Russia's federal budget aligns with Stratfor's 2017 Fourth-Quarter Forecast, in which we suggest that the Kremlin will bolster strategic sectors to help the country's slow economic recovery. As Russia gears up for elections in March and September 2018, the Kremlin will have to stretch its limited funds while tackling regional debt and a keeping a lid on growing opposition, confirming our analysis that the country is preparing for a domestic political battle.
The Russian government is preparing for another few years of economic stagnation. The Duma, the lower house of Russia's legislature, approved a draft of a conservative 2018-2020 federal budget Nov. 17. As expected, the budget allows for increased social spending and a higher minimum wage, as well as increased pay for teachers and health care workers, ahead of federal elections in 2018. Otherwise, though, the modest spending plan reveals the Kremlin's expectations for three more years of sluggish growth.
Russia is dealing with a variety of financial challenges. In recent years, the government in Moscow has spent nearly $100 billion to bail out the banking sector. To make matters worse, a growing number of companies in the country are declaring bankruptcy, several provincial governments are more than $100 billion in debt, and many prominent state-owned firms are struggling to stay afloat. The 2018 budget, at $279 billion, accounts for a series of government bailouts for companies such as Russian Railways, United Aircraft Corp. and RusHydro.
Energy revenue will continue to account for around 30 percent of the federal budget, though Moscow will introduce some changes to its allocation. The draft budget assumes the price of oil will stay at $40.80 per barrel over the next few years. Should oil prices rise above that point, the Kremlin will divert any surplus revenue into its reserve funds rather than working it back into the budget or handing it over to the energy firms, as it traditionally has done. The plan indicates that the Kremlin is trying to build up its financial reserves up to protect itself against further turbulence.
One question the draft budget leaves unanswered is how much Russia will spend on defense and security over the next three years. Considering the re-armament initiatives underway in Russia, along with the country's military involvement in theaters such as Syria and Ukraine, the Kremlin is unlikely to curb its military spending. In a recent meeting with Russia's security council, Finance Minister Anton Siluanov suggested the federal government decrease defense spending to help bail out Russia's indebted provincial governments. But President Vladimir Putin reportedly rejected the idea, saying the government could cut its expenses anywhere but on defense.