MOSCOW BLOG: Russia to buy guns instead of books

By bne IntelliNews July 10, 2013

Ben Aris in Moscow -

The Russian government approved the next three-year budget on July 4. The fiscal plan cuts spending on education and health in favour of a boost for the armed forces.

Relations between Russia and the west are probably at their lowest ebb since the fall of the Soviet Union. Russia's refusal to hand over former NSA agent Edward Snowden, who is holed up in the departure lounge of Moscow's Sheremetyevo airport, has incensed the US government, but its just the latest in a string of PR disasters that have rubbed salt into a very raw wound.

The Obama administration's attempt to "reset" relations with Moscow has failed. Russian President Vladimir Putin said that time has run out at the Kremlin's St Petersburg Economic Forum last year and Russia will no long reach out and try to be "friends" with the west. Instead it has turned eastward to China to build its strategic partnership, and while the west is not exactly an "enemy" Russia clearly no longer trusts the west to help it in any way other than as a business partner.

All of this is manifest in Putin's commitment to reequipping the Russian armed forces. A new Cold War has started. If relations are going to be prickly, Putin feels that he needs a strong conventional army so Moscow has a stick to stand behind any strong words that are exchanged.

Russia has massively expanded its military spending in recent years. However, the increasingly cash-strapped government, which is only just in profit thanks to the global economic slowdown, has had to cut spending on other areas to pay for the new warships, planes and missile systems.

Fittingly enough, on July 4 - as America celebrated Independence Day - the Russian ministry of finance submitted a proposal for spending through to 2016.

Under the plan, military expenditure as a share of overall government spending will be dramatically increased from 15.7% of the total spending in 2013 to 22% in 2016. That suggests a rise from 3.2% of GDP to 3.8% - far above the rest of Europe, but still slightly behind the US, which spends a bit more than 4% of GDP on its military.

Still, with Russia's increase in spending, a shift in military power in the world is perceptible. The US was running a debt to GDP ratio of 107% in 2012, according to the World Organisation of Creditors, or $53,229 per person against Russia's 11% of GDP, or $1,544 per person. Under the weight of this massive debt, America has been forced to dramatically cut back on its military spending.

The situation in Western Europe, which is labouring under similar debt levels, is even more drastic. To Washington's alarm, almost all of its NATO allies in Europe have cut military spending to below the 2% of GDP they are required to maintain under the terms of the treaty.

However, Russia cannot afford all this spending and has had to make cuts elsewhere. "While the overall framework is prudent in nature as it formally preserves the fiscal rule, it reveals a worrying (and significant) distribution of expenditures away from much needed education and health towards defense and national security," Ivan Tchakrov, chief economist for Russia and the CIS at Renaissance Capital, wrote in a note.

"The share of health spending falls from almost 4% in 2013 to only 2.2% in 2016. Similarly, education spending is reduced to 3.9% in 2016 from 5.1% in 2013," Tchakrov adds. "This is particularly concerning as Russia already lags [emerging market] peers (South Africa, Brazil, Poland and Mexico) in education expenditures, and Brazil, South Africa, Poland, Turkey and Mexico in health spending."

That risks Russia falling even further behind in terms of economic development, he suggests. "Thus, the budgetary framework entrenches already existing structural weaknesses and poses longer-term risks to the development of Russia as a genuinely competitive global EM economy."

In other words, with the latest budget Putin is sacrificing the long-term economic development that comes with higher education and health levels for a short-term military catch up in power. It's testament to the poor relations with the US that the Kremlin feels it needs to rearm - a process that will take a decade to complete by the Kremlin's own admission - before it can turn to the task of rebuilding the Russian economy for long-term prosperity.

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