proposal

Russia's War Costs: Military Expenditures and Resource Allocation in "Wartime"

Miho Okada

Introduction.

Two and a half years have passed since Russia launched a full-scale armed invasion of Ukraine on February 24, 2022, which Russia declared "special military operations." Unprecedented economic and financial sanctions imposed by the West on Russia since the outbreak of the war have had a significant impact on the country's trade structure, procurement methods of goods and equipment, and procurement lead time. However, they have not changed the war situation or Russia's military actions. On the contrary, over time, it has become evident that the Russian economy and finances have more durability than expected. With increased military production as background, the Russian economy fared well and achieved a GDP growth rate of 3.6% in 2023. Emphasizing the favorable war situation and economic growth, President Putin was reelected in the March 17, 2024 presidential election with record number of votes and turnout. He appears to further consolidate his domestic political base.

At this point, viewed from various indicators, the Russian economy and finance show no bad signs; roundabout trade and import substitution prove effective measures to address harsh sanctions; many people, especially in urban areas, live as they did before. President Putin's persistent high approval rating is not unrelated to these factors. It is a persuasive argument that the Putin administration has motives to prolong the war amid the current economic boom1 and that Russia "adapts to" war, beginning to use the prolonged war as leverage on the political and economic fronts.2

However, "Military Keynesianism," in which public works, especially military demand and war drive the economy, may achieve immediate economic growth but at the expense of narrowing the path to long-term development in various ways, including reduced spending on non-military activities, lower productivity due to decreased competition, and the interruption of education for the younger population.3

This paper discusses the evolution of Russia's military expenditures4 since the outbreak of the war in an attempt to get an overall picture of Russia's war costs. The fact that the Putin administration calls the war "special military operations," fails to declare a legal "military state of emergency," and continues to spend massive financial resources under the guise of normal civil life means that Russia's war costs are not defined as "war spending" but included in peacetime expenditure items, and that "military expenditures" expand invisibly. The prolongation of the Russian-Ukrainian war makes it essential to analyze how Russia has borne war costs, how it will bear them in the future, and how they will affect the course of the war and domestic politics in Russia.

In the following, first, we examine the 2022-2023 federal budget and its execution, alongside the question of military expenditures and resource allocation.5 Next, we describe the 2024 federal budget bill and the 2025-26 budget plan and then examine the situation in which more military expenditures than are known have been borne by the budgets of the federal components. Lastly, in association with the war situation and trends in human cost, we will point out that the fiscal flows that have significantly changed due to the war are beginning to rapidly transform Russian society.

1. Evolution of Military Expenditures Since the Outbreak of the War

(1) The 2023 Federal Fiscal Performance

The 2023 federal budget, enacted after the outbreak of the war following the budget formulation cycle in late 2022, was executed as Table 1 shows. First, an 11.4% increase from the budgeted amount is observed for total expenditures. Second, defense spending (primary item 2.), the largest expenditure item, registered a 37.2% increase in the executed amount from the budgeted amount, which contributed to raising the ratio of defense spending to total expenditures from 17.1% to 21.1%. An increase of 11.3% was observed for national security and law enforcement spending, which is considered part of military expenditures. These suggest that Russia's resistance to the Ukrainian counter offensive since June 2023 required more additional budgetary measures than expected.

Table 1. The 2023 Federal Fiscal Performance Unit: 1 billion rubles
Primary Items 2023 Fluctuation (%)
Budget Execution
1. National Projects 2008 1678 -16.4
2. National Defense 4973 6821 +37.2
3. Security/Law enforcement 3564 3965 +11.3
4. National Economy 3801 4244 ＋11.7
5. Housing/Public Works 591 974 +64.8
6. Environmental Protection 352 318 -10.7
7. Education 1410 1483 +5.2
8. Culture 197 215 +9.1
9. Healthcare 1524 1594 +4.6
10. Social Policy 7674 7252 -5.5
11. Sport 71 74 +4.2
12. Mass Media 120 138 +15.0
13. Public Debt Interest Payment 1519 1724 +13.5
14. Federal-to-Local Transfer 1252 1873 +50.0
Total Expenditures 29056 32354 +11.4

(Source: "Federal Budget Law for 2023 and the planned period of 2024-2025."

