Prigozhin’s practice of recruiting prison inmates into armed formations is now being used by the Ministry of Defense. It turns out that the criminalization of the social environment following the return to civilian life of these people is an acceptable price for cannon fodder.Twin deficit
“Secret” (classified or unspecified) budget expenditures are growing every year and have now reached almost a third of all expenditures (a total of RUB 3.5 trillion
had been spent before May). It is quite obvious that the secret part of the budget is being used mostly for financing the war; Prigozhin’s private army, the future rebels, was most likely bankrolled by it too.
For the first five months of the year, the budget deficit reached RUB 3.4 trillion (there was a surplus in the first five months of both 2021 and 2022). Official statistics have ceased to publish the budget deficit as a percentage of GDP, but experts put it at 2.5%. Budget revenues, meanwhile, are falling: For the first five months of the year, they were RUB 2.2 trillion less than a year earlier. “The main reason for this visible reduction in budget revenues was oil and gas revenues, which did not even reach the level of the same period in 2021,” Gaidar Institute experts
Expenses, including those to support regional budgets that are heavily dependent on federal transfers, are trending higher, which means a further widening of the deficit. Economists who study fiscal policy conservatively forecast a deficit of 5% of GDP at the end of the year.
The dragging-on of the “special operation” – and its end is not visible – combined with the buying of loyalty, means that fiscal policy will not change and generous military spending will continue. Budget deficits inevitably give rise to inflation, but experts believe that the government will only index social and pension payments in response to the higher inflation, as this is important to keep the population calm.
To prevent social tension, inflation needs to be curbed, and economists believe that the government will try to keep annual inflation around 7-8% at the highest.
A possible way to reduce the deficit is to borrow from the public, but this will not bring the state much money, and besides, such tactics would contradict public statements about the healthy state of the economy.
As a result, funds from the National Welfare Fund (NWF) will be actively used to plug the deficit, though the well is not bottomless. The state, looking for more money, is even resorting to extraordinary measures, like a one-off tax on the “windfall profits” of large companies, which, however, runs the risk of becoming not a one-off
, but a regular tax.
Another standard way is to sequester spending with a carveout for “protected” items – social and military spending. Top officials from the financial and economic bloc have already started talking
about the need for a sequester.
The budget deficit – the search for money to finance the “special operation” and buy loyalty – will inevitably become a chronic problem. Yet there is another deficit – a labor shortage. In the long term, it is not clear how it will be possible to compensate for the emigration of so many of the best brains and hands, the movement of labor into unproductive “sectors” (see the interview with Vladimir Gimpelson
in Russia.Post) and people going to fight in the war. On top of this, the demographic trends indicate that the working-age population will continue to decline until at least 2030.‘Après nous, le déluge’
The lack of public control over budget revenues and expenditures in Russia, which has been waging war for many months, is a quite normal situation. Equally “normal” is feeding characters like Prigozhin and allocating taxpayer money to teach teenagers
to fly drones.
From a long-term perspective, it is suicidal, but for the Russian regime, as for similar regimes, it is critically important to throw everything into solving current problems instead of carrying out a responsible strategy. Responsible for themselves as well – a rising tide can lift all boats, but also sink them: the elites are still feeling pretty good, but if the fiscal crisis worsens, they will eventually have to deal with it. It may not be next year, but in the medium and long term, wasteful policies risk “bleeding” both the budget and the economy.
The bleeding-out of the budget is not only an economic, but also a political and even psychological problem. The most fundamental element of the Putin system is maintaining the population’s dependence on the state. It is maintained, of course, by the public sector and the significant and growing presence of the state in the economy, where some of the most attractive jobs are (including the police, the FSB, the army, law enforcement and regulatory agencies). Economic dependence gives rise to political submission, obedient and/or apathetic behavior.
The war has further increased this dependence, which is now being maintained through massive regular social payments for complicity in Putin’s military and repressive policies. Looking ahead, the wartime fiscal policy could militarize and undermine the budgetary system – everything will become secret, defense, military-industrial and completely unaccountable to anyone. This will mean the fraying of the state fabric, the degradation of state institutions, which even now are either imitative – for example, the Duma – or repressive – like law enforcement and regulators.
The strategy of “après nous, le déluge
” also has its limits. “After us” might come earlier than Putin’s petrostate, which is losing oil and gas revenues, is counting on. Meanwhile, there are practically no tools to contain the “flood,” as was shown by the authorities’ lackluster management of the rebellion. The main tool is money, but there is less and less of it.