MOSCOW: Russian authorities are facing some unpleasant options as they try to keep the economy afloat unless they would stop President Vladimir Putin to massive military spending.
Officials fear that without limiting the defense budget, the government will have to raise taxes, increase the pension age or print money to prevent the state deficit from running out of control.
Despite a crisis brought on by diving oil markets and Western sanctions, they believe Russia can muddle through next year provided the price of crude, its dominant export earner, holds near current levels.
But even at $60 per barrel, the present oil price is little more than half what the Kremlin needs to balance the budget, and it is quickly running out of money.
Without radical action, the officials are much less confident about 2016-17 — and even sooner, should global oil prices continue their slide toward $40.
One senior government source expressed concern about the effects of an unchecked deficit on one of Russia’s two funds built up from past oil income.
“If no spending is cut and revenue risks persist, we will have a deficit of 4 trillion rubles. The Reserve Fund will be spent within 18 months,” he said. “In 2016 we will have no resources to meet our budget obligations. Not to mention 2017.”
At current exchange rates, 4 trillion rubles equates to about $70 billion, not far from the $89 billion that the Reserve Fund now holds.
Sanctions imposed by the European Union and United States over Moscow’s role in the Ukraine crisis have deepened the problems: foreign investment is down sharply, more than $100 billion has fled abroad this year, Russian firms and banks have lost access to international capital markets and privatization plans are on hold.
The Central Bank has had to spend heavily from its reserves, which have dropped to just below $400 billion from $510 billion at the start of 2014, to arrest a steep slide in the ruble.
Defense Drain
Spending will be cut 10 percent next year, but Finance Minister Anton Siluanov said last week that this was not enough to balance the budget. Expenditure is dominated by social and defense commitments, and Putin had set military investment as a priority even before the stand-off with the West began when Russia annexed Crimea from Ukraine in March.
Out of total spending of 13.96 trillion rubles (about $250 billion) in 2014, social benefits account for over 33 percent, and defense and security for 32.5 percent.
Next year, military spending will rise to 35 percent of the 15.51 trillion ruble ($265 billion) budget. That means about $100 billion for defense and security at today’s exchange rates.
At the same time, the weaker ruble will lead to higher inflation next year by pushing up import costs, threatening Putin’s reputation for safeguarding Russians’ living standards.
The lion’s share of social spending goes on pensions, and this will rise sharply due a rapidly aging population unless the government takes radical action by raising the retirement age from 55 years for women and 60 for men.
“Without cutting military spending and raising the pension age, we won’t muddle through. What options do we have? Raise taxes and print money, which triggers a downward spiral of inflation and higher interest rates,” the government source said.
