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Russia's President Vladimir Putin speaks during a session of the Valdai Discussion Club in Sochi, Russia October 19, 2017. REUTERS/Alexander Zemlianichenko/Pool
Peace denied? Russian budget jacks up wartime economy
December 07, 2024
On December 1, Russian President Vladimir Putin signed the budget law for 2025-2027. The Duma had earlier approved the law on November 21, and the Federation Council rubber stamped it on November 27.
The main takeaway from the budget is that Russia is planning for the long haul in its war with NATO-backed Ukraine and makes clear that Russia intends to double down on defense spending no matter what the cost. While the increased budget does not shed light on expectations for a speedy resolution to the war, it is indicative that Moscow continues to prepare for conflict with both Ukraine and NATO.
More importantly, the recently signed budget only reinforces Russia’s move towards a war economy at the risk of exacerbating growing problems in the domestic economy related to labor shortages and inflation.
According to Russia’s Ministry of Finance (MinFin), the largest portion of budget expenditures will be dedicated to national defense. According to published figures, 32.4 percent ($126 billion) will be specifically allocated to defense. In comparison, the figure for 2024 was 29.4 percent of the budget or $98 billion. In 2026 and 2027 the expected budget increases are estimated at $69.5 billion and $125.1billion, respectively.
The figures suggest that military expenditures are crowding out spending in other areas of the economy. Planned spending on "national defense" is more than twice that allocated to social spending. Defense expenditures are followed by social policy (15.7 percent), national economy (10.5 percent) and national security and law enforcement activities (8.3 percent).
In addition, the new budget threatens to exacerbate existing pressures within the domestic labor market. According to Reuters, heavy recruitment by the armed forces and defense industries has drawn workers away from civilian enterprises, as has emigration, pushing unemployment to a record low of 2.3 percent.” Figures from Rosstat indicate that unemployment is at the lowest level since the collapse of the Soviet Union in 1991.
Furthermore, last week Anton Kotyakov, the minister for labor and social defense, appeared before the State Duma where he announced that labor market demand by 2030 could face a deficit of 2.4 million people. The shortage is expected to be most critical in manufacturing, logistics and IT. The Labor Ministry is fearful that as Russia's labor woes intensify it may contribute to slowing economic growth.
Overall, Russia’s GDP growth, which is approximately 3.9 percent for 2024 according to the Russian ministry of economic development (MinEcon), will slow to about 2.5 percent in 2025 and level off at 2.8 percent by 2027. This contrasts with the International Monetary Fund’s estimate of 1.3 percent growth for 2025.
As a result of the new budget, MinFin forecasts an increase in state debt of nearly 50 percent in ruble terms through 2027. That would translate to 15 percent in 2023 of GDP to 18 percent in 2027. This runs counter to previous Russian economic policy that emphasized budget surpluses to counter Russia’s persistent inflation.
Inflation in Russia is currently running at about 8.7 percent. The MinEcon forecasts a decline to 7.3 percent by the end of the year. .
One result of the rise in inflation will be a 7.3 increase in pensions at the beginning of 2025. This will be higher than the expected figure. Pensioners make up a significant portion of Russia’s populace and can be a source of protest and public discontent. According to Sergei Chirkov, head of Russia’s Social Fund, more than 42 million people, or nearly 25 percent, will receive a pension in 2025.
It must be noted that Putin approved the increase in military expenditures as the United States announced that it is preparing a new $725 million military aid package for Ukraine. The assistance includes counter-drone systems, munitions for High Mobility Artillery Rocket Systems (HIMARS), and antipersonnel land mines. Previously, President Biden committed to expending all allocated Congressional funds for Ukraine's military support before leaving office on January 20. His latest package brings the total U.S. aid to roughly $7.1 billion in Pentagon stockpiles since the start of 2023.
Thus, both sides continue to see doubling down as the only option both militarily and fiscally. Until this cycle of escalation is broken, the risk of direct conflict, possibly even nuclear exchanges, appears ever more likely. Indeed, the absence of restraint from either side appears to be the course of action at least until the change of U.S. administrations.
For Russia, expanded military expenditures are a worrying development for the long-term health of a Russian economy that continues to expend greater amounts of financial resources on its war versus NATO-backed Ukraine. According to the Center for European Policy Analysis (CEPA), “for the first time on Putin’s watch, pure military expenditure is expected to rise above social spending, including social policy, education, and healthcare.” Moreover, CEPA notes “increases in overall tax rates contribute a larger share, not least because the extra revenue (including from a higher corporate tax rate) will be diverted into the federal budget and not given to the regions.”
