FPRI BMB Ukraine: the cost of war

FPRI BMB Ukraine: the cost of war
Finance Minister Anton Siluanov said that Russia needed “huge financial resources” and increased the promise of social and economic support to RUB8 trillion – double previous estimates. / wiki
By FPRI BMB Ukraine June 8, 2022

Speaking at the Financial University on May 27, Finance Minister Anton Siluanov said that Russia needed “huge financial resources” for the war in Ukraine. Siluanov did not give a figure, but initial budget data for the period January-April provides a part of the picture of the direct and indirect costs of the war.

In April, total spending increased by 38% year on year. According to Siluanov, total additional government support this year could reach RUB8 trillion, equivalent to an increase in spending of over 30% compared to the original 2022 budget (although some of this support will take the form of tax holidays and reduced federal revenue, rather than additional spending). This is a stimulus equivalent to around 6% of the pre-war forecast GDP for 2022.

How much of this additional spending will go directly on the military? Over the first four months of the year, Russia had already spent 44% of the planned budget for "national defence". In April, spending on national defence was up by 150% y/y to RUB627bn. It was also 80% higher than the average monthly spending on defence from January to March (a period that included more than a month of fighting). Earlier in May, Prime Minister Mikhail Mishustin said that the cost of economic support, including tax relief, was expected to reach RUB5 trillion, while “other measures” would raise the total additional budget stimulus to RUB8 trillion. The RUB3 trillion gap between those two figures may represent additional spending on the military.

On the revenue side, the April budget data showed a collapse in VAT and excise receipts of 36% and 43% respectively, which is in line with the estimates for the decline in imports as a result of sanctions. As a result, the contribution of the oil and gas sector to budget revenue rose to 63%, compared with 32% in 2021 and just 28% in 2020. Oil and gas revenue in January-April was up by 91% y/y, but Russian oil is now trading at a big discount. In April the average price of Russian oil was just over $70 per barrel, compared with a Brent average of $106 per barrel. The partial EU oil embargo, announced at the end of May and discussed below, will further widen that spread.

The outlook for Russian budget revenue has become harder to forecast. This is due to the sharp increase in dependence on oil and the uncertain outlook for Russian oil prices in the context of further sanctions and the faltering global economy. Spending could also adjust upwards again depending on how long the war in Ukraine continues. The HSE Development Center calculates that if spending in May-December follows the pattern of April, the full-year deficit will reach RUB3.85 trillion, or 2.7% of GDP. While this appears to be a fairly modest deficit, financial sanctions mean the Finance Ministry is likely to have to draw down reserves or cover the deficit via the National Welfare Fund.

This article originally appeared in FPRI's BMB Ukraine newsletter. Click here to learn more about BMB Ukraine and subscribe to the newsletter.


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