Putin’s defence focus risks deeper budget woes

Military costs to rise by 30% amid recession

MOSCOW: Russian President Vladimir Putin’s insistence on huge defence spending makes it hard to see how a government plan to make deep budget cuts will see Russia through a deepening economic crisis.

Finance Minister Anton Siluanov called on Wednesday for a 10% cut in planned expenditures, warning that if oil were to average US$50 (1,630 baht) a barrel this year, the budget would face a shortfall of 3 trillion roubles (1.5 trillion baht).

But defence spending will not be affected because of a Putin directive that dramatically limits room for manoeuvre: Military and security costs swallow up more than a third of the budget and are set to rise by about 30% this year.

Mr Siluanov had signalled opposition to the huge outlay on the military.

“One needs to redistribute and restructure expenditures in favour of infrastructure, education and so on. Such military expenditures are heavy to carry,” he said.

However, that was on Dec 26 and on Wednesday he performed his about-face, acknowledging that defence was off-limits.

Despite the crisis gripping the economy, Mr Putin is preoccupied with boosting Russia’s international might, being tested in the standoff with the West over Ukraine.

He has also shown he will not put his popularity at risk by cutting social expenditures such as pensions, which rely on federal subsidies that consume another quarter of the budget.

Last month he said pensions must be indexed to inflation, which is now running at more than double the annual rate of 5.5% projected in the 2015 budget.

“For Mr Putin the priority is the army, the secret service and the bureaucracy. And also financing pensioners, the main supporters of the regime,” Boris Nemtsov, an opposition leader and former deputy prime minister, wrote on his Facebook page.

“All the same ... a reduction in people’s real incomes and a rise in poverty is unavoidable.”

Both Mr Siluanov and Prime Minister Dmitry Medvedev have now acknowledged the budget agreed late last year, based on the oil price averaging $100 per barrel over the next three years, is not fit for purpose.

Since it was agreed the price of oil, Russia’s main export earner, has fallen below $50 and the rouble’s parallel dive has continued. The currency lost more than 40% against the dollar last year and Russia’s problems have been aggravated by Western sanctions over the Ukraine crisis.

Before the plunge, oil and gas produced around half of federal tax revenues, and the World Bank now expects the economy to contract 2.9% this year.

Economy Minister Alexei Ulyukayev sees a “pretty high” chance Russia’s credit rating will be downgraded to junk and a deputy, Alexei Vedev, expects inflation to peak at 15-17% in March/April.

Russia plans to spend more than 20 trillion roubles by 2020 on modernising its armed forces, but the dilemma is not new. Long before the collapse in oil prices, Mr Siluanov’s predecessor Alexei Kudrin warned that plans to spend hundreds of billions of dollars on rearmament were unaffordable.

Mr Kudrin was sacked in 2011 for speaking out against the military build-up and now doubts the Kremlin has woken up to the new realities. “I have the impression that at all levels of power, including the first person [Mr Putin], there isn’t an objective assessment of the challenges before Russia,” he said in an interview with Russian agency RBC on Monday.