The Russian Defense Budget and You

IHS Janes’s story “Russia announces deepest budget cuts since 1990s” got a lot of attention this week, claiming the Russian defense budget will be reduced by $1 trillion rubles or 25%. It is also wrong and has a bombastic headline to boot.  Here is a concise assessment of Russia’s defense budget, the cuts, and the reasons.

Bottom line, the Russian defense budget is going from 3.09 trillion RUB in 2016, to 2.84 trillion RUB in 2017, a reduction of ~7%, which about 1-2% harsher than announced in October of last year. The original estimate for the 2017-2019 budget plan was a 6% reduction over that period of defense spending. The cuts amount to about 250 billion RUB. Including planned cuts for the coming two years, the 3 year average is still a ~6% reduction.

The Russian defense budget is undergoing a sequester to tamp down growth, but is not experiencing large scale cuts, especially relative to other federal departments who were dealt 10% reductions.

The defense budget in 2016 was 3.09 trillion RUB. However, Russia had a problem with debt in the defense industrial complex. Manufacturers had been withdrawing commercial loans to cover the costs of production (i.e. they must have been producing on IOUs from the MoD), but this resulted in financing costs, and those costs were being carried over into the price of equipment being produced. This was no small issue, the interest rate + inflation resulted in some notable costs to the manufacturers, and financing this debt was having a waterfall effect on the state armament program.

Eventually the ministry of finance had to pay them down, so in December 2016 they made a onetime payment of 700 billion RUB to clear this debt (though some sources average it up to 800 billion). Added to 3.09 budgeted, this brought the overall amount spent on national defense to ~3.9 trillion RUB in 2016. Statistically, that resulted in a spike of spending to 4.7% of GDP, but in reality an important chunk was this singular debt payment.

The budget figures announced for 2017 reduce the budget by 7%, to 2.84 trillion. Janes did the following math, 3.9 trillion – 2.84 = 1 trillion RUB reduction or -25%.  To put it mildly, that is not the right interpretation of what is happening. The annual planned reduction is really just north of 200 billion RUB.

The future planned reductions are much smaller at 3.2% in 2018, and 4.8% for 2019. This would amount to 3% and 2.8% of GDP respectively, and perhaps 17% of the government budget. Though the figures do not include other spending on national security. My understanding is that these were based on really low oil prices of 40/barrel as well.

However, based on the past two years the defense budget is probably going to be reduced by less. 2015 saw only a 3.8% reduction, and 2016 a 5% reduction, relative to much louder announcements. Meaning, we should expect MoD to claw back some % points from Ministry of Finance planning. Here IHS Janes also seems to indicate that the 2017 defense budget is the first significant reduction after a period of extended growth, when in reality it is the 3rd straight year of budget reductions, and when everything is reconciled, the degree to which it is a reduction is debatable.

We should note there is always inflation, which is a tax on everything, and it is steadily eating away at the budget. The real sequester is the inflation rate that the budget must absorb.

I would add that by spending to reduce the defense sector’s debt, the MoD in reality has also reduced its procurement costs for the future so it’s unclear how the 7% reduction in the budget plays out relative to likely lower purchase prices since the budget is no longer forced to absorb financing costs for these debts. In conclusion, the Russian defense budget will remain very much alive, while the state armament program will continue to truck along with reduced expectations.

NOTE: I edited this article from originally saying the 2015 budget was 3.07 tril to 3.09 tril – with minor adjustments that follow, but the conclusions remain.

Because budget and spending figures are not that exciting, below I offer a photo of our chief budget analyst, my dog Ivan.

Ivan

5 thoughts on “The Russian Defense Budget and You

  1. My understanding is that this was an early repayment of state guaranteed defense industry loans for 2017 and 2018. So basically 700-800 billion rubles from 2017 and 2018 budgets was paid off in advance in the 2016 budget. Thus in effect it isn’t really even the case that there is a reduction in 2017 at all, some of its procurement cost just was paid already. If we say that half of the repayment was for 2017, that is at least 350 billion giving 2017 a real level of some 3190 billion rubles (2840+350). Also the baseline for 2018 budget is 2728 and with the other 350 billion it adds up to 3078. This seems to give a pretty constant spending level for these years.

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    • Technically yes, and the right way to read this is not as a reduction but as an additional 800 bil of spending. Even if the budget over three years assume 6% average cuts of 200 bil per year, it will still be less than this payment. The hidden savings are found in MoD not having to pay finance rates for commercial loans being taken out by the defense industry to continue operations. But this is just numbers, the end result is a sequester based on inflation and a reduction in growth of spending.

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  2. Sadly despite these useful correctives we see again the power of “fake news”. Far more decision-makers will have already internalised the “fact” that Russia was forced to cut defence spending by 25% than will bother to understand the nuances and complexities of the real situation.

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