Russia’s finance ministry has revised the 2016 budget deficit target to 3.66% of GDP, above the 3% red line set by the Kremlin, Reuters reported on October 3, citing changes to the fiscal forecast posted on the government’s online portal as it shapes spending for 2017-2019.

As the ministry tries to balance rising military spending with essential social outlay while supporting modest economic recovery, unconfirmed reports showed that the defence budget specifically is being boosted as Russia’s relations with the West deteriorate, notably over Syria.

After analysing the latest amendments to the 2016 budget, Gazeta.ru reports that almost all previous priority areas are being cut, including social and investment programmes. At the same time, lower projected revenues and higher military spending results in a higher deficit of RUB679bn ($11bn) or 3.66% of GDP.

Specific recipients of additional funding are unclear as they are listed in classified parts of the budget, which does not disclose itemised information about defence and security allocations, government sources told the online daily.

The finance ministry is reportedly paying up to cover state-guaranteed loans taken out in recent years for military spending, hoping to ease the pressure from defence budget in 2017-2019, the sources claim.

Other pro-military spending developments reportedly include proposed amendments to classify defence budget discussions among ministries, members of parliament, and senators. The finance ministry is also reportedly seeking to be allowed to unilaterally increase military spending by 10% at short notice without revising the federal budget law.

Ex-finance minister and policymaker Alexei Kudrin said he was “surprised” to discover that additional spending in 2016 will go into classified categories, RBC online business portal reported on October 4. 

As well as increasing the expected budget deficit, the government increased planned domestic borrowings from RUB300bn to RUB500bn ($4.8bn-$8bn), while restricting use of the Reserve Fund at RUB2.1 trillion.

Keeping use of the rainy day fund flat suggests the government expects to see revenues from the Bashneft oil company privatisation deal still in 2016, and adds weight to reports that the Kremlin-controlled Rosneft oil major will be approved to buy Bashneft.

The changes to the 2016 budget are in line with previous statements by Finance Minister Anton Siluanov on main fiscal guidelines that include higher external and domestic borrowings, depletion of reserve funds, and adhering to a presidential veto on major tax moves before the 2018 elections.

Gazprombank sees the news on increased spending in 2016 as positive for the GDP recovery, as recently its analysts have been pointing to the close correlation between spending and output dynamics. However, higher spending might further delay the renewed monetary easing cycle by the central bank and thus limit the financing sources for economic recovery.

This year’s budget was drafted at $50 per barrel oil price, with Urals oil averaging at about $40 in January-September, while the 2017-2019 budget is drafted at a conservative $40 per barrel forecast.

“It is likely that the deficit this year will end up being slightly less than 3.7% of GDP, as the $40/bbl oil forecast looks rather conservative to us,” VTB Capital commented on October 4.

Meanwhile, Russia’s Reserve Fund decreased in September by 2.5% to RUB2.037 trillion ($32.57bn), while the National Wealth Fund lost 2.2% and stands at RUB4.617 trillion ($73.84bn), the finance ministry said on October 4. Last month, no money was taken from the Reserve Fund to cover the budget deficit. In August, it took RUB390bn ($6.24bn), officials added.