Russia is running out of cash

As the Russian government tries to put together its budget plan for 2013-2015, it is clear that it cannot possibly meet all its pre-election promises. Dmitry Travin looks at the financial crisis facing the country (photo RIA Novosti Agency).

The Russian government’s draft budget plans for the next three years have already run into trouble. For the first time in his twelve years at the helm, as president, prime minister and now again president, Vladimir Putin has strongly criticised some of his ministers for failing to allocate finance for certain important initiatives. The Minister for Regional Development, Oleg Govorun, was so offended by this that he even handed in his resignation (although it has not as yet been accepted). And although the row has not escalated into a serious political crisis, it should be read as a symptom of problems that might prove intractable in the not too distant future.

'Some ministers were formally reprimanded for this dereliction of duty, others got off with a tongue-lashing from the president, after which they all, unsurprisingly, found the extra cash.' 

Putin’s chief criticism was focussed on the budget plan’s lack of provision for the development of Russia’s Far East and the reform of the country’s pension system. Some ministers were formally reprimanded for this dereliction of duty, others got off with a tongue-lashing from the president, after which they all, unsurprisingly, found the extra cash.

The crisis is apparently over. There is however, one small, but important, detail. There are no planned reserves in this budget. The government has not been able to cut any areas of expenditure, and has been forced to find extra sources of finance for its plans. Specifically, it has seized 95% of the assets of Rosneftegaz, the holding company created in 2004 to facilitate state control over Russia’s oil and gas monopolies and headed by Putin’s old friend Igor Sechin.  PM Dmitry Medvedev has probably taken this step with great pleasure, since he and Sechin have not been the  best of friends for some time. 

Putin has had no choice but to go along with this, since it is his numerous demands on the budget that have made drafting it so much more difficult than in previous years. In the first place, the budget needs to finance a significant growth in the real disposal incomes of Russians, since Putin’s popularity depends on this. Secondly, it has to cover an increasing amount of military expenditure, as Russia attempts to challenge the USA and makes hawkish statements on such issues as the European based American Anti-Ballistic Missile system. Thirdly, with the regime fearing the spread of mass protests on the streets of the capital, a large sum must be factored in for the police. Fourthly, the budget deficit needs to be minimised, given that the situation in the countries of southern Europe serves as an awful warning of the dangers of any serious discrepancy between income and expenditure. Finally, fifthly, Putin is very aware that some of the revenue from high oil prices must be kept in reserve, since the present, advantageous to Russia, state of the global market could change at any moment.   

In other words, demands on the budget are growing apace, and will need to continue to grow at the same rate if Putin is to remain in power. But at the same time it becomes more difficult every year for the Russian economy to meet these demands and provide the government with the money it requires. Conflicts over budget plans are therefore also likely to grow, and Putin’s anger may be directed not at individual ministers, but at the government as a whole and even at Dmitry Medvedev, who heads it.

The roots of the problem

This issue goes back in fact to the beginning of the 2000s, when Putin secured his authority by putting a lot of money into increased pensions and public sector salaries. Compared to the problems of the 90s, the start of the Putin era seemed to many Russians like a golden age. It was of course not difficult to increase people’s living standards when oil prices were shooting up and the economy was booming. It was, however, more difficult to maintain these gains after the crisis of 2008-9, when the economy collapsed in the wake of falling oil prices.

'The voters support Putin only because they don’t see any alternative, but they soon will if the Kremlin stops filling their pockets with cash on a regular basis.' 

The situation called for a prioritisation of spending needs, to avoid a future financial crisis, but the Russian government proved incapable of doing this. In the short term Putin showed himself to be a responsible politician by setting up the Stabilization fund of the Russian Federation in 2004, to accumulate reserves in times of economic growth, which would then be used to help balance the books in harder times. And the Fund did indeed save the country in the crisis of 2008-9. However, Putin shied away from addressing the longer term problem of how to reconcile the growth in government expenditure with the real potential of the post crisis Russian economy.

Putin is of course well aware of the extent to which his personal popularity depends on the growth of Russians’ real disposable income. And this dependence is in itself growing. If in the past one could find lots of Putin ‘fans’ among the public, people who would love him through thick and thin, more recent polls show that this has changed radically over the last few years. The voters support Putin only because they don’t see any alternative, but they soon will if the Kremlin stops filling their pockets with cash on a regular basis.

Military spending – why try to keep up with the US?

In this situation, the optimal solution would probably be to increase social spending and cut the military budget. It is clear to everyone that Russia cannot maintain parity with NATO (especially on its own). Increasing expenditure on armed forces is totally senseless in the post Soviet era, when Russia has embraced the capitalist system which Soviet marxists used to regard as the enemy. But Putin has none the less decided to put enormous amounts of money into its defence budget.

It is difficult to say why he took such a strange step. Perhaps the Russian government feels that, with the danger of the protest movement getting out of control, the military should be better paid. But if this is the rationale, why then spend large sums on strategic arms systems which will never match US capability? And in any case, if the priority is to maintain the viability of the present government, it would make more sense to cut the army to a minimum, leaving a core of highly paid regular forces to secure the continuance of the regime. 

'If the priority is to maintain the viability of the present government, it would make more sense to cut the army to a minimum, leaving a core of highly paid regular forces to secure the continuance of the regime. ' 

Perhaps Putin, listening to the ideas of certain economists, imagines that expenditure on the military will provide the stimulus for general economic growth, by creating a momentum for the development of a wide range of high tech production that will increase the international competitiveness of the Russian economy. This view is however also highly debatable. The last few years have shown that large injections of government cash stimulate not cutting edge technology, but massive corruption, since there are no mechanisms in place to prevent people just pocketing the money. And Putin must be aware that this is the case.

If the priority is to maintain the viability of the present government, it would make more sense to cut the army to a minimum, leaving a core of highly paid regular forces to secure the continuance of the regime. 

A final thought is that perhaps Putin’s common sense has simply let him down. After his many years in power, he would like to see himself as one of the top global movers and shakers determining the future of the world.  Hence his determination that Russia host the Asia-Pacific Economic Cooperation summit earlier this month and the Winter Olympics in 2014, not to mention the football World Cup in 2018 – all of which represent a major drain on the Russian treasury.

The most likely explanation for increased military spending is, however, that it is an unforeseen consequence of the popularity contest between Putin and Medvedev in 2010-2011. Medvedev, hoping that the elites would support his hopes for a second presidential term, cultivated the military and promised them incredible levels of funding. And Putin obviously could not openly say that this was vote-chasing claptrap and that the cupboard was bare. As a result, the present draft budget is the victim not only of the rapid rise in the real income enjoyed by the Russian population in the years before the 2008-9 crisis, but of the power struggle played out in 2010-11.

'The present draft budget is the victim not only of the rapid rise in the real income enjoyed by the Russian population in the years before the 2008-9 crisis, but of the power struggle played out in 2010-11.'

The first clear sign that Russian budget plans might be heading for a crisis was Finance Minister Aleksey Kudrin’s resignation almost exactly a year ago. By resigning, the man who undoubtedly understood recent Russian budget policy better than anyone else gave a clear message that the government was about to hit serious trouble if it couldn’t drastically reduce its expenditure.

The present stand off between Putin and the members of his government confirms the seriousness of the situation. On the other hand, Kudrin himself has been recently noting that the government is putting its most populist decisions on hold. But the question still remains: how in the foreseeable future is it going to make ends meet?  

About the author

Dmitry Travin is Research Director at the European University in St. Petersburg's Centre of Modernization Studies.

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Ministry of Finance of the Russian Federation, official website

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