Russia doubles defence spending for 2023

(Patria) - Russia has doubled its target defence spending for 2023 to more than $100 billion, a third of all public expenditure, a government document reviewed by Reuters showed, as the costs of the war in Ukraine rise and increasingly strain Moscow's finances.

The figures shed light on Russian spending on the conflict at a time when data on budget expenditures for individual sectors is no longer published. They show that in the first half of 2023 alone, Russia spent 12%, or 600 billion roubles, more on defence than the 4.98 trillion roubles ($54 billion) it originally planned for 2023.

Defence spending in the first six months of 2023 amounted to 5.59 trillion roubles, 37.3% of the total 14.97 trillion roubles spent in that period, the document shows. Russia's budget plan allocates 17.1% of total funds to "National Defence".

Rising war costs are supporting Russia's modest economic recovery this year with higher industrial output, but have already pushed budget finances into a deficit of about $28 billion - a figure exacerbated by a drop in export revenues.

Higher defence spending could further increase the deficit, while increased production could threaten other sectors and crowd out private investment.

Reuters calculations based on the document showed that Russia spent on defence in the first six months 19.2% of all originally planned budget expenditures for 2023.

The last publicly available data shows that Moscow spent 2 trillion roubles on the military in January and February. In the first half of this year, budget expenditures were 2.44 trillion roubles higher than in the same period of 2022. According to the document, 97.1 percent of that additional sum was directed to the defence sector.

The document provides a new estimate of annual defence spending of 9.7 trillion roubles, which is one third of the total target spending of 29.05 trillion roubles, which would be the largest share in at least the last decade. Between 2011 and 2022, Russia spent a minimum of 13.9% and a maximum of 23% of its budget on defence.
Russia has already spent 57.4% of its new annual defence budget, the document shows.

Full capacity?

Military production has led to a strong recovery in industrial output, and analysts say state defence contracts have been a key driver of Russia's economic recovery to GDP growth so far this year from a contraction of 2.1% in 2022.

Specific defence funding falls under closed expenditures, but some data, although no longer public, is distributed. For example, the document shows that Russia spent nearly 1 trillion roubles on military salaries in the first half, 543 billion roubles more than in the same period last year.

Deputy Prime Minister Denis Manturov said in July that the defence industry now produces more ammunition every month than in the entire year of 2022.

Funding for schools, hospitals and roads has been cut this year in favour of defence and security, but as the share of defence spending rises, other areas could face cuts.

"The military-industrial complex enables industrial growth, 'civilian' industries are slowing down again," said Dmitry Polevoy, head of investment at Locko-Invest, following last week's industrial output data for June.

Economist at CentroCreditBank Yevgeny Suvorov said the military industry is operating at full capacity. "We do not know what the potential is for further increasing the production of tanks and missiles," Suvorov said. "But we know that further increases in this production are possible only at the expense of bleeding more personnel from other sectors of the economy."

As a major exporter, Russia usually records budget surpluses, but will post a deficit for the second consecutive year, with the value of energy exports falling 47% year-on-year in the first six months.

Higher budget spending increases the risk of inflation. The central bank raised interest rates to 8.5% in July, and analysts expect borrowing costs to continue rising.

The Bank of Russia forecasts GDP growth of 1.5%-2.5% this year. The International Monetary Fund in April forecast growth of 0.7% this year, but with global isolation set to dim Russia's prospects in the years ahead.

"Abundant fiscal 'steroids' are helping quite well for now, but they hardly improve the medium- or long-term position of the economy," Polevoy said. "As soon as fiscal consolidation becomes inevitable, there will be a rapid slowdown of the economy," he added.