Lily Donahue | 14 October 2024

Summary

• The Russian Duma has proposed a new defence budget, increasing military expenditure by 30% to RUB 13.5t (USD 142b). 

• Though the Kremlin has promoted the line that the budget is aimed at social relief, the paltry percentage dedicated to social services negates this. 

• Oil and gas revenues are expected to decline dramatically despite the budget increase due to governmental tax relief initiatives towards gas giant Gazprom. 

• In line with the increased spending plans, Russian President Vladimir Putin has called for a new batch of conscripts. The figure, notably, is equivalent to previous conscription calls. Ukrainian President Volodymyr Zelenskyy, meanwhile, has wrapped up a US visit. Due to Republican skittishness regarding continued funding to Ukraine, it is likely Zelenskyy would prefer a Democratic win in the coming US elections. There are no indications the war is coming to a close.

Already at Soviet-era levels of military expenditure, Russia aims to catapult its defence spending a further 30% in the next fiscal year. Already a security-dominated economy (defence and security now account for 40% of overall expenditure), the Russian Duma has aimed to promote its new budget as relief for average Russians, with a secondary objective of defence spending. The budget proposal was publicised on 30 September, the day Putin has deemed “Reunification Day” - the day Russia annexed the four south-eastern Ukrainian oblasts of Luhansk, Donetsk, Zaporizhzhia and Kherson in 2022. 

Though any keen observer of Russia will doubtless remain unsurprised, the new budget does go against prior announcements. Indeed, last year’s budget aimed to reduce defence spending by 21% in 2025. Whether this was due to a rosy-eyed belief in the war’s end, or only a false attempt to preempt potential anti-war backlash is up for public debate. 

In line with previous budgets which posited coming years would see decreased military spending, the 2025 budget proposes a decreased defence budget in 2026. The budget may spark some - though undoubtedly muted - complaint over bloated soldiers’ salaries. 10% of defence spending is set for military personnel, who, in their first year of service, receive an average of approximately USD 35,000 annually. (For comparison, the average national wage amounts to USD 14,800 annually.)

Oil and gas revenues, once the mainstay of the Russian economy, are expected to fall, even while the duma further bloats the defence budget. Gazprom, the largest gas producer within Russia, has benefited from tax relief, having its mineral extraction tax reduced by over 30%. The move aimed at supporting the company, which had to cut exports to Europe after the Russian invasion. The relief is expected to stabilise Gazprom and allow it to orient towards more friendly outlets, especially China. Russia, however, does not have adequate pipeline infrastructure to support such a move. 

As the war does not appear to be waning, Ukraine is undoubtedly watching the coming US elections with a keen eye. In line with Ukraine’s Democrat-leaning interests, Zelenskyy met with Democratic governor Josh Shapiro on a visit to an ammunition factory in Pennsylvania, a battleground US state. Republican Speaker of the House, apparently inspired by Russia, complained such partisan politicking amounted to “election interference.” Should Republican nominee Donald Trump - who has criticised Zelenskyy for what he sees as profiteering - win in November, American funding to Ukraine may be cut.

Forecast

• Short-term

  • Ukrainian President Volodymyr Zelenskyy was recently in the United States to campaign for continued funds. Ukraine likely prefers a Democratic win in the November 2024 US elections, as Republican candidates Trump and Vance have eschewed further funding to Ukraine. 

• Medium-term

  • Putin’s call for new conscripts and the recent increase in aerial bombardments on Ukraine will likely increase Russia’s defence budget further in 2026. 

  • Ukraine has paralleled Russia, setting aside 60% of the national budget to defence and security. With increased military expenditure on both sides, and no apparent appetite for a withdrawal from Russia, the war is very unlikely to end in the medium-term.