Page 34 - bneMag Oct23

34 I Cover story bne October 2023
Russia retail turnover (inc. cars) change y/y
Defence spending is being raised
by almost 70% next year as Russian President Vladimir Putin makes it increasingly clear he is preparing for along war. With Moscow's "special military operation" now dragging through its twentieth month, both sides have been digging deep and procuring weapons from allies in preparation for a protracted conflict.
The announcement came as Nato chief Jens Stoltenberg and the defence ministers of Britain and France visited Kyiv, where President Volodymyr Zelenskiy lobbied for more air defence systems.
"We need to get through this winter together, to protect our energy infrastructure and people's lives," Zelenskiy told Stoltenberg, warning of a fresh campaign of Russian strikes after last year's strikes left millions short of water and heating. Ukraine has invested $2.3bn in the restoration and defence of its energy infrastructure ahead of winter which is due to start in the next month or so.
Defence spending in 2024 is also set to total around three times more than education, environmental protection and healthcare spending combined, according to AFP calculations.
"The focus of economic policy is shifting from an anti-crisis agenda to the promotion of national development goals," the Finance Ministry said in budget draft document.
While the military spending will bring
a short-term boost to Russia’s economy, analysts say the distortion in investment goals will lead to long-term stagnation. But Putin and other high officials have largely shrugged off the economic effects of the Ukraine offensive, arguing that Russia has weathered the storm of Western sanctions and will deal with the stagnation problems later.
Russia's Central Bank warned this month that economic growth was set to slow in the second half of 2023, while ordinary Russians feel the pinch from rising prices that will probably get worse in the coming years.
Source: Rosstat
The share of rubles in Russian exports totalled 41% in July, while in August and September it may grow even higher, Reshetnikov said at a plenary session of the Moscow Financial Forum.
“We are expanding the network of direct correspondent accounts in the national currencies between the banks of Russia and the friendly countries, and the list of the currencies of the friendly countries that are trading on the Moscow Exchange,” he said.
The government and the central bank also prepared a step-by-step plan for launching trans-border settlements through the blockchain technology with utilization of digital financial assets, he added. Russia launched a digital ruble pilot scheme in the middle of August that could eventually provide an alternative to international trade settlements that by passes the SWIFT system.
Huge defence spending hikes
Of course the war in Ukraine was lurking behind all the gushing statements on the good economic performance and has massively distorted the nature of both the economy and state spending. Where the private sector and consumption were driving the economy two years ago, now it is state procurement and investment that are the engine of Russia Inc’s growth.
The latest 2024 budget includes massive increases in military spending that
has overtaken social spending for the first time. Russia approved its first full wartime budget for 2024 on September 23 that sees a whopping 1.7-fold increase in
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military spending to RUB10.8 trillion ($112bn), or 6.8% of GDP, up from RUB6.4 trillion and more than the RUB7.5 trillion earmarked for social spending.
An increase in Russia’s defence spending is an “absolute imperative,” Russian Presidential Spokesman Dmitry Peskov has said.
"It is obvious that such an increase is absolutely necessary, because we are
in a state of hybrid war that has been unleashed against us. We are continuing the special military operation, and this requires great spending," Peskov said about the draft budget.
Russia’s spending on defence is more than triple Ukraine’s UAH1,164bn ($32bn), or a whopping 20% of GDP. Clearly, Russian President Vladimir Putin intends to go all out against Ukraine in 2024 and is preparing for a long war.
To finance these huge expenses the government will have to find an additional RUB7 trillion in revenue from somewhere compared to 2023. That means inflation will inevitably accelerate and the Central Bank of Russia (CBR) will before to keep growth-killing interest rates high, hence the forecast for slowing growth in the next could of years. But Siluanov told the forum that the funds reserved in the draft budget for the next three years would be enough for all planned purposes.
He added that the slogan "Everything for the front, everything for victory" was among the budget’s priorities.