Prepared by the author from data from the Executive Authorities of the Russian Federation)

Third, two expenditure items marked with significant increases from budget to execution are housing/public works and federal-to-local transfer. The relation between increases in these two items and military expenditures will be discussed later.

(2) Federal Budget Bill for 2024 (Planned Period of 2025-2026)

As Russia dealt with Ukrainian counteroffensive operations, the federal budget bill for 2024 (planned period of 2025-2026) was enacted in November 2023 following a budget formulation cycle (Table 2). First, we should note a massive 58.0% increase in defense spending (against the executed amount in 2023). At the same time, the interest payments on public debt are also expected to increase by 32.9% (against the executed amount in 2023); a growing dependence on domestic debt is conspicuous.

Table 2. Federal Budget Bill for 2024 (Planned Period of 2025-2026) Unit: 1 billion rubles
Primary Items 2023※ 2024 2025 2026
1. National Projects 2324 2171 2287 2411
2. National Defense 6407 10775 8534 7409
3. Security/Law Enforcement 3227 3389 3275 3406
4. National Economy 4126 3890 3248 3666
5. Housing/Public Works 857 881 507 361
6. Environmental Protection 347 478 470 523
7. Education 1464 1547 1312 1412
8. Culture 209 224 177 227
9. Healthcare 1570 1620 1635 1615
10. Social Policy 6493 7732 7693 7855
11. Sport 71 67 54 54
12. Mass Media 122 121 94 100
13. Public Debt Interest Payment 1519 2291 2804 3316
14. Federal-to-Local Transfer 1530 1474 1433 14334
Total Expenditures 30266 36661 34383 35587

(Source: "Federal Budget Law for 2024 (the planned period of 2025-2026)."

※2023: Estimated amount specified in the budget bill.)

It is a matter of course that a country at war increases military expenditures; the question is the degrees of burden, resource allocation, and sustainability. Table 3 shows the degrees of burden calculated according to the definition of military expenditures. Social policy spending had been the largest expenditure item until 2021, but military expenditures surpassed it after the outbreak of the war. Looking at the 2024 budget, the ratio of military expenditures to GDP exceeds 7%, and its ratio to total expenditures reaches 35.0%.

Furthermore, the supplementary budget enacted on July 12, 2024 increased total expenditures by 522 billion rubles to 37.182 trillion rubles, while the forecast for oil and gas revenues was amended downward, and total revenues decreased by 3 billion rubles to 35.062 trillion rubles. As a result of these changes, the 2024 budget deficit will increase to 2.12 trillion rubles (1.1% of GDP) from 1.595 trillion rubles (0.9% of GDP) at the time of budget formulation.

Regarding disclosed items of defense spending, annual expenditures were supplemented by about 230 billion rubles, an increase of almost 10%. The Lower House Defense Committee explains the breakdown of the defense spending amendment as "military cooperation with foreign countries" (0.8%) and "military housing" (0.5%), but this does not include the amount of undisclosed items, suggesting that the amendment was also made to undisclosed items. In the supplementary budget, the domestic debt limit was raised and set at 26.68 trillion rubles.6

Table 3: Breakdown of Military Expenditures in the Federal Budget and Their Evolution (2023-2026) (Unit: 1 million rubles)
2023 2024 2025 2026
Budget Execution Budget Plan Plan
2. National Defense 4972600 6821000 10775442 8534144 7408964
01Russian Armed Forces 2542297 3293656 3020556 3502048
02 Mobilization & Exercises 17910 19235 19037 19513
03 Mobilization Preparation 2712 2713 2713 2745
04 Collective Security & Peacekeeping 2949 2968 - -
05 Nuclear Facilities 49266 62746 56932 62094
06 International Obligations, etc. 14839 149293 32336 32745
07 R&D 409217 396233 324966 345510
08 Other Defense Issues 1945299 6980034 5091890 3458579
Defense Ministry-Financed Items
･Housing/Public Works 93910 118884 96968 96773 98378
･Environmental Protection 2899 3033 3190 3346 3556
･Education 88263 105423 100807 102857 107732
･Culture 6407 12578 137423 9450 13368
･Healthcare 106326 124154 9224 124896 127539
･Sport 4453 4814 4581 4640 4738
･Mass Media 3995 3995 4007 2463 2509
･Military Pension 453949 460165 501331 546450 568310
･Social Support 429670 1151964 557559 362367 371145
Paramilitary Organizations
･Rosguard 314401 386000 358845 352123 366691
･Border Guard 166302 191000 210350 205179 219061
･Rosatom 8952 8952 8952 8952 8952
･Baikonur Cosmodrome 1198 1324 1716 1198 1198
Total Military Expenditures 6648213 9388396 12765284 10349709 9296800
GDP 149949000 172148312 179956000 190637000 203304000
Total Expenditures 29055564 32353857 36660675 34382820 35587392
Defense Spending/GDP 3.3 3.9 6.0 4.5 3.6
Military Expenditures/GDP 4.4 5.5 7.1 5.4 4.6
Defense Spending/Total Expend. 17.1 21.1 29.0 25.0 21.0
Military Expend./Total Expend. 22.9 29.0 35.0 30.0 26.0

