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ruble sign-on bonus. “The Ministry’s spending on salaries for servicemen, which was estimated at 1.5 trillion rubles... is now likely to be close to 2 trillion,” an official told The Bell.
2. Defense spending drives growth
The Kremlin has doubled-down on using the defense sector to drive Russian economic growth. For example, between January and April, manufacturing grew 5.2%. A significant part of that growth stems from defense and related sectors, including finished metal products, computers and optics, and vehicles from aircraft to ships and trucks.
For defense sector spending to be an effective driver of growth, there needs to be demand. Obviously, a drawn-out war in Ukraine provides this demand. Even after the war finishes, though, Russia will need to continue spending in order to replenish its stockpiles.
This suggests that military spending will remain high well beyond 2025. At some point, domestic demand will dry up. One way to compensate for this could have been export, but this is unlikely to be an option for Russia. As their output increases, Russian enterprises will need to replace equipment: Russia is already scouring China for second-hand machines. The parts needed for hi-tech military manufacturing are also scarce due to sanctions: chips, semiconductors and circuit boards are a problem. As a result, given a choice between exporting items or producing them for use by its own military, Russia countries will prioritize domestic needs.
3. Inflation and a tight labor market
Rising spending will also be driven by inflation, and high labor costs. Both high interest rates (currently at 16%) and reduced imports due to Western sanctions will push inflation higher. And there’s no sign of a slowdown in the growth of credit, or consumer demand, which means inflation could remain at present levels or rise even further. Between January and May, state spending was up 18%. Salaries in March increased 21.6% year-on-year in nominal terms, and 12.9% in real terms. Deputy Prime Minister Denis Manturov estimated in February that, in the defense sector, some salaries were up as much as 60%. A sales manager at a defense ministry contractor can earn up to 1.6 million rubles a month, according to a vacancy on Headhunter, Russia’s leading online recruitment site.
Unemployment is currently at a record low of 2.6%, with defense enterprises leading the way in hiring, and turners, machine operators and mechanics able to boost their pay by as much as 70,000 rubles a month if they switch to the defense sector. In addition, the defense sector promises staff additional benefits: increased overtime, bonuses for working with classified information, preferential loans, healthcare packages and vacations. Of course, the mobilization of 300,000 men in 2022 and 2023 negatively impacted the labor market. Moreover, the high cost of labor reduces the profitability of the military industry.
4. Inefficient command economy
Russia’s defense sector is a long way from operating along free market lines. This is due to several factors: a persistent Soviet management mentality,
26 RUSSIA Country Report July 2024 www.intellinews.com