Russia plans to increase spending by more than 25% next year

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Russia plans to increase state spending in 2024 by more than 25 per cent compared with this year amid expectations the Kremlin will drastically raise cash for president Vladimir Putin’s invasion of Ukraine.

The draft Rbs36.6tn ($383bn) budget, presented by prime minister Mikhail Mishustin on Friday, lists “strengthening the country’s defence potential” as a key priority alongside “integrating the new regions” partially annexed from Ukraine last year.

The plans also highlight “social support for the most vulnerable” — a sign that the Kremlin intends to boost spending on pensions and welfare ahead of next March’s presidential election, where Putin, who has ruled as either president or prime minister for 24 years, is expected to coast to victory, extending his rule until at least 2030.

Though officials did not say how much of the budget will go on military spending, which is classified, the increase showed “there hasn’t been such huge defence spending in the whole modern history of Russia”, according to Alexandra Prokopenko, a former Russian central bank official.

“This shows that the Kremlin has set out its priorities — and the main priority is the war, followed by social spending and internal security,” added Prokopenko, a non-resident fellow at the Carnegie Russia Eurasia Center. “Putin is betting on an eternal war — the war has become critical for the regime and the economy.”

Bloomberg reported on Friday that Russia planned to raise defence spending to nearly 6 per cent of gross domestic product, an increase from 3.9 per cent this year and 2.7 per cent in 2021, the year before Putin ordered the invasion. Russia’s finance ministry did not respond to a request for comment.

In presenting the budget legislation, various government officials emphasised the additional spending that could be attributed to Putin’s plans for social expenditure, some of which were related to the war.

For example, the budget will support a foundation for those involved in Russia’s “special military operation” and their families, as well as covering classified payouts to injured soldiers and relatives of those killed in battle.

The budget also reflects the grim economic future Russia faces after western sanctions cut it off from global markets and limited its ability to sell energy exports overseas.

Though Putin claimed this week that Russia had overcome western sanctions after emerging from a recession last year, his cabinet’s low expectations for the weak rouble and vague descriptions of how it would raise funds for the huge increases in spending illustrated a bleak future for Russia’s economy more than a year and a half into the war.

Russia’s economy ministry said it was basing its plans on the rouble hovering around Rbs90-Rbs92 to the dollar from 2024 to 2026, as opposed to a prewar average of slightly more than Rbs70.

The draft budget expects Russia to run a deficit of Rbs1.6tn in 2024, while the cabinet acknowledged that it did not expect a surplus in the coming years and forecast a deficit through to 2026.

It also projects budget revenues of Rbs35tn, an increase of nearly 15 per cent from the current budget for 2024, which was approved last year.

“We tried to keep the deficit down as much as possible and foresaw that it will mostly be covered through borrowing,” Mishustin said.

The prime minister claimed that Russia’s revenues from oil and gas, which have in recent years accounted for as much as half of the entire budget, would amount to a third of next year’s total.

But former central bank officials cast doubt on how exactly Russia would fund the spending as western sanctions continue to bite at energy exports.

“The rise in expenses suggested by the law draft isn’t the real surprise; it’s the nearly identical increase in income that catches the eye,” said Sofia Donets, a former central bank official and chief economist at Renaissance Capital.

“It’s hard to explain this uptick in income solely by what’s already been disclosed,” she added.