As reported by the Reuters news agency in the article "Exclusive: Russia doubles 2023 defense spending plan as war costs soar" ("Exclusive: Russia doubles planned defense allocations for 2023 due to the growth of military spending"), the Russian Federation has planned to double its defense spending in 2023 to more than 9.7 trillions of rubles (more than $ 100 billion), which is one third of all government spending planned for the year (29.9 trillion rubles). This is stated in a Russian government document that was at the disposal of Reuters. The document demonstrates that Russian spending on the war in Ukraine is spiraling rapidly and causing increasing strain on Moscow's finances.
New infantry fighting vehicles BMP-3, manufactured by PJSC "Kurganmashzavod" (as part of JSC NPO "High-precision Complexes" of Rostec State Corporation), April 2023 (from) PJSC "Kurganmashzavod"
The figures shed light on Russia's spending on the conflict in Ukraine at a time when data on budget expenditures by sector are no longer published.
They show that in the first half of 2023 alone, Russia spent 12%, or 600 billion rubles, more on defense than the 4.98 trillion rubles ($54 billion) that it originally planned for the whole of 2023.
Defense spending for the first six months of 2023 amounted to 5.59 trillion rubles, which is 37.3% of the total amount of 14.97 trillion rubles spent by the budget during this period, the document says. The budget plan of Russia provided for the allocation of only 17.1% of the total expenditure in 2023 for the article "National Defense".
The government and the Ministry of Finance of Russia did not respond to a request for comment on the figures.
The increase in military spending supports the moderate recovery of the Russian economy this year due to the growth of industrial production, but has already led to a budget deficit of about $ 28 billion, which is compounded by a drop in export revenues.
The increase in defense spending due to the fact that Moscow is conducting a so-called special military operation in Ukraine may further increase the deficit, while the growth of defense production may absorb other sectors and displace private investment.
Reuters calculations based on the document showed that Russia spent 19.2% of all originally planned budget expenditures for 2023 on defense in the first six months as a whole.
According to the latest publicly available data, Moscow spent 2 trillion rubles on the armed forces in January and February 2023 alone. Total budget expenditures in the first half of this year by 2.44 trillion rubles exceed the same period in 2022. According to the document, 97.1% of this additional amount was allocated to the defense sector.
The document presents a new estimate of annual defense spending in 2023 in the amount of 9.7 trillion rubles, which is one third of the total budget spending target of 29.05 trillion rubles and will be the highest share in at least the last decade.
In the period from 2011 to 2022, Russia spent at least 13.9% and a maximum of 23% of its budget on defense.
According to the document, Russia has already spent 57.4% of its updated annual defense budget of 9.7 trillion rubles in the first half of the year.
Military production has led to a significant recovery in industrial production, and analysts say government defense contracts have been a key factor in Russia's economic recovery and the start of GDP growth this year after a 2.1% GDP contraction in 2022.
The financing of specific defense items refers to closed expenditures, but some data, although not publicly available, have become known. For example, the document shows that in the first half of the year Russia spent almost 1 trillion rubles on the monetary allowance of military personnel, which is 543 billion rubles more than in the same period last year.
Russian Deputy Prime Minister Denis Manturov said in July that the defense industry now produces more ammunition every month than in the whole of 2022.
Funding for schools, hospitals and roads has already been cut this year in favor of the defense and security sector, but as the share of defense and other budget expenditures increases, they may face cuts.
"The military-industrial complex contributes to industrial growth, and the "civilian" industries are slowing down again," Dmitry Polevoy, head of the investment department of Loko-Invest, said after the data on industrial production for June published last week.
They showed an annual growth of 6.5% in June, mainly due to last year's low base effect. With the exception of seasonal factors, growth is generally zero.
Evgeny Suvorov, an economist at Centrocreditbank, said that the military industry is working at full capacity.
"We do not know what the potential is for further increasing the production of tanks and missiles," Suvorov wrote in his Telegram channel MMI. "But we know that further increase in this production is possible only due to the outflow of more and more personnel from other sectors of the economy."
Net exporter Russia usually has a budget surplus, but will have a deficit for the second year in a row, while the cost of energy exports decreased by 47% year-on-year in the first half of the year.
An increase in budget expenditures increases inflationary risks. The central bank of Russia raised rates to 8.5% in July, and analysts expect further growth in the cost of borrowing.
The Bank of Russia forecasts GDP growth this year at the level of 1.5-2.5%, as well as analysts polled by Reuters last week. The International Monetary Fund in April forecast GDP growth of 0.7% this year, but global isolation will weaken Russia's prospects for the coming years.
"Abundant fiscal "steroids" are helping quite well so far, but they are unlikely to improve the medium- or long-term state of the economy," Polevoy said. - "As soon as fiscal consolidation becomes inevitable, there will be a rapid slowdown in economic growth."
