‘Après Nous, le Déluge’ Has its Limits – What the Conflict Means for Kremlin Fiscal Policy
July 9, 2023
  • Andrei Kolesnikov

    Senior Fellow, Carnegie Russia Eurasia Center
Andrei Kolesnikov writes about the Kremlin’s fiscal policy, noting that the dragging-on of the “special military operation,” combined with the need to keep the population dependent on the state, will inevitably widen the budget deficit. Looking ahead, the budget could become militarized, and the integrity of the fiscal system is under threat.
From May 2022 to May 2023, the private military company Wagner received RUB 86.3 billion from the budget, Vladimir Putin said in the aftermath of the Prigozhin rebellion. Another RUB 110 billion went toward insurance payments for the mercenaries. Eighty billion rubles was made by Prigozhin’s company Concord for supplying food to the military.

Later, the “voice of the Kremlin,” TV host Dmitri Kiselyov said that Wagner had received more than RUB 858 billion under state contracts (for what period was not specified), and Concord provided services to the state for RUB 845 billion.

These figures had not been disclosed anywhere before, as Prigozhin’s business was considered “private” – the state, as Putin has noted throughout the years, had nothing to do with it. Now, the publicization of the figures, the unveiling of how Wagner was financed is intended to show the public that that ungrateful Prigozhin took a lot of money from the state, i.e. from Putin, and then rebelled against his own benefactor.

A rebellion bankrolled by Putin

Neither Putin nor his propaganda machine is embarrassed by the fact that Prigozhin was given taxpayers’ money from the state budget and that these expenses were not controlled by taxpayers, that there is no funding earmarked for private armies in official budget expenditures, while the legal status of PMCs is not regulated.
It turns out that Putin financed the rebellion against himself with taxpayers’ money.
From October this year, the state will raise the salaries of the military and siloviki. In the photo, Putin meets with the leadership of security services. Source: Twitter
The status of Prigozhin’s army follows with the political principle of the Putin regime, which outsources certain state functions in the defense sphere, thereby eroding the state’s monopoly on legitimate violence – a view that has become commonplace. However, the legitimacy of state violence – carried out under increasingly repressive legislation and in violation of the Constitution – is already low.

Another political – specifically political – principle finds its expression in the fiscal priorities: expenditures on salaries for the siloviki are constantly increasing. The latest example of this looks like a “thank you” from Putin for loyalty during the rebellion – the state will raise the salaries of military personnel and employees of various security agencies by 10.5% from October 1, 2023.

The president is seeking to buy the loyalty of precisely those whose job it is to protect him from threats, including internal ones. This is chiefly the army, the FSB, the FSO, the police, the Investigative Committee, the prosecutor’s office, the Ministry of Justice, certain regulatory agencies, well, and television, which neatly broadcasts who is friend and who is foe.

Another important category of loyal citizens is soldiers and their families. They get social benefits that are so generous that, according to Putin, the real disposable income of the entire country has slightly risen as a result. In the structure of income, the share of social payments has long significantly exceeded income from business or property.

The fact that real disposable incomes have risen is indirect evidence of an increase in payments to the families of dead and wounded soldiers. In other words, this figure may reflect an increase in casualties. For the economy, such an increase in real incomes is thus not a plus, but a minus, as human capital declines, its quality and quantity, and free riding, the readiness to live at public expense, becomes the new normal.
The Ministry of Science and Higher Education has announced that students who fought in the special operation in Ukraine can study for free. Pictured is Voronezh State University. In July, the rectors of Voronezh universities spoke about how their universities supported soldiers. Source: Wiki Commons
There are other ways to reward soldiers – for example, their families are now provided with additional benefits in the area of education. The latest measure: the Ministry of Education and Science intends to give university students who fought in the “special operation” the right to study for free, even if they previously had not qualified for state scholarships.

The declining quality of education and human capital, a ballooning budget, a free-riding attitude taking hold in the population – this is the price that the state pays for the loyalty of a significant part of the population. In addition, by calming one group and mobilizing another with generous payments, the Russian state can prolong the “special operation,” which has taken on a literally messianic meaning for Putin and his team.
Recruiting such a big number of contract soldiers and volunteers is also expensive for the regime, but it calms the population, as it implies that a new military mobilization will not be needed.
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 believe.

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 talkingabout 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.
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