EurasiaNet – 2008-09-08 22:37:01

http://www.eurasianet.org/departments/insight/articles/eav090408a.shtml

(September 4, 2008) — An analysis of Russia’s state spending shows that Vladimir Putin’s Kremlin is taking the country in a dangerous direction, girding for a new Cold War while neglecting the domestic infrastructure. Military and security spending is so lopsided in Russia that the country’s cash cow — the energy sector — is being starved of funds.

According to figures recently released by the State Committee for Statistics, Russia’s revenue for the first half of 2008 amounted to almost 4.4 trillion rubles, or, at the current exchange rate, about $176.5 billion. Expenditures totaled almost 3 trillion rubles, or $120.9 billion. Overall, the Russian government is projected to spend almost 7 trillion rubles, or $278.6 billion, under the full-year 2008 budget.

A breakdown of federal expenditures during the first half of the year indicates that Russia is muscling up, spending lavishly on defense and security. At least one-quarter of Russia’s expenditures during the first six months of 2008, or $31.2 billion, was directly devoted to those two sectors.

Given the fact that the budget also contains almost $15 billion for discretionary spending, the actual share of defense-security spending during the time period could hover around 35 percent. Long before Russian troops swarmed into Georgia, military-security spending was projected to accelerate during the second half of the year. If discretionary funds are included, the share of military-security outlays for all of 2008 is projected to approach 40 percent.

In sharp contrast to the defense spending binge, the Russia government is scrimping on expenditures to maintain and improve the country’s energy infrastructure.

A paltry 3.3 billion rubles, or about $133 million, was devoted during the first half of 2008 to what is without doubt Russia’s key economic sector. Likewise, the agricultural sector, which employs a large share of the Russian population, received only $363 million in funds. Combined, that is less than half of 1 percent of the budget for the first six months of the year.

While expenditures on the oil & gas sector and on agriculture should rise during the second half of the year, spending on these two sectors nevertheless will remain just a tiny fraction of what is going to Russia’s once-again burgeoning military-security complex.

Not only does Russia appear to be short-changing the present, it seems to be risking the future. According to official first-half figures, the state spent only 29.1 billion rubles, or $1.17 billion, on research and development for technologies and products with civilian applications. Over the same period, expenditures on social welfare amounted to $16 billion, a figure than is slightly lower that defense outlays.

Energy exports have provided Russia with robust budget surpluses in recent years. For example, the first-half surplus was over $55 billion. But the country may not be able to count on windfall profits for much longer. According to official budget projections, state spending is expected to equal the amount of revenue collected in 2010.

The rapid shrinkage of surpluses could have profound geopolitical ramifications for Russia, as in recent months the Kremlin, operating through state-controlled conglomerates such as Gazprom, has been able to purchase the allegiance of Central Asian states, especially Turkmenistan and Uzbekistan.

During a September 2 visit to Uzbekistan, for example, Russia’s political supremo Vladimir Putin was able to convince Uzbek leaders to agree to the construction of a new Central Asian gas pipeline by promising to pay higher prices for Uzbek gas.

Current spending patterns could leave Russia dangerously exposed to sudden shifts in global economic conditions down the road. The budget suggests that the Kremlin is not giving much thought to contingency planning, despite the presence of warning signs, such as double-digit inflation. In a report issued in June, the International Monetary Fund expressed concern that the Russian economy was overheating.

“Inflation has almost doubled during the past year and now extends well beyond food and energy price increases. Domestic demand is increasing at an annual rate of 15 percent in real terms, while GDP is growing at 8 percent, which is somewhat above the level that can be maintained without causing accelerating inflation,” the IMF report said.

“Resource constraints are particularly evident in labor markets, where shortages are causing real wage increases of about 16 percent annually, well above growth in labor productivity. As a result, unit labor costs are now rising,” the IMF report continued. “Domestic resource constraints are also evident in the rise in import volume growth to almost 30 percent annually.”

The IMF suggested state spending on the country’s social infrastructure needs to be significantly increased. In particular, it cited a need for a substantial increase in outlays for the public pension system. “Severe infrastructure bottlenecks are an obstacle to long-term growth prospects,” the report said.

Russia’s ability to finance its budget aims is heavily dependent of energy exports, which generate fully two-thirds of all export revenue covering countries of the “far abroad”, according to the Federal Customs Service. Other raw material export earners for Russia include; metals, with a 14.3 percent share; and chemicals, with a 5.4 percent share.

Meanwhile, manufacturing, including the production of machines and equipment, account for only a 3.4 percent share of Russia’s overall export revenue. If the price of energy does not remain in the stratosphere, the Russian economy could come crashing back to earth.

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