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Militarizing the economy Russia’s next budget allocates over a third of spending to ‘defense.’ Here’s how it was developed.

Source: Meduza
Alexander Nemenov / AFP / Scanpix / LETA

On November 17, Russia’s State Duma approved the final version of its national budget bill for the next three years (2024–2026). Five days later, the plan was approved by the Federation Council. When Vladimir Putin signs the bill into law, it will mark the first time in modern Russian history that a budget has designated more money to the military than to social spending. At 10.7 trillion rubles ($120.8 billion), expenditures on “national defense” make up a third of all spending outlined in the budget, while social spending receives 7.5 trillion rubles ($84.7 billion), though the latter amount also included some military-related expenditures such as medical care for injured soldiers. Russian Finance Minister Anton Siluanov has defended the bill as necessary to “ensure victory.” Meduza explains how the budget’s final draft differs from the original version, how objections to the militarization of national spending fell on deaf ears, and why Russian businesses should expect an increase in their own tax burden.

How did the budget change during lawmakers’ discussions?

By the second reading of Russia’s next national budget bill, State Duma deputies and officials had introduced over 900 amendments, 768 of which were ultimately adopted. Most of the proposed changes concerned the reallocation of spending from the classified part of the budget to the public part. As a result, the unclassified part increased by 1.17 trillion rubles ($13.2 billion), reaching 26.82 trillion ($302.8 billion), according to the outlet RBC.

  • Most of the redistribution occurred in the budget’s “national defense” section: its non-classified portion increased by 725 billion rubles ($8.2 billion).
  • The category that had the second-highest amount of funds redistributed was “national economy”: 152.49 billion rubles ($1.7 billion) were transferred from the classified to the non-classified section. A significant part of these funds are set to go to rebuilding the Ukrainian regions that Russia annexed.

In total, for the next three years, the Russian authorities moved about seven trillion rubles ($79 billion) from budget’s classified section to its non-classified section, according to the Finance Ministry. While this did increase transparency, the budget remains more classified than any previous one: the share of expenditures that are classified will be just under 27 percent in 2024, compared to about 19 percent in 2022 and 15 percent in 2021.

More spending on the annexed Ukrainian regions

The Russian government’s program to restore Ukraine’s Donetsk, Luhansk, Kherson, and Zaporizhzhia regions, which it annexed, was originally slated to receive 232.9 billion rubles ($2.6 billion) in 2024. Later amendments increased funding for the program by several tens of billions of rubles (equal to hundreds of millions of dollars) by reallocating money from the budget’s classified section.

Twenty-four billion rubles ($271.9 million) will be designated to support people whose homes were destroyed or damaged by the war; three billion ($34 million) will go to restoring power grids; 2.2 billion ($25 million) is earmarked for the development of the coal sector in the Donetsk and Luhansk regions; and 3.9 billion ($44.2 million) is set to go towards recapitalizing local industrial development funds.

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Increased subsidies for state-owned companies

By redistributing expenditures from the classified section of the budget to the unclassified section, the government also increased subsidies for state-controlled companies.

For example, funding for the transport of agricultural and food products will increase from eight billion rubles (90.3 million) to 11 billion rubles ($124.2 million).

Fifteen billion rubles ($169.3 million) was reallocated to banks to subsidize preferential auto loans. In 2024, more than 17 billion rubles ($191.9 billion) will go towards these loans; in 2025, more than 23 billion rubles ($259.7 million) will; and in 2026, they’ll receive more than 24.7 billion ($278.9 million). In total, 65 billion rubles ($733.8 million) will go to preferential car loans over the next three years compared to the initial proposal of 50 billion ($564.5 million).

Additionally, the amount of money designated for preferential leases in 2024–2026 will increase from 10 billion ($112.9 million) to 31 billion ($350 million). Subsidies for the purchase of natural gas vehicles will increase by a factor of 1.5, reaching 16.7 billion rubles ($188.5 million).

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A modest increase in healthcare funding

Lawmakers marginally increased spending on several items popular among voters: they designated an additional six billion rubles ($67.7 million) for the purchase of medications for patients with cardiovascular diseases and another three billion rubles (33.9 million) for children’s recreation and health.

An increase in funding for law enforcement salaries

Another notable change the Duma made in the federal budget is the indexation of salaries for security officers. The initial budget draft included provisions specifying that law enforcement salaries would not increase. By the State Duma’s second reading, however, lawmakers decided to remove these provisions, evidently taking care to preserve the loyalty of the country’s security apparatus in an election year.