Minister of finance Siluanov noted last week that overall regional budgets will shift from a surplus of one trillion rubles to a deficit of approximately 100 billion rubles in 2024. Declining finances in the regions are primarily attributable to declining exports and export revenues. He cites lower coal exports in the Kemerovo region as one example. This development is important as inhabitants of Russia’s regions are doing most of the fighting.
Combined with Russia’s labor shortages, fears of consumer inflation, and budget pressures on non-defense items, like pensions, education and social services, it is doubtful that the Kremlin can continue on this course indefinitely without risking popular opposition.
Likewise, the Trump campaign’s promises to reduce government spending and increase the real income of most American workers are likely to affect its support for Ukraine. While Trump will almost surely increase defense spending, it will probably not be directed to Ukraine if one believes his campaign rhetoric.
Russia’s leadership must understand this and, therefore, the condition of the Russian economy must be part of the formula for when and under what conditions Russia agrees to negotiations. Perhaps the newly signed Russian defense budget is a signal to the new Trump administration that Moscow is willing to up transaction costs of the war until it reaches a point where restraint and negotiation becomes possible if not necessary.
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Top Image Credit: Senate Committee Hearing: The Imperative to Strengthen America's Defense Industrial Base and Workforce (YouTube/Screenshot)
Industry: War with China may be imminent, but we're not ready
December 06, 2024
Military industry mainstays and lawmakers alike are warning of imminent conflict with China in an effort to push support for controversial deep tech, especially controversial autonomous and AI-backed systems.
The conversation, which presupposed a war with Beijing sometime in the near future, took place Wednesday on Capitol Hill at a hearing of the Select Committee on the Chinese Communist Party (CCP) entitled, “The Imperative to Strengthen America's Defense Industrial Base and Workforce.”
“Planning, preparing, and then doing what is necessary as if we will be at war with China in the next three years is probably the best way to ensure that we will not be at war with China during this time,” said speaker Dr. William Greenwalt, a nonresident senior fellow at the American Enterprise Institute (AEI).
Similarly sounding the alarm, Anduril Industries Chief Strategy Officer Chris Brose suggested the U.S. would run out of weapons in under a week of war with China.
Positing that inaction may invite aggression from China, committee witnesses proclaimed that America cannot counter increasingly innovative adversaries without a radical transformation of its defense industrial base.
And in such a transformation, witnesses proclaimed that deep-tech innovations including AI, autonomy, software and adjacent tech are vital to both the development of state-of-the-art weaponry but also towards the “hyper-scaling” of production processes key towards developing competitive arsenals.
“Deterrence depends on an industrial base that can produceorders of magnitude more weapons and military platforms,” Brose said. “This is not possible on a relevant timeline with our traditional defense systems and their equally traditional means of production, but it is eminently achievable with new classes of autonomous vehicles and weapons.”
Ultimately, AI tech tools were lauded for their perceived centrality in Washington’s ability to compete amid a fraught geopolitical climate. Going unmentioned were growing ethics concerns, where, for example, AI-powered weapons and targeting systems have sparked controversy for their use in Gaza, often against civilians and for high rate of errors.
Critically, conflicts of interest also abound. Brose’s Anduril Industries has springboarded off venture capital funding from the likes of billionaire Peter Thiel’s Founders Fund into the forefront of the weapons industry. The organization has quickly forged close government ties, as showcased by Anduril co-founder Trae Stephens’ recent consideration by President-elect Trump for the deputy secretary of defense position, the second highest civilian post at the Pentagon
While Greenwalt’s AEI does not publicly disclose donor information, an AEI speaker likewise revealed in a 2023 talk that the organization receives funding from Pentagon Contractors like Lockheed Martin and Northrop Grumman.
And passing through the Pentagon-private sector “revolving door,” witness Halimah Najieb-Locke, vice president of policy and strategy for AI and computing company Entanglement, Inc., worked for the DoD as assistant secretary of defense for industrial base resilience until May of this year.
Meanwhile Najieb-Locke’s Entanglement, which focuses on AI, quantum computing, and algorithms, appears positioned to benefit from lawmakers’ positive response to the technology-forward hearing.
Indeed, lawmakers present were on the same page. “We need a healthy defense industrial base now to deter aggression and make sure the world’s dictators think again before dragging the U.S. and the world into yet another disastrous conflict,” Rep. Raja Krishnamoorthi (D-Il.) said.
The hearing’s witnesses may well believe their efforts bolster America’s competitiveness and national security in increasingly tenuous times. And yet, their affiliations suggest their efforts also line their pockets, all while advancing contentious AI-backed and autonomous military production and weapons systems.
