(Adnkronos) – Vladimir Putin will have sufficient resources to continue the war in Ukraine, as he has done so far, only for another 12-18 months, while the military sector has launched a strategic restructuring that will last 8-10 years that will have to be fueled significantly, although not necessarily at the levels of next year, when defense spending is expected to exceed six percent of gross domestic product, with a further increase therefore on the record set in 2024, without the accounts being affected.
In recent days, the government has submitted to the Duma the draft budget forecast for 2025 and for 2025-2027. And from these measures it is possible to anticipate Moscow’s plans and possible breaking points – as economists Aleksandra Prokopenko, former advisor to the Central Bank of Russia and researcher at the Higher School of Economics in Moscow, and now a fellow at the Carnegie Russia Eurasia Center, and Alexander Kolyandr, former vice president of Credit Suisse, and analyst at Cepa, did in a podcast produced by Carnegie Russia Eurasia Center.
Military spending is considered the main driver of economic growth now, with indicators to confirm it, but also in the future. This is the thesis of many, including Defense Minister Belousov. But there are other voices, in favor of rebalancing the economy, currently lacking the political strength of the industrial lobby, such as that of the governor of the Central Bank Elvira Nabiullina, who point out the medium and long-term fragility of this model. The Kremlin is setting aside their fears, with the idea of addressing problems as they arise.
But domestic demand for defense is not infinite and it is also possible to calculate when it will run out. Even the prospects for exports are not positive, considering the sanctions. So in 5-7 years the country could face another economic shock, according to Prokopenko. But one thing must be considered: the end of the war against Ukraine does not mean, for Russia, the end of sustained military spending.
Once the ‘normality of this war’ window closes, it will be “increasingly difficult” for Putin, and it is already visible from these forecast budgets, to continue to maintain the status quo, that is, to continue to manage the three variables of the economy affected by the conflict in Ukraine, spending on welfare – which will already decrease next year, albeit not even remotely at the levels of the late eighties and early nineties – funding for defense companies and macroeconomic stability.
The defense budget will therefore also increase in 2025, both in nominal terms and as a share of gross domestic product with the accounts in order. Because in the next year or two, more soldiers will be needed, weapons to replace those used at the front, defense systems and electronics for the defense of civilian businesses.
The Russian government is now able to spend more on the war because it is convinced that it can count on more revenue next year. The flow of revenue not attributable to the sale of gas and oil will increase by 73 percent next year. The surplus will come from the increase in taxes for businesses and incomes launched this year and which will come into force in 2025, from the increase in VAT generated by economic growth and from the cut in the rest of non-military public spending. The surplus will be entirely absorbed by the increase in defense spending: the other items of public spending will decrease. A trend already visible in Russia, with the stop to the construction of new roads and bridges.
The defense sector is operating at maximum capacity to support the needs of the war. But already at the beginning of this year, it reached its limit. This is why restructuring is necessary, to increase production capacity which cannot be financed other than with public funding.
To explain the economic growth, it should be remembered, as Kolyandr does, that traditionally large countries at war see their economies grow, at least at the beginning and until the intermediate phase of the conflict. Among the unforeseen factors that have made the sanctions less effective and contributed to economic growth, there is also the blocking of capital in Russia which, before February 2022, flowed abundantly to the West, where it was used to buy dollars, shares, luxury goods.
Furthermore, Putin and his accounts were saved by the globalization of the economy, which the Russian president criticizes politically but which allows Moscow to evade sanctions. Russia sells oil and gas to non-aligned countries, which do not support economic restrictions against Moscow, as would not have been possible in the 1970s. Now Russia is able to sell its oil and procure microchips elsewhere than in the West.
Among the factors that instead anticipate a crisis to come is the labor market extended to the maximum. With unemployment at 2.4, perhaps even 2.3 percent, it is not possible to increase the production capacity of the military-industrial complex. Also for this reason, it could be very effective, to strengthen the policies of the front of countries that support Ukraine, to promote policies of ‘recruitment’ of Russian personnel in the IT, technology, and science sectors, regardless of their political position as well as even facilitating the return to the flight of capital from Russia.
