The cost of war 

How much is mobilisation worth

Vladimir Putin promised in October that all mobilised privates will receive a monthly wage of 195,000 rubles [€3,000] after joining their military unit. Those of higher ranks were promised to be paid even more: 225 to 244 thousand [€3600-3900], but the number of such draftees remains undisclosed. 

If the authorities’ reports that around 320 thousand people have been mobilised are to be believed, and assuming that they will try to maintain this figure, then the monthly expenditures on wages for the mobilised will stand at 62 billion rubles [€973 million]. This is more money than the annual budgets of 20 Russia’s regions. Paying the wages for two months [€1.95 billion] will cost Russia more money than half of the country’s regions get to spend in a year.

However, the salaries of the mobilised may become but a small proportion of the expenses compared to the compensation pay-outs for the wounded and killed. The authorities promise to pay 6 million rubles [€94,200] to each of the wounded, and 12 million [€190,000] the families of the deceased.

Shortly after