Next year’s unprecedented military budget reflects a fundamental change in Russia's economic policy. For more than two decades, the authorities have adhered to a conservative fiscal and monetary policy, acknowledging the risks of softening it in the face of volatile export-oriented state revenues. The government initially assessed realistic income parameters and then planned its expenses based on them. However, the war has forced a shift in favour of a hybrid approach. The government has moved towards 'expense-based planning,' essentially loosening the fiscal reins, while the Central Bank has played the role of the stern enforcer, tightening the screws on monetary and credit policies. The programme documents published last week by the government and the Central Bank on the main directions of budgetary and monetary policy, respectively, clearly demonstrate this difference in approaches and goals. The government's goal is to finance the war and ensure 'social stability' on the eve of the so-called presidential elections. The Central Bank's goal is to prevent a surge in inflation during this period. In the process, the Central Bank is forced to adapt its plans to suit the government's innovations, and therefore after reviewing its budget projections, the regulator has already announced adjustments to its document next month. The question is how long these divergent paths can be sustained. To avoid answering this question, each year the government seems to cautiously assume that the war will somehow end the next year.
According to the draft Russian budget for 2024-2026, next year's expenditures are expected to reach 36.6 trillion rubles, which is 22% more than in 2023. The government and Duma websites state that 'one of the main priorities is targeted support for families with children,' but almost all the growth will be allocated to 'National Defence', with over 10.7 trillion rubles allocated to this spending category compared to 6.4 trillion in 2023. 'The budget structure clearly shows that the main emphasis is placed on ensuring our victory... This is our absolute priority,' noted Finance Minister Anatoly Siluanov. As Re:Russia has reported, in reality, Russia will spend even more on the war in Ukraine, with some military expenditures hidden in other budget categories. This will not change that much. Noticeable growth is only planned for interest expenses, rising from 1 trillion to 2.3 trillion rubles (borrowing will be more expensive for the government because of the high key rate). Spending on national security will increase from 3.2 to 3.4 trillion rubles. There is a planned reduction in spending on the 'National Economy' from 4.1 to 3.9 trillion rubles. Social expenditures will increase from 6.5 to 7.7 trillion rubles (they have to increase these in a year with presidential elections, but expenses for compensation payments to those killed and wounded in the war are included in this category as well). Spending on education and healthcare will remain almost unchanged, at 1.5 and 1.6 trillion rubles, respectively.
To make the budget appear balanced, oil and gas revenues for the next year must increase by 30%, while non-oil and gas revenues must increase by 19%. According to the 'Basic Guidelines for Budget, Tax, Customs and Tariff Policy for 2024 and the Planning Period 2025 and 2026,' the Ministry of Finance expects that the average price of a barrel of Urals crude will exceed $71 next year, with the dollar worth at least 90 rubles. This does not appear to be an unrealistic scenario. According to data from Argus, cited by Bloomberg, by the end of September, the price of a barrel of Urals had exceeded $80, and the discount on Brent had shrunk to $13. Such price levels may persist, at least in the medium term, the International Energy Agency (IEA) warns. Russia and Saudi Arabia are manipulating prices, having created the most acute supply deficit in a decade through voluntary production cuts. Both countries are increasing fiscal spending at the expense of oil importers. The decisions regarding voluntary production cuts will be revoked in early 2024, but this is unlikely to lead to a sharp price drop — by that time, reserves will be at uncomfortably low levels, according to IEA analysts. The future dynamics are uncertain. According to the latest forecasts, the Chinese economy, which significantly influences market sentiment, is expected to perform worse in 2024 than had been anticipated previously.
In terms of non-oil and gas revenues, the government has set a high target — these are expected to reach 23.3 trillion rubles, equivalent to 13% of GDP. For them to achieve this target, the Russian economy would need to grow by 2.3% in 2024, which appears unrealistic against the backdrop of a sharp interest rate hike. Thus, both key revenue indicators (oil prices and GDP dynamics) are not conservative, revealing a new reality in budgetary policy that has shifted away from restraint and is now built around expenditure. 'No one is likely to take the revenue figure seriously, but expenses are the new reality. In such a reality, the Central Bank will require a more stringent monetary policy,' the MMI Telegram channel commented on the parameters of the new budget. Indeed, the peculiarity of Russia's economic policy during wartime is the combination of loose fiscal policy and fairly tight monetary policy. In response to the spike in inflation primarily caused by budget expenditures, the Central Bank had to react with a sharp interest rate hike. And, now, the Central Bank has to adjust its plans to align with those of the government.
On the eve of the Ministry of Finance releasing its 'Basic Guidelines,' the Central Bank presented a new version of the 'Basic Guidelines of Unified State Monetary Credit Policy for 2024–2026.' The previous version came out in August — just a few days before an extraordinary meeting of the board of directors, where, as Re:Russia previously reported, under Kremlin pressure, the Central Bank was forced to sharply raise the key rate to 12%. A month later, it was increased to 13%.
In the document produced in September, the Central Bank adapted to the new realities but assessed the prospects of the Russian economy much more conservatively than the government. In August, the Central Bank expected inflation in 2024 to range from 4.5% to 5.4%, the key rate to be between 8.5% and 9.5%, and GDP to change in the range of 0.5% to 2.5%. In the new version of the document, the regulator has forecast inflation at 5.0% to 5.6%, the key rate at 11.5% to 12.5%, and GDP growth in the range of 0.5% to 1.5%. The forecast for the price of Urals crude oil has been raised from $55 to $60 per barrel. In other words, the Central Bank's forecast, unlike the government's, is quite conservative, and the revenues planned by the government appear unattainable in such a scenario. However, now that the government has revealed its 'spending budget,' the Central Bank is being forced to acknowledge that it will have to present a new version of the macroeconomic forecast in November, taking into account a 'more significant budgetary impulse in 2024–2026.' The regulator expects pro-inflationary risks to intensify and promises to take them into account when making a decision on the key rate in October.
Thus, the coming year is expected to look similar to the current one. The budgetary injection into the economy has led to overheating, resulting in increasing inflation. The Ministry of Finance itself has placed the budgetary impulse in the Russian economy in 2022–2023 at 10% of GDP. The Central Bank leadership has warned that the problem of economic overheating could only be solved by 'returning to the path of sustainable and balanced economic growth,' which means reducing budget expenditures. But this argument remains within the framework of the old logic, not the current wartime logic. The government, however, promises to return to the previous path in 2025, not because it plans to rein in military spending, but because it seems to be assuming that, by default, that the war will have ended by then. However, even in such an instance, such good intentions seem more like fantasy — assuming that this war ends, the government will still need to prepare for a new one.