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The war in Ukraine is costing Russia more and more every day, the Russian independent media writes, reporting on the budget deficit for 2022 and the budget for 2023, also referring to the problems facing the industry sector, where the focus is on military production.
THE INSIDER: Because of the war Russians will face health care, housing and utilities budget cuts and currency devaluation in 2023
Russia enters the new year with the most fantastic budget in 20 years - almost no one believes it will be fulfilled. Oil and gas revenues are falling, the national debt is growing, and the reserves, so much cherished during the pandemic, are running out. This time it is not only ordinary Russians who will suffer, but also the oligarchs and the billionaires who will become the main sponsors of military spending. The Kremlin is sparing no expense on the war; 50% more money will be spent on security and law enforcement agencies, while health care and utilities spending will be cut back. Experts believe the government will have to raise taxes again while the ruble exchange rate will continue to decline, which will lead to higher prices in the long run, The Insider writes.
A record deficit: the war has boosted spending
The foundation of Russia's 2023 budget turned out to be fragile: instead of the initially planned $18 billion surplus by the end of 2022, the government will face a record deficit of 2% GDP, or $39 billion. Finance Minister Anton Siluanov had to adjust his estimate of the budget deficit several times during the year. The reason is the war, or the “new challenges” as the members of the Russian government prefer to call it. But even the new estimate is considered to be too optimistic: experts admit that by the end of the year the deficit will rise to 3.5% GDP ($830-920 million, tantamount to 4.5-5 trillion rubles), which is comparable with the 2009 budget of the global financial crisis era.
The Russian budget dynamics in 2022 perfectly demonstrates the appetites of the “new goals”: the positive balance has been evaporating since spring. Increased military spending has been systematically “eating up” the budget surplus: to $19 billion in May, $18 billion in June, $6.5 billion in July, $1.86 billion in August and $0.75 billion in September. The trend reversed in October, due to a temporary increase in oil prices and supply volumes as well as the one-off increase in the mineral extraction tax (MET) for Gazprom.
This maneuver led to a surplus in October ($1.74 billion) and November ($7.55 billion). […]
Spending in December will grow at a faster rate than in 2021: the government is forced to finance military needs and increase social benefits amid economic recession. In November, spending has already exceeded the annual target of $370 billion and reached $340 trillion. Siluanov himself has already stated that by the end of the year, spending will exceed $410 billion - an absolute record. $64 billion will be spent on national defense in 2022, which is almost $16 billion higher than plan. Taking into account the chaotic mobilization, defense spending may reach $75-76 billion.
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The increase is most likely due to military operations, including payments to mobilized soldiers and their families.
Everything for security, nothing for the economy: what will Russia spend money on in 2023?
For next year, the Finance Ministry expects a budget deficit of around $41 billion (2% of GDP), although a year ago it hoped to be in surplus by $4.06 billion. The new version of the budget suggests a $52 billion increase in spending (to $390 billion), while revenue will increase only by $8 billion to reach $350 billion. Contrary to the Russian president's statements about his reluctance to put the economy on military tracks, most of the money will be spent on law enforcement agencies.
Analysts are confident that the real budget deficit next year will significantly exceed the expectations of the Finance Ministry.
“Many factors will influence the size of the final deficit, but according to our basic assumptions and given the spending plan remains unchanged, the final deficit may be in the range of 3-4% of GDP, i.e. one and a half to two times higher. Formally, a larger deficit would mean a more stimulating fiscal policy, which is logical as the economic recession continues. But this scenario may also mean higher inflation and, as a consequence, higher Central Bank refinancing rate, which will be bad for an economy going through structural adjustment,” believes Dmitry Polevoy, Investments Director at Loko-Invest.
Natalia Orlova also expects the budget deficit to grow significantly. According to her estimates, it may reach $41 to $68 billion. […]
Spending on “national defense” and “national security and law enforcement” will increase by 40% and 52%, respectively, compared to what was planned in the previous draft version of the budget. Defense and security spending will reach nearly $130 billion, which is about one-third of all budget expenditures. Compared to 2022, defense spending will increase only slightly, by $4.07 billion, while spending on law enforcement will climb by $22 billion (+58%). The Finance Ministry has not just increased war spending, it also wouldn't say on what exactly the money will be spent: the government has classified a record amount of 2023 spending, about a quarter of it ($88 billion). Besides the traditional spending on uniformed agencies, the authorities wouldn't disclose how much money will be spent on the annexed territories. […]
NOVAYA GAZETA. EUROPE. War and oil
Russia’s industrial sector avoided a crash in 2022 thanks to raw materials and military contracts. Things are not looking up in the future
Russian officials have been insisting since summer that the industrial sector “has shown stability”. The official statistics shows that defense contracts can be largely credited for crafting this illusion. At the same time, the manufacturing of consumer, business, and export-oriented goods has dropped by dozens of percent. Instead, there’s a growing share of classified data which often have military-related goods sewn into it.
Novaya Gazeta.Europe takes a closer look at the Russian industry’s 2022 military turn coupled with factory closures, a hidden unemployment rise, and an imitated import phaseout.
Camouflaged growth
According to Rosstat, Russia’s official statistics office, the national manufacturing industry (constitutes almost a half of the Russian industrial sector in money terms, raw material extraction ranks second) plummeted in the negative zone since March compared to last year. […]
According to the latest official reports, manufacturing grew by 4.9% in October compared to September.
However, if you compare the current numbers with those from last year, the picture becomes very different. Manufacturing shrunk by 0.7% in the first 10 months of 2022 compared to the same period in 2021, October 2022 was 2.4% worse than October 2021, while the decrease between 1 March and 1 November stands at 2.6%.
The influx of military contracts propped up the manufacturing statistics, Investment Director at Loko-Invest Dmitry Polevoy and Moscow State University geography department professor Natalya Zubarevich told Novaya-Europe.
“Output has grown in the last few months in such industries and positions as special clothing, diesel fuel, finished metal products, and electronics. Apart from civilian goods, they also include military-grade products. We can surmise that military expenses influence these industries and offer a more positive picture than that in the industries that solely reflect civilian demand,” Polevoy says.
An analysis of the Rosstat data confirms that the share of military components in manufacturing has grown after the war started. Some of them show abnormal growth when other industries are in free fall.
For instance, production of “finished metal products apart from cars and equipment” grew in October by 4.7% in comparison with the same period in 2021, by 3.6% in the past 10 months, and by 16.5% when compared with September 2022. The output has dramatically jumped in July 2022 by 29.7% compared with last year’s figures.
According to the statistics classification, this category includes manufacturing of weapons and ammo as well as “products with special properties”. Rosstat does not specify what and how many weapons have been produced. […]
Diesel production in October was 5.7% higher than last year’s result and 5.4% higher in the past 10 months. Military hardware, such as tanks, is mainly fuelled by diesel. At the same time, the production of petrol is decreasing; in October there was 6.2% less automobile petrol and 11.8% less straight-run petrol compared with last year.
The production of overalls/uniforms was 2.2% higher in October compared to last year and 40.9% compared to the previous month. In the first 10 months of the year. Production in the first 10 months of the year stood at 28.5 billion rubles. The textile industry went up in October by 11.9% compared to the previous year. According to Sberindex, spending on clothing and footwear suddenly dropped with the start of the war. By mid-December, total spending in this sector was 17.3% lower compared to the previous year.
Rosstat did not publish the share of military equipment reflected in this percentage, although the difference between sales figures and production suggest that military uniforms account for a large share of total clothing production, a figure that steadily increased since the start of the war.
In recent months, output for computers has also risen sharply, and that includes military products, Polevoy notes. Output for “computers, parts and accessories” jumped 61.3% in October from a year ago. […]
Categories with a military component make a significant contribution to the overall statistics on the manufacturing industry, so their growth can overlap the decline in other industries. Such a conclusion can be drawn from the Rosstat data on the turnover of organizations present in these industries.
In October, the figures with military components accounted for at least 18% of the total turnover of organizations in the manufacturing industry. […]
The total turnover of organizations according to this indicator is slightly more than 1 trillion rubles (€12.6 billion). This is more than the metallurgical production (813 billion rubles or €10.3 billion) and chemical production (388 billion rubles or €4.9 billion), and not much less than the largest manufacturing industries: oil refining and coke production (1.2 trillion rubles or €15.2 billion). […]
The fact that (civilian) the manufacturing industry is shrinking does not bear on employees, for the time being we’re not seeing any large-scale layoffs, Natalia Zubarevych argues. “People are shifted on part time, their salaries are cut, but no layoffs are being operated”, the expert says.
This year, the number of employees working part time or limited hours or taking unpaid leave has gone up, representing forms of camouflaging unemployment. […]
In November, Central Bank governor Elvira Nabiullina announced the economy will undergo further economic restructuring over the course of 2023 and in coming years. The manufacturing statistics has so far been propped up by “military” articles and the stable level of oil product production.
However, unlike the “civilian” industries that are in free fall because their development depends on citizen, business, and world market demand, the growth of “military” articles is financed by the budget. Meanwhile, there are already the first signs pointing to the fact that Russia will not be able to maintain the record-high level of military expenditure for a long time.
