The war in Ukraine drives the Russian budget: more weapons, less social spending and a drop in the birth rate

Russia’s 2024 budget draft clearly reflects Vladimir Putin’s priorities: prolong the conflict with Ukraine for at least another year and ensure social stability until the next presidential elections. But Russia faces increasingly limited options to accomplish these objectives when military expenditures are rising, revenue forecasts are based on over-optimistic oil income, and rampant government spending threatens to impoverish Russian households even more.

The imprint of the war in Ukraine can be seen everywhere in the budget, and has even affected demographic projections. Moscow acknowledged a sharp decline in birth rates, even lower than those observed after the collapse of the Soviet Union. With an economy debilitated by war and economic sanctions, the number of births has dropped this year to the same level Putin encountered when he succeeded Boris Yeltsin in 1999. Birth rates are expected to drop even more over the next three years. According to the Russian Social Fund, the projected number of births is as follows: 1.24 million in 2023; 1.17 million in 2024; 1.15 million in 2025; and 1.14 million in 2026. In the turbulent 1990s, Russia’s annual birth rate dropped from around two million pre-USSR dissolution to approximately 1.3 million, excluding 1999 when the effects of the 1998 ruble crisis were felt.

The country is also grappling with a draining war of attrition that started shortly after the Covid-19 pandemic caused over a million unnecessary deaths. Now, young Russians considering parenthood are being compelled to join the war, risking injury or death. In September, Russia’s Ministry of Labor issued 230,000 certificates “for families of disabled or deceased war veterans.” The Viortska newspaper reported that four months earlier, the ministry issued 23,716 such certifications. By comparison, the ministry only issued 5,777 certificates in all of 2022.

Money for a new military mobilization

Russia’s military budget of $106.9 billion will surpass spending on social programs like pensions and benefits ($74.2 billion). As a result, the budget allocated to war-related expenditures will increase from 3.9% to 6% of GDP, marking the highest level in the country’s recent history. However, this doesn’t mean that Russia will soon have significantly more weaponry. The country’s arms industry has been operating at maximum capacity for a year now, and the new funding only reflects the current situation. The Reuters news agency reported in August that military spending had already exceeded its targeted 17.1% of the national budget in the first half of 2023, and could skyrocket to 33% by the end of the year. In 2024, military spending is projected to account for 29.5% of the national budget.

In a Russian-language report for the Carnegie Endowment for International Peace, analysts Alexandra Prokopenko and Pavel Luzin wrote, “This record level of military spending suggests that the war is likely to persist in 2024. If it transitions to a less intense phase or even stops temporarily, Russia’s arms industry will focus on replenishing depleted arsenals... Moreover, the budget allows for another partial or even general mobilization, and enables the declaration of martial law if the Kremlin deems it necessary to escalate the conflict.”

The Russian government’s priorities are clear. “We need this money to accomplish our most important immediate task – achieving victory,” declared Finance Minister Anton Siluanov during budget discussions this week in the Russian Parliament. “We are implementing a budget based on fairly optimistic macroeconomic forecasts, although we must be prepared for other scenarios.” The Russian government estimates that its revenues will increase by over 33% next year to $346 billion, and expects one third to come from oil and gas sales despite economic sanctions that cap the price of a barrel of Russian oil at $60. But Russia’s budget estimates that it will earn $71.3 per barrel and over $90 if the Brent benchmark is re-established.

“The artificial adjustment of the oil market is not sustainable and a price correction is expected in 2024. Our estimate is $75 a barrel,” stated Swiss investment bank Julius Baer. Meanwhile, Bank of America is sticking to its $90 per barrel forecast despite other reports suggesting a potential price drop if Venezuela sanctions are lifted or Asian economies slow down.

The Kremlin developed its budget based on a ₽90.1-$1 exchange rate for the ruble. Analysts have serious doubts about the future strength of the Russian currency due to the significant internal demand for euros and dollars caused by capital outflows from the country. The Carnegie report calls the revenue forecast “overestimated and unrealistic,” and says these earnings will not materialize if oil prices were to suddenly collapse due to an economic slowdown in China or if Western countries ramp up sanctions.

Bearing the cost of war will fall on ordinary Russians as companies transfer higher operating expenses to consumers. Notably, the restaurant industry has revealed plans for an imminent 20% price hike.

Cutbacks in social programs

Russian President Vladimir Putin assured during the annual Valdai Club (a pro-government think tank) meeting that Moscow has not neglected social programs, and stated that development plans, strategic goals and social obligations will all be fulfilled. However, the 2024 budget reflects significant cuts to many social programs. Funding for relocating half a million Russians from “unlivable housing” will be reduced by 60% next year, and funding for new public housing and water facility renovations will be cut by 12% and 11%, respectively.

The Russian government seems committed to harnessing prisoner labor, and has a goal of increasing tax revenues from this sector by 58% next year. Prominent state-owned companies like Russian Railways and Uralvagonzavod, the country’s largest tank manufacturer, have used prisoner labor in their facilities.

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