Russia’s wartime economy and defense spending could make it weaker | Wilnesh News

Analysts say Russia’s war-oriented economy and unprecedented military spending plans could exacerbate serious imbalances within the government’s finances.

The Russian government under Prime Minister Mikhail Mishustin last week approved a draft budget for 2025-2027, which foresees a significant increase in defense spending to 13.5 trillion rubles ($145 billion) in 2025, an increase from 2024 levels 25%, accounting for 6.3% of total expenditures and gross domestic product (GDP), According to a draft document translated by Reuters.

Since launching a full-scale invasion of Ukraine in 2022, Russia has transformed its domestic economy, putting it on a war footing as it looks to significantly increase military production and circumvent international sanctions, which have largely prevented it from procuring military supplies elsewhere. Equipment, parts and weapons.

Russia’s military-industrial complex powers an insatiable war machine; As a result, the area has grown significantly in size since the beginning of the war.

The draft budget shows that in 2025, defense and security expenditures will account for about 40% of the Russian government’s total expenditures, demonstrating Russia’s commitment to fighting a war in Ukraine. It is worth noting that Reuters pointed out that defense spending will be more than twice the allocation for social needs such as pensions.

As a result, analysts say the latest spending plan shows an ambitious and aggressive Russia determined to continue its war on Ukraine, but also poses risks at home as the Russian economy and people’s living standards decline while consumer prices remain high. Too high.

Andrews said: “The intention to maintain military spending at similar levels until 2027 sends a signal that the country has sufficient financial resources and political will to continue to expand and reorganize the country’s armed forces, which is consistent with Ukraine’s This contrasts sharply with the increasingly uncertain outlook in the West.

“(But) despite confident political rhetoric and optimistic forecasts, further militarization of the economy supported by expansionary state spending may be unsustainable in the medium to long term,” he noted.

Tursa said the economy is already operating at capacity and Russia is vulnerable to continued inflationary pressures in 2025 due to labor shortages – given ongoing conscription and the departure of migrant workers – increased government spending and housing and utilities, etc. Various taxes increase tariffs.

Russian Annualized inflation is currently 9.1% The country’s central bank said last month it expected “overall underlying inflationary pressures to remain high” Raise the key interest rate by 100 basis points to 19%.

Liam Peach, senior emerging markets economist at Capital Economics, expects Russia’s budget plans to do little to calm supply and demand imbalances, leading to further price pressures.

“While personal income and corporate tax increases will help fund part of this (the draft 2025 budget), the overall fiscal stance still appears to be too accommodative. In addition to binding supply-side restrictions, this will keep inflation Strong, sovereign bond yields set to remain unchanged The government’s debt-servicing costs will continue to rise, reaching their highest levels in decades, analysis published last week said.

Peach noted that another hike by the central bank to 20% appears more likely, adding: “The broader point, however, is that as long as Russia maintains high interest rates for a long time, it will become the norm.” as the government prioritizes war efforts. .

Tenio’s Tursa said that while Russian authorities may see military expansion as a driver of economic and technological development, unprecedented military spending comes at the expense of investment in other sectors such as education, health care or infrastructure, “This will have a negative impact on the quality of Russia.”

The decline of these areas of public life will lead to a decline in living standards for most Russian citizens, and while it is unlikely to trigger any large-scale public protests now, Tursa warned that “public dissatisfaction with living standards may increase at some point in the future.” “explosion”, especially if Putin’s grip on power begins to slip. “

Despite international sanctions on key Russian industries and sectors due to the war, Russia says Western sanctions have made it more self-sufficient, with private consumption and Domestic investment remains resilient.

Meanwhile, oil and commodity exports continue to countries such as India and China Suspected of evading sanctions and high oil prices, allowing it to maintain strong oil export revenues, which (together with gas export revenues) will account for 27% of total state budget revenues by 2025, Finance Minister Anton Siluanov said.

The International Monetary Fund said in its spring economic outlook that it believed the Russian economy would grow faster than all advanced economies this year, even as Western nations seek to isolate and punish Russia for its invasion of Ukraine. 3.2%.

The IMF’s latest forecast for Russia will be released next week and may have been revised. The Russian budget draft is based on the assumption of GDP growth of 2.5% in 2025.