per barrel at the beginning of the year to $ 55 by the end of the year helped stabilize the financial sector. At the end of January 2016, the dollar was 83.6 rubles, and by the end of the year it has fallen to 60 rubles, which significantly improved the condition of the federal budget.

Against this background, the basic outlook for the Russian economy over the next two years at the current level of oil prices (US $ 50-55) looks quite optimistic: growth in the range of 1%, inflation at the level of 4-5%, reduction of the budget deficit, a relatively stable exchange rate.

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We should expect the termination of decline of consumption and a gradual recovery in investment activity. In general, this period should not be called an end of the crisis of the Russian economy, but at the same time, this is not a collapse.

Now let us speak on military expenditures.

Firstly, these expenses are being more and more secret information, and the observers might simply do not know some insides.

Second, the Russian Prime Minister Medvedev said, "There is no money!" It means that the whole structure of the Russian federal budget for the next three years is based on a total freeze in nominal spending. Moreover, the Russian Finance Ministry initially insisted on a small annual cost reduction, but in the course of the adoption of the 2017  budget, this position was not defended.

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As a result, due to the indexation of a number of positions (salaries, social benefits, pensions), the remaining budget items should be declined. This "sequestration" touched Russian defense spending.

At the same time the scale of military spending cuts should not be exaggerated. As they say, there are lies, big lies, and statistics.

Indeed, if we compare the actual defense spendings of 2015-2016  years with planned expenditure of 2017-2019 years, it might seem that the Russian defense spending sharply reduced after a sharp rise in 2016.

Military expenditures of RF, billion rubbels

 

2015 p

 2015 f

2016 p

2016 f

2017 p

2018 p

2019 p

Autumn 2014

3 033

 

3 342

 

3 532

 

 

Autumn 2015

 

3 108

2 931

 

3 065

 

 

Autumn 2016

 

 

 

3 889

2 840

2 728

2 816

Including credits

 

 

 

3 089

3 107

3 047

3 135

In prices of 2015

 

 

 

2 928

2 804

2 632

2 604

 

However, the table clearly shows that military spending of the 2016 year were greatly reduced in the autumn of 2015 as compared to the volumes provided in the three-year budget for this year. In addition, it is striking that the military expenses of the 2016 were sharply increased in the autumn of 2016.

The fact that in 2012-2014, the Russian Ministry of Finance, trying to give an opportunity to the state-owned banks, used the so-called credit scheme to finance part of defense expenditures: state-owned banks lend defense companies under the guarantee of the Ministry of Finance.

The total amount of these loans was about 2 trillion rubles. By the end of 2016, about 1.2 trillion rubles remained outstanding, of which loans to 800 billion rubles were redeemed at the end of 2016. If divide this amount for 2017-2019, it is clear that Russian military expenditures over the next three years is actually "frozen" in nominal terms.

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Experts immediately say that taking into concideration inflation we can talk about reducing defense spending in real terms. Of course, they are right: taking into account the 5.5 percent inflation rate in 2016 and its decrease by 0.5 percentage points per year, in 2019 expenses will be 16% below the level of 2015. However, it is not that simple.

First of all, the costs of the Russian state armaments program were planned in nominal terms. In addition, the prograp predicted increase of the purchases until 2017-2018 years, after which the funding arms purchases started to decline.

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This reduction may be stopped after the adoption of the following state programs, LG-2025, the implementation of which is still in 2016 was due to start, but it was moved to the beginning of 2018.

At the same time, the Finance Ministry and the Defense Ministry have nunerous disagreements about the arms procurement spending in 2018-2025. Ministry of Defense requires 24 trillion rubles, and the Ministry of Finance is not ready to give more than 12 trillion rubles.

Finally, in the original version of the program, Navy was in the most beneficial position. It has got more than a quarter of total expenditure, but it has never been important from the point of view of Russian military priorities.

Since the beginning of the Russian military aggression against Ukraine, the latter stopped its supplies of the military equipment to Russia, but then it turned out that a large part of marine engines for the Russian Navy was of Ukrainian origin.

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In the summer of 2015, naval expenditures have been reduced or shifted over longer periods, which could also reduce the pressure of the defense procurement on the Russian budget.

Roughly two-thirds of Russian military budget expenditures were directed to the purchase of arms in recent years, and only one third went for the current maintenance of the army.

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In the course of fiscal consolidation, the cost of the arms purchase have been subjected to reduction. Russian military action against Ukraine from the point of view of the Russian army and the Russian budget is extremely limited in scope and do not require the allocation of significant human, material or financial resources.

In addition, part of the used material resources - weapons, ammunition, fuel, food – are taken from the warehouses of the Ministry of Defense and the Russian Ministry of Emergency Situations and unlikely to be replenished, i.e. they do not require funding.

So we should not seriously expect that the current budget problems would somehow affect the combat capability of the Russian army.

Moreover, if oil prices remain at current levels until the end of 2017, the Russian budget would generate additional income, and I am ready to assume that a substantial part of this income would go to the Russian military as a compensatation.

 

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