PARIS – On May 9, Russia held its largest military parade since the Soviet era. In the tradition of that era, Red Square was filled with the army’s latest equipment, including the new T-14 “Armata” tank. And, also in the tradition of that era, ordinary people were quick to joke when the tank stalled during the parade rehearsal: “The Armata truly has unprecedented destructive power; a battalion can destroy the entire Russian budget!”
The joke, though an exaggeration (each tank costs about $8 million), highlighted another throwback to Soviet life: overspending on the military. There is now no question that the Kremlin’s military spending is threatening Russia’s fiscal position, which has already been undermined by low world oil prices and the West’s economic sanctions. And this spending spree shows no sign of slowing. In recent months, growth in military expenditure has accelerated rapidly, exceeding the authorities’ already ambitious plans.
The 2015 budget that Russia developed last summer was based on the assumption that oil prices would remain at $100 per barrel, with annual GDP growth and inflation at about 2% and 5%, respectively. Then oil prices plummeted, the economy contracted, and inflation reached double digits. Russia’s government was slow to accept reality, with President Vladimir Putin signing a revised budget only last month.
The good news is that the new budget is much more realistic, as it cuts spending by about 2% in nominal terms. Given annual inflation of at least 11%, this amounts to roughly an 8% real reduction in planned spending.