(Source: Prepared by the author from federal budget law, execution data, Federal State Statistics Service /Ministry of Economic Development data)

(3) Discussion on Changes in Resource Allocation

How are the above changes discussed in Russia? At the Lower House Budget Committee on October 16, 2023, Finance Minister Siluanov candidly admitted that a primary priority is strengthening the country's defense capabilities, especially support for "special military operations" personnel. At the same time, he stressed that various measures in the area of social policy should be financed and concluded that despite the increase in defense spending, the nature of the federal budget is not military. He noted as evidence that more than 30% of total expenditures are allocated to social needs.7

If expenses for social policy (7.7 trillion rubles), education (1.6 trillion rubles), health care (1.6 trillion rubles), culture (0.2 trillion rubles), and sports (0.07 trillion rubles) are defined together as "social expenditures," they would account for 30.5% of total expenditures. Siluanov compared this figure to the percentage of defense spending alone (10.8 trillion rubles, or 29.4%), skipping mention of national security and law enforcement spending (3.4 trillion, or 9.2%). Yet, this item forms the budgets of military-related ministries and agencies except for federal armed forces deeply involved in "special military operations," and this item plus defense spending account for 38.6% of total expenditures. This percentage is higher than the figure shown in Table 3, which represents the sum of all confirmed spending items falling under the definition of military expenditures. Regardless, it is apparent that military expenditures strain Russia's national finances.

The Lower House Defense Committee described the increasing military expenditures as contributing to the country's economic security and as opening opportunities for developing new advanced weapons and improving existing weapons.8 Here, we can discern "Military Keynesianism" that deliberately endows military expenditures with the role of supporting and driving the Russian economy.

In the current situation, where Russia faces the need to expand production in the military industry as well as the shortage of not only labor but also capital, wage hikes in the defense industry and other related manufacturing industries are combined with mounting inflationary pressure to make it necessary for the government to adopt a tight monetary policy. Rising prices, high interest rates, and labor shortages will strain the private sector. Yet, as Siluanov emphasized, the government is ready to increase social expenditures: it plans to increase support payments to families with children and pensions; it also plans to raise the minimum wage. Thanks to these measures, most Russian citizens do not feel a decline in their standard of living.

2. Other Military Expenditures

We have thus far discussed military expenditures in the federal budget. However, this analysis is not free from limitations. What cannot be overlooked is the role played by the federal components. Although information on military expenditures of the federal components is scarce, it is conceivable that, as the war drags on, Moscow's dependence on the federal components for financial support will likely increase. Specifically, the federal components will be expected to contribute to allowances for mobilized and volunteer soldiers, the governance of occupied territories, and construction costs for defensive facilities in areas adjacent to Ukraine. As for specific fiscal measures that individual federal components adopt, it is conceivable that some federal components secure military expenditures with money transferred from the federal budget while others finance necessary military expenditures on their own. It is difficult to distinguish the two patterns because there may be some cases where both the federal government and federal components contribute accordingly to securing military expenditures.