Altogether, the witnesses’ drive for ground-up defense industrial base transformation, especially when posed in tandem with what’s depicted as imminent war with China, steers congressional discourse towards a tech-forward war-footing.
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Diplomacy Watch: Still tap dancing around NATO for Kyiv
December 06, 2024
Kyiv and Moscow both hinted this week at their shifting expectations and preparations for a potentially approaching conclusion to the Ukraine War, amid a frantic push from the Biden administration to “put Ukraine in the strongest possible position” ahead of President-elect Trump’s inauguration in January.
National security adviser Jake Sullivan reiterated this goal as part of a Dec. 2 White House announcement of $725 million in additional security assistance for Ukraine, which will include substantial artillery, rockets, drones, and land mines and will be delivered “rapidly” to Ukraine’s front lines. The Kremlin said on Tuesday that the new package shows that the Biden administration aims to “throw oil on the fire” of the war before exiting office.
Later in the week, House Speaker Mike Johnson told reporters he has no plans to give in to a Biden administration request to include $24 billion in additional Ukraine aid as part of a short-term spending bill that Congress must pass by Dec. 20.
“It is not the place of Joe Biden to make that decision now,” Johnson said. “We have a newly elected president, and we’re going to wait and take the new commander-in-chief’s direction on all of that, so I don’t expect any Ukraine funding to come up now.”
Ukrainian President Volodymyr Zelensky’s rhetoric made a subtle shift in the past week, signalling now that he is open to negotiating a peace deal. In an interview over the weekend, he suggested a potential cessation of the lands Russia has seized in exchange for a NATO invitation, with the hope of winning the rest of the territory back “in a diplomatic way.”
Kyiv made this known at a NATO foreign ministers meeting on Tuesday, saying it will not settle for anything less than NATO membership in any future negotiations. Ukrainian Foreign Minister Andrii Sybiha referenced Ukraine’s pact with major powers 30 years ago exchanging its nuclear arms for security guarantees it has not received — and only would with NATO membership.
Diplomats sidestepped the call, with several officials saying there remains a lack of consensus in the alliance. Latvian Minister of Foreign Affairs Baiba Braze said NATO political leaders have agreed “in principle” for Ukraine to join the alliance, according to Al Jazeera, but are waiting on Trump’s administration to take office before moving forward.
Russian officials have increasingly hinted at the materialization of peace talks with Ukraine as well; on Monday, Valentina Matviyenko, the speaker of Russia’s upper house of parliament, said there could be attempts at peace talks with Ukraine next year.
Still, the Kremlin remains adamant that the conditions are not yet right for talks. Russian spokesperson Dmitry Peskov thanked Qatar and “many” other countries on Wednesday for their interest in hosting Ukraine peace talks, but said “there are no grounds for negotiations yet.”
Other Ukraine News This Week
Russian President Vladimir Putin approved a 2025-2027 Russian military budget, which includes a 25% increase in military spending, CNN reported. The budget allocates 32.5% of total government spending to the military, a total of $126 billion, for 2025 alone.
Russian and Ukrainian forces have continued heavy exchanges this week, principally in the form of drone attacks, according toAl Jazeera. Russian forces have attacked critical infrastructure The Russian Defence Ministry said this week that its military gained control over the towns of Illinka, Petrivka, Kurakhove, and Novodoarivka in eastern Ukraine.
ABC News reported that the Russian Navy tested new-generation hypersonic missiles, the Zirkon antiship missile and the Kalibr cruise missile, as part of a series of exercises in the eastern Mediterranean Sea on Tuesday. Putin told Russian state media the Zirkon weapon has “no analogues in any country in the world,” according to BBC.
NATO chief Mark Rutte told reporters on Tuesday ahead of the foreign ministers’ meeting that the alliance will step up intelligence sharing and infrastructure development to counter “hostile” acts by Russia and China including “sabotage, cyberattacks, disinformation and energy blackmail.”
NATO concerns about “hybrid” attacks connect to various events throughout the past several months, including an ongoing probe as to whether a Chinese freighter’s severing of two fiber-optic cables in the Baltic Sea last month was sabotage. According to Reuters, China has expressed readiness to assist in the investigation, and Russia has denied involvement in the incident as well as other accusations of sabotage.
From State Department Press Briefing on Dec. 2
State Department spokesperson Matthew Miller said “Ukraine’s future is in NATO,” saying they’ve made “great progress” on the outlined path towards membership but also that there is more work they need to do.
“I don’t want to preview any actions that we will take at this meeting, but certainly every time we can get together as allies and to talk with our Ukrainian counterparts, it’s an important step along that road towards NATO membership,” Miller said.
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