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Did anyone argue against spending so much on the military?

No — at least not openly. But some lawmakers did publicly criticize the decrease in spending on categories such as infrastructure as well as the inadequate funding on specific social programs.

Some State Duma deputies demanded certain rejected amendments be put to a separate vote. For example, Communist Party deputies Mikhail Matveyev and Nina Ostanina proposed increasing funding for housing for orphans, arguing that the program has been receiving only 10 billion rubles ($112.9 million) annually for years and that this amount should increase to 30 billion rubles ($339 million).

Finance Minister Anton Siluanov opposed these amendments, saying there’s insufficient money for it in the Federal Treasury. State Duma Budget Committee chairman Anton Makarov added that simply maintaining funding for the program at its current level is a challenge on its own. The amendments were ultimately voted down.

Other deputies proposed allocating additional funds for the resettlement of citizens living in dilapidated housing and people living in the Far North, as well as funding for fighting forest fires. These proposals were also rejected.

Broadly speaking, however, lawmakers supported the proposed budget. The bill was approved by the leaders of all party factions except the Communist Party leader, Gennady Zyuganov. Though he did advocate for an increase in spending on the war, he ultimately refused to support the budget due to the reduction in spending on the economy.

Is anyone worried about running out of money?

When the budget was first submitted to the State Duma for discussion, economists criticized its authors for being too optimistic. To cover the increased military expenses laid out in the bill, Russia’s Federal Treasury will have to take in 35 trillion rubles (about $395 billion) in revenue — 22 percent more than it received in 2023.

Anton Siluanov explained that the funding will come from the introduction of export duties, the improvement of indirect tax collection processes, and an increase in excise taxes on tobacco and wine.

Nonetheless, analysts from the Telegram channel MMI referred to the budget revenue estimate as an “artistic rendering based on strategic objectives.” If Russia’s economy does worse than forecasted, the budget could fall short by up to one trillion rubles ($11.3 billion), according to Denis Popov, an analyst at the government-owned bank Promsvyazbank. The Audit Chamber estimated the potential shortfall at 119.3 billion rubles ($1.3 billion) in 2024, 129 billion rubles ($1.5 billion) in 2025, and 151.7 billion rubles ($1.7 billion) in 2026. Andrey Baturkin, an auditor with the agency, called the expectation of an increase in the VAT collection rate “excessively optimistic,” noting that the rate is already at 95 percent.

During the bill’s first reading, Alexander Demin, a deputy from the New People party, asked Siluanov what the government plans to do if expenditures don’t increase as expected. “In any event, all of the obligations outlined in the budget will be financed either through revenues or through other sources,” the minister responded.

An economist from a major investment firm told Meduza that one method the government may employ to meet its budgetary goals is an increase in taxes on businesses.

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Already in the works

The Russian authorities are already discussing a tax hike for businesses. On November 15, members of the Russian Union of Industrialists and Entrepreneurs (RSPP), a lobbying group for major businesses, met with Vladimir Putin at his residence in Novo-Ogaryovo.

One of the issues the businessmen were most concerned about is the stability of their tax load. Rather than discussing the maintenance of the tax rate at its current level, they asked about its predictability.

RSPP chairman Alexander Shokhin said that he would be open to a tax increase in exchange for long-term predictability in the government’s tax policy. He proposed that the government raise the corporate income tax rate (which is currently at 20 percent) while simultaneously guaranteeing the stability of other taxes and fees, including customs duties, tariffs for natural monopolies, and others.

So far, the government has only resorted to one-time contributions from enterprises. For example, part of its revenues next year will come from export duties (which contribute around 750 billion rubles, or $8.5 billion, to the budget) and a windfall profits tax (which is expected to yield approximately 300 billion rubles, or $3.4 billion).

Russia’s businesses have likely come to terms with the inevitability of further withdrawals from their profits to supplement the national budget. Absent any better alternatives, business owners want to make the size of the payments more predictable and less painful, which is why they’re currently doing their best to negotiate tax increases.

“Entrepreneurs no longer have the feeling that things will be easy, but the conversation ended with applause,” said one person who attended the meeting with Putin, according to the Russian newspaper Vedomosti.

Explainer by Artur Arutyunov

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