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© RIA Novosti. Sergey Mamontov

Putin’s military bonanza

by at 20/02/2012 21:34

Continuing a reform agenda that already looks to set the government back many billions of dollars, Prime Minister Vladimir Putin on Monday promised to pump $770 billion into the military in the next 10 years.

Putin, who will run in and likely win presidential elections next month, described the Russian military as “chronically underfunded” and said a “new army” was needed to confront modern threats.

His pledge included funds to build over 400 modern intercontinental ballistic missiles, 28 submarines, over 50 military surface vehicles, 600 modern warplanes, and anti-aircraft and anti-missile systems.

“This is not a militarization of the Russian budget,” Putin said in an article titled: “Being strong is a guarantee of Russia’s national security,” published in the government’s official newspaper, Rossiiskaya Gazeta. “It’s obvious we cannot strengthen our international position, develop the economy and democratic institutions if we are not able to defend Russia.”

Coming just two weeks before election day at a time when increasing public discontent is causing a scramble for votes, experts say the pledges should probably be taken with a pinch of salt.

But unlike some of the other proposals Putin has been brandishing around in the past few weeks, the pledges do not come straight out of thin air. They simply finetune a wider military reform agenda that has been growing since Russia’s 2008 conflict with Georgia. The drive has already made some headway in its aim of converting the country’s vast and outdated conscription-based army into a smaller, professional one.

However Putin’s new suggestions, which bump up the reform costs by over $1 billion, come at a time of growing global economic uncertainty and follow a string of other expensive pre-election pledges.

The military reform and rearmament plans were laid out in the sixth of a series of newspaper articles that detail Putin’s campaign manifesto in the run-up to the presidential elections.

Previous articles have focused on economic issues, demography, ethnic problems and social policy. Notably absent from all has been any suggestion of where the funding will come from.

The Sberbank Center for Macroeconomic Research calculated late last week that the biggest of Putin’s social spending pledges alone would cost the budget 5.1 trillion rubles ($170 billion) over the next six years, around 0.84 percent of GDP.

Former Finance Minister Alexei Kudrin, who was respected by the business community for his conservative fiscal policies, left the government last fall after a disagreement with the leadership over social and defense spending. He said then that the government’s defense program was “completely impossible” to implement with the defense industry in its current state.

“We simply can’t afford this [increase]. We can’t afford to have such an army,” Kudrin said at the time.

Higher taxes?

Prime Minister Putin called Monday for increased military spending

© RIA Novosti. / Dmitry Astakhov

Prime Minister Putin called Monday for increased military spending

A high oil price helped the Russian budget to run a surplus last year, despite an increase in spending in the run-up to parliamentary elections in December, but economists forecast a deficit for 2012.

“There is a lot of discussion now about how to balance the budget given all these obligations [outlined in Putin’s agenda],” Citibank strategist Andrei Kuznetsov told The Moscow News. “Now the government is discussing either which areas of spending to cut or which areas of taxation to increase.”

Currently the government’s preferred policy is to increase taxation.

But while this is certainly an area in which the authorities have significant space to maneuver – the current tax rate is only 13 percent – there is a limit to the volume of funds it can raise. An attempt last year to raise social taxes only led more businesses to move into the shadow economy.

Implementing spending cuts could also be tricky because Putin’s populist campaign is causing him to run short of options.

Asked last week in which areas the government could potentially cut spending to finance social spending, analysts mentioned the defense sector. This week, that looks less likely.

Efficiency drive

Alexei Devyatov, chief economist at investment bank Uralsib, said that a more effective way to create funds for increased social spending would be to increase budget spending efficiency by clamping down on corruption.

“Medvedev said in late 2010 that his estimate of corruption in the state procurement system was about 1 trillion rubles [$33 billion] per year,” Devyatov told The Moscow News “It think the real figure is more than that, but even at this level, over the next five years, it would be enough to finance social spending.”

However, he noted that since such a measure would interfere with the interests of some government officials, it could only be pushed through if there was more substantial pressure from society.

“I think at the end of the day we will see a combination of three things – under-fulfilled spending obligations, higher taxes and a higher budget deficit,” Devyatov said.

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