30/4/17: Did Russia Really Cut 2017 Defense Budget by a Quarter?

Headline figures from the Federal Treasury of the Russian Federation show a budgetary cut to the country defense spending of a whooping 25.5% y/y for 2017: from RUB3.8 trillion (USD65.4
billion) to RUB2.8 trillion.

However, the headline figure of 25.5% is misleading, because it is based on a fiscal defense allocation in 2016 that includes the federal funding for defense industry debt reductions.

Let me explain.

Russian defense budget (excluding debt payments) in 2016 was RUB3.07 trillion. Debt payments added ca RUB700-800 billion to that amount. Which means that 2017 defense allocation represents a decline of just 7% on 2016 actual defense spending figure, slightly deeper cut, but still in line with previously budgeted 6% reduction. In other words, relative to October 2016 projections for 2017, latest budgetary proposal is to reduce defense spending by an additional RUB230-240 billion, not by RUB1.06 trillion associated with 25.5% cut figure.

Since the start of 2014 economic crisis, and the associated funding crisis (relating to sanctions against a range of Russian lenders and corporates), Russian defense sector has suffered from sustained debt pressures. In December last year, the Ministry of Finance, made a one-time payment to defense contractors to reduce their commercial debt levels, amounting to between RUB700 and RUB800 billion. The range of numbers that reflects timing of payments and exchange rates used, plus rounding differences.

Multi-annual budgetary framework implies that on top of 7% cut in 2017, defense budget will also face reductions of 3.8% in 2018 and 4.8% in 2019. On top of this, the reductions in 2017-2019, even if implemented (a big if) come on foot of Russian defense spending expansion in 2011-2014 that saw nominal defense spending rising at almost 20% per annum. Even with a 7% cut, 2017 defense spending will still be some 14.4% above 2014 levels (in nominal terms).

Based on the ludicrous mistake of including one-off debt repayment into defense budget figures, the Stockholm International Peace Research Institute (SIPRI) - a defense spending watchdog - reported that "Russia increased its spending by 5.9 per cent in 2016 to $69.2 billion, making it the third largest spender. Saudi Arabia was the third largest spender in 2015 but dropped to fourth position in 2016. Spending by Saudi Arabia fell by 30 per cent in 2016 to $63.7 billion, despite its continued involvement in regional wars." Even though the same report admits that "late in 2016 actual spending was pushed substantially higher by a decision to make a one-off payment of roughly $11.8 billion in government debt to Russian arms producers. Without this debt repayment, Russia’s military spending would have decreased by 12%".

This, in the nutshell, is the circus that is 'analysis' of Russian data: with actual spending down, and amounting to ca USD57.4 billion, Russia is still behind Saudi Arabia in terms of military expenditures. The one-off payment of debt in the State Owned semi-commercial military suppliers, hardly represents an expenditure that materially increased Russian army, navy of its airforce, in as much as, say Greek debt restructuring did not materially increase country investment or output. But, the narrative of 'Bad Kremlin is beefing up its military to start WW3' is simply too delightful to pass.

Thing is, personally, I am not a fan of either increasing spending on the military (for any country, including Russia) or subsidising debt loads of State (or private) enterprises. However, if we are to bother reporting fiscal spending across specific programmes, debt relief is not equivalent to increased spending on core programmes relating to defense. It's a waste of taxpayers' resources. But it is not a waste that has gone into funding new bombs or howitzers.