The first is allowances for mobilized and volunteer soldiers. In relation to the partial mobilization decree issued on October 19, 2022, President Putin instructed the heads of the federal components to support mobilized soldiers and their families. Even before that, some federal components, such as Sakhalin Oblast, had announced making temporary payments to soldiers going to war and their families. But there was a wide disparity in the amount of payment. After the partial mobilization, the budgets of 26 federal components explicitly provided for financial measures, but the budget amount failed to cover the number of people to be mobilized. In her report, Osmolovskaya, who investigated this matter, noted that this could be explained by either of the three possibilities that fewer people than planned were recruited; that the missing funding came from some undisclosed sources, or that the authorities directly provided for underpayment of the promised money to the mobilized people.9 To avoid a decline in approval rating due to mobilization, the federal government is shifting the replenishment of soldiers to volunteer recruitment. However, the shortage of soldiers has made temporary payments, family allowances, and allowances for bereaved families more expensive; the major financial question will be how and who pays for these allowances.

Second is the governance of the occupied territories. By October 2022, Russia occupied the self-proclaimed "Donetsk People's Republic" and "Lugansk People's Republic" in eastern Ukraine, as well as parts of Zaporizhia and Kherson Oblasts in the south, and completed the procedures for unilaterally incorporating them into the Russian Federation. The federal government plans to invest in the restoration of these areas, which it calls the "New Territories," and to establish new governments there. These moves may be related to increases in housing/public works spending and federal-to-local transfer spending that were prominent in the 2023 budget execution. Approximately 90% of the New Territories' administrative costs will be subsidized by the federal government,10 which reportedly plans to spend 1.88 trillion rubles from 2024 to 2026.11 The difference between GDPs, including or excluding the "New Territories," is only 1.6% of GDP; the economic gain from the territorial expansion is negligible, whereas the cost of running the occupied territories will be a heavy burden.

Third is the construction cost of defensive facilities in the areas adjacent to Ukraine. In April 2023, Bryansk Oblast reportedly spent 500 million rubles to build defensive facilities near the Ukrainian border,12 and similar reports appeared regarding Belgorod Oblast (1 billion rubles), Kursk Oblast, and the Republic of Crimea.13 In August 2024, Ukrainian forces launched a cross-border counteroffensive on Kursk Oblast. The Russian side has been slow in its response, allowing Ukrainian troops to operate in the region for over a month. The federal government, focusing on implementing "special military operations," has left the defense of border regions to the federal components. The current situation stems from such negligence on the Russian side and the defensive facilities voluntarily built by the federal components have proved inadequate.

Conclusion

Since the outbreak of the Ukraine war, the number of confirmed deaths on the Russian side is said to have reached 68,011 as of September 6, 2024; however, the actual number of deaths is estimated to be about double that number.14 Since the beginning of 2024, there has been a marked increase in the percentage of "volunteers" among the fallen soldiers―13,152 deaths have been confirmed. For the federal government to continue replenishing troops through the federal components, it will be vital to implement financial measures, including additional federal funding for allowances.

From the above, three conclusions can be drawn. First, Russia's war costs, in terms of military expenditures in federal finance, reached 5.5% of GDP and 29.0% of total expenditures by the end of 2023 and are expected to reach 7.1% and 35.0%, respectively, in the 2024 budget. These estimates may be revised to be even higher, given that military expenditures have increased due to the budget amendment in July 2024. These figures represent a large increase in military expenditures from the pre-war days, indicating that Russia's war costs weigh heavily. As the war drags on, these figures will likely grow even higher. Nevertheless, as long as the majority of Russian citizens do not feel that the standard of their living has declined significantly because of the war,―or even if they think so, as long as such sentiments do not turn into a nationwide anti-government movement that would shake the regime,―the federal government can carry on warfare. It actually takes various financial measures and engages in information manipulation to dispel such public discontent.

Secondly, the current war permeates Russian politics and society much more profoundly than the macro figures suggest; each of the 85 federal components benefits from the war in different ways, or is involved effectively in logistics and financial support. Meanwhile, the war-driven federal government is rapidly increasing financial support to such federal components where many military companies are located and where many people from poor households go to war seeking increasingly expensive allowances. The war is beginning to function to correct disparities in Russia. Arguably, the war has given rise to a "new middle class" enriched by the war.15

On the other hand, the burden on the masses, hard as it is to quantify, has increased over the past two and a half years and will continue to grow as economic sanctions continue and oil and gas revenues inevitably decline. We need to keep monitoring how the costs of the prolonged war will impact Russian politics and society.

(Professor, the National Defense Academy)

(Translation by Tsutomu Inuzuka)

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