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Never in modern history has Russia had such a budget.”
“This is the first real wartime budget.”
“For the first time in Russia’s modern history, military spending will exceed social spending.”
“The Kremlin has set its priorities, and number one among them is war.”
These are just some of the comments after the first details emerged of Russia’s draft budget for 2024 and the three-year fiscal framework until 2026. They were approved by the government last week and are expected to go to parliament for discussion this week. The press center revealed only the most general parameters, because for the first time the secret part of the law reached nearly 30%.
But journalists from “Bloomberg” were among the first to get the details, even as the final preparations were being made by the ministers last week, and then additional details were shared by the “Financial Times”, “Reuters” and others. The structure shows that Putin is increasingly setting up the economy for a protracted war (defense spending as the main driver of growth), dependent on imports and subject to high inflation.
Here are the key cost highlights (for euro equivalence, ruble data can be divided by 100; the exchange rate yesterday was 102 rubles to one euro):
Military expenditures (per “National Defense”) in 2024 will amount to 10.8 trillion rubles. This is almost 70% more than Russia will actually spend on defense in 2023 ($6.4 trillion, according to Bloomberg) and 2.3 times more than in the first military year of 2022 ($4.7 trillion). 10.8 trillion rubles is approximately 6% of GDP or more than 50% more than the 3.9% share planned for defense spending in 2023 and three times more than the last pre-war year (2021). This ratio is comparable to US spending on defense in the 1980s, at the last peak of the Cold War (after 1988, the US never spent more than 6% of GDP on this purpose). Russia is still far from the USSR, which officially allocated 12-14% of GDP to defense. Social spending will also increase (per “Social Policy”) – but not so sharply: from 6.5 trillion rubles in 2023 to 7.5 trillion in 2024 (an increase of approximately 15.4%). An almost nominal – but still growth – is planned for the “National Security” section, which takes into account the costs of law enforcement and intelligence services – from 3.2 to 3.5 trillion rubles.
Russia’s economy is overheating due to war spending and arms production
Of the three remaining major sections of the budget, spending on one (“National economy” – where state investments and business subsidies are taken into account) will be reduced from 4.1 to 3.9 trillion rubles. The remaining two areas – healthcare and education – will remain unchanged: 1.6 and 1.5 trillion rubles, respectively.
In other words, Vladimir Putin plans to spend three and a half times more on defense than on the health and education of Russians. Or about 7 times more than either of these two feathers in the budget.
This “space growth” of the military and other expenses must be ensured with seemingly incredible revenues in the budget without sacrificing anything else in the expenditure part Collecting almost 9 trillion. rubles more compared to 2023, the ministers planned, and this is a growth of as much as 34% (from 26.1 to 35 trillion rubles.), based, according to economists and analysts, on overly optimistic forecasts for budget revenues and expenses (36.6 trillion rubles or $383 billion, up 25.8% year-on-year)
11.5 trillion rubles in revenue must come from oil and gas (8 trillion are planned for 2023) at an average annual price of Urals oil of $85 per barrel. But annual natural gas exports for 2023-2025 are expected to decline by almost 40%.
The average rate of the dollar in 2024, according to the forecast, will be 90.1 rubles. GDP should grow by 2.3% next year (and not less than 2% in 2025-2026) is the optimistic forecast of the Ministry of Economy. The current forecast of the Central Bank is clearly more modest – for 2024, it promises 0.5-1.5% GDP growth and a price of Urals of 60 dollars per barrel. Next year’s budget deficit is planned to be reduced – from 2% of GDP (planned for 2023) to 0.8% of GDP (or a drop from 2.9 trillion rubles to 1.6 trillion rubles).
The current budget is estimated at 29.4 trillion. rubles of expenses for 2024 (and 29.2 trillion for 2025), and the new draft budget increases the forecast to 36.6 trillion rubles next year (34.4 trillion for 2025), or an additional 7.8 trillion. rubles for 2024
Compared to the current three-year framework, revenues should increase by 29% and expenses by 24% next year. In 2025, they should be, respectively, +20% and +18%.
In an attempt to control the shortage of fuels, Moscow banned the export of gasoline and diesel indefinitely to almost every country in the world.
Where will all the necessary money come from?
First, it makes it inevitable that inflation will continue to accelerate (by the end of 2023 it should be 7.5%) and the Central Bank will maintain a high interest rate (in August the ruble crossed the psychological threshold of 100 for 1 dollar and Bank of Russia extraordinarily raised the interest rate from 8.5% to 12%, and then to 13%), The Bell and RBC write. And second, it almost inevitably means new taxes – and the authorities are already moving in that direction.
The nominal growth of budget revenues will be facilitated by the already occurring weakening of the ruble and the already open talk of introducing restrictions on the export of national currency with the risk of creating an internal and external market for it, similar to the Chinese model of “offshore” yuan and such for internal payments.
The offshore yuan is used in auctions in Hong Kong, Singapore, etc., and the exchange rate for it is determined by the market, for the latter, the central bank of China sets a reference rate with a 2% fluctuation band every day.
Restrictions on the export of rubles were proposed in an interview on September 11 by Andrey Kostin, the president of the large state-owned bank VTB, because it was not normal for someone to export as many rubles as he wanted, convert them into currency and return them back: “It just needs to be understood that we do not live in peaceful times. Some additional actions (to support the ruble) are needed compared to what we are used to”. Why someone abroad would be interested in buying millions and billions of rubles, he did not explain.
The governor of the central bank, Elvira Nabiulina, reacted coolly and called the ideas of restrictions on the withdrawal of rubles from the country ineffective. According to her, the transfer of funds abroad “in itself does not create a demand for currency”, but “occurs at the moment when this currency is purchased”. “This search [на рубли] it can only be influenced by increasing the attractiveness of the ruble as a store of value”. Nabiulina also does not believe much in the meaning of the return of the obligation for businesses to sell part of their income in foreign currency (the so-called budget rule announced recently in new parameters from Finance Minister Anton Siluanov).
But on Monday, September 25, Economy Minister Maxim Reshetnikov nevertheless proposed an analogue of the “Chinese model” as “a kind of membrane between the internal and external ruble markets.” The minister hastened to specify that this is a position exclusively of the ministry, which is being discussed with the central bank, and that it is not about two rates of the national currency. “We need to track how many rubles circulate abroad, how they get there, what amount is exchanged for another currency and whether they are used in stock market games against the ruble. At the moment we do not have such a tool,” added Reshetnikov.
The effect of transfers under the budget rule (a threshold of 60 dollars per barrel, where all revenues above it go to the budget, and those below it – to the so-called state Fund for National Welfare). Alexander Isakov – the chief economist for Russia at Bloomberg Economics estimated additional budget revenues at 1.5 trillion. This is very, very far from the planned 9 trillion. rubles.
The government directly hinted these days how it will get them: from October 1 until the end of 2024, it introduces new fees for exporters, i.e. indirect tax for export-oriented enterprises. Depending on the exchange rate of the ruble, it will be 10% for fertilizer producers and 4-7% for all other industries. At an exchange rate of 80 rubles per dollar and below, this fee will be reset (but, as mentioned above, the forecast of the Ministry of Economy next year is for an average annual rate of 90.1 rubles per dollar; currently the dollar is worth 96.2 rubles). Neither the business nor the central bank participated in the discussion of this measure, claims The Bell.
Other revenue options – apart from raising taxes – are almost non-existent. Domestic demand is likely to slow or stall because of high interest rates, without which inflation risks spiraling out of control, especially with a planned 26% increase in budget spending.
No sharp movements are expected until the presidential elections with a known result in March 2024. Unpopular measures may then follow.
Annual natural gas exports for 2023-2025 are expected to decline by almost 40%