Editor's Note: This is the second installment in a two-part series on Russia's ongoing budget negotiations.
The Kremlin has the option of cutting government spending in two areas: social spending and the defense budget. However, changes to either area come with political, social and security risks. Making cuts in either budget would also be difficult because President Vladimir Putin and Prime Minister Dmitri Medvedev during the last election based their campaigns on promises to increase spending in both areas.
So far, Russian Finance Minister Anton Siluanov's draft for the 2013-2015 budget — which includes cuts in social projects — has not met too much resistance from the Kremlin. The draft cuts health care by 8.7 percent, social and cultural activities by 2.5 percent, education by 2.8 percent and social policy by 0.7 percent.
The problem with Siluanov's draft is that the proposed cuts do not account for the campaign promises made by Putin and Medvedev, who pledged to increase spending in the social sphere — namely, to increase pay in the public sector by $85.5 billion and to increase pensions by $45 billion (a 45 percent bump) between 2013 and 2015. These promises were an attempt to pacify and win over the Russian people at a time when the public attitude toward the Kremlin was less than favorable.
Early in 2012, a series of large demonstrations against the Kremlin and Putin's return to the presidency swept across Russia, lasting for months. With many regional and municipal elections set for October, the Kremlin will want to appear as though it has been keeping its promises. It is possible that the Kremlin could eliminate federal allocations to regional budgets and instead use that money to increase federal spending in order to show the public that the government is living up to its word. However, such budget shifts are uncertain at this time.
While the Kremlin could cut spending on social programs to shrink the budget, it is far more dangerous to try to cut defense spending. Disagreements over social spending could impact the country's internal stability during the current election period, but disagreements over the defense budget could impact Russia's geopolitical strategy in the region for years to come.
There are two contrasting proposals on the table. The first, favored by Siluanov, is to decrease defense spending by 8 to 20 percent. The second, favored by Putin, is to increase defense spending by 25.8 percent year-on-year (to $72.2 billion in 2013) and to increase spending on national security and law enforcement by 9 percent (to $61.9 billion in 2013). For over a decade, Russia has increased its defense budget every year, with percent increases varying from 21 percent in 2006 to 4 percent in 2010. An increase of 25 percent would be in line with Russia's previous defense spending policies.
The Kremlin has previously expanded the defense budget to maintain and reorganize the Russian military, which has increasingly shown its age. But this proposed expansion has a very specific purpose: a massive new armament program called GPV 2020, which would use $770 billion over the next 8-10 years to replace the majority of the military's equipment with an extensive list of new arms. Part of the defense budget increase would also be used to improve living standards and raise salaries for Russian troops and to create a new multibillion-dollar agency that would develop cutting-edge weaponry.
Putin is focusing on such grandiose defense plans for two reasons: the country's demographic decline and Russia's resurgence within the former Soviet region. Russia's demographic decline is already affecting the Russian military, which is failing to meet its recruitment goals. The situation will continue to degrade as the population ages. Increasing military expenditures over the next decade is meant to entice more recruits to join the military by offering better benefits and by giving soldiers more modern equipment to work with. Currently, the majority of the Russian military's equipment needs to be replaced in order to remain effective.
The emphasis placed on upgrading the military over the next decade also shows that the military will continue to be one of Russia's preferred tools in regaining influence in the former Soviet states, particularly as Russia attempts to increase and solidify its position in neighboring countries through the creation of its newest union. Overall, Russia sees quite a few security threats on the horizon that come from many different directions. Building out a more modern military is critical to Russia's ability to hold its sphere of influence and to rebuff pressure from powers in East Asia and the West.
But such defense plans are quite costly, and Siluanov believes that Russia's massive defense expansions can wait a few years until Russia can tell how oil prices will trend and how the European economic crisis will play out. According to his proposal, up to 20 percent of defense expenditures would be cut and the rearmament program would be postponed until 2016 or later.
Even if cuts are made to the defense budget, Russia's imminent demographic crisis and the military's difficulties attracting enough recruits mean that Moscow must maintain its spending on programs that benefit soldiers. It is therefore unlikely that any potential cuts to defense spending would significantly affect the military's personnel budget. If the Kremlin decides to implement Siluanov's plan and cut 20 percent of the defense budget, then it is unlikely that any noteworthy additions will be made to the research and development budget or to the implementation of the GPV-2020 rearmament program.
So far, Putin has insisted on proceeding with the expansion plans and has given several speeches during August on the importance of creating a new and modern military. On the surface, any cuts in defense spending seem improbable because they have the potential to seriously undermine Russia's plans for a regional resurgence. If cuts were to be made, Russia might still be a military power, but Moscow could lose its ability to wield the military as broadly as it would like in order to accomplish its geopolitical plans in the region.
On the other hand, military expansion is not economically viable if Russia wants to ensure long-term financial stability. Putin's expansion plans are dependent upon oil prices, which cannot be reliably predicted. The polarized Kremlin will continue to debate over both spending cut proposals, but lawmakers must reach an agreement by September, when the parliament is set to vote on the draft of the budget that then must be finalized by October. Only when an agreement is reached will Russia's track for the next few years become clear.