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Russia has added at least Rbs3.4tn ($37bn) to its budget for this year, further aggravating inflationary risks in an overheated economy and highlighting the ballooning cost of Vladimir Putin’s war in Ukraine.
The finance ministry expects spending to reach Rbs32.5tn in 2024, an increase of almost 12 per cent from the originally planned Rbs29.06tn, according to the latest official data.
The additional spending without a concurrent rise in expected revenues indicates how Putin’s war machine is consuming yet more funds, extending an inflationary spiral that officials admit creates macroeconomic risks for the country.
The increased spending comes despite promises from Russia’s president and other officials that the massive Rbs1.76tn deficit that the Kremlin ran in January was temporary.
Instead, Russia’s budget expenses for October increased by 29 per cent year on year, according to an estimate by Olga Belenkaya, the head of the macroeconomic analysis department at Moscow-based brokerage Finam.
Taking into account how much Russia has already spent, the expenses for November and December could amount to Rbs7.3bn-Rbs8.2tn, or about 23-25 per cent of annual expenses, Belenkaya added.
Without a concurrent rise in revenues, Russia’s deficit is set to increase to Rbs3bn, or 1.8 per cent of gross domestic product, compared to the “one and a bit per cent” deficit that finance minister Anton Siluanov predicted last month.
The new figures are still below the 2 per cent deficit that officials originally planned for this year. That indicates how revenues have recovered recently because of a narrowing of the Urals-Brent discount, a weaker rouble and changes in the taxation of oil exports.
But the budget top-up probably means that the Kremlin has added new, undisclosed spending before next year, when Russia is already planning enormous increases to the defence budget to fund the war.
“Shifting expenditures to the end of the year is a standard curse of the Russian budget system,” said Alexandra Prokopenko, a non-resident fellow at Carnegie Russia Eurasia, adding that this year the finance ministry has sought to solve that problem by moving most of the spending to the first quarter of 2023. But more top-ups were needed.
Some of the additional funding may be used in relation to an expected announcement in March that Putin will run for a sixth term as president, probably extending his 23-year rule until at least 2030, Prokopenko said. “People need to be paid so they don’t go into the new year with empty pockets,” she added.
The huge increases in spending have deepened Russia’s reliance on imports, driven inflation and helped weaken the rouble. They have also exposed disagreements between Russia’s finance ministry and central bank.
Central bank governor Elvira Nabiullina has said that the constant growth in budget spending is one of the main obstacles to fighting inflation.
In its latest monetary policy report released on Tuesday, the CBR repeatedly cited “looser-than-expected fiscal policy” as one of the main obstacles to achieving the 4-4.05 per cent target, down from 7-7.05 per cent this year.
Last month, Putin expressed concern about the impact of a weak rouble on the country’s inflation rate. “It is obvious that one of the main problems at the moment is the acceleration of inflation,” he said. The president emphasised that the CBR and the government must “co-ordinate their efforts to reduce inflation” which “directly affects the wellbeing of Russian families”.
But analysts say that it remains unclear how the Kremlin plans to align the central bank and finance ministry.
“There is a terrible lack of co-ordination,” said Carnegie’s Prokopenko. “The right hand is holding back inflation, while the left hand is constantly increasing spending and thus fuelling inflation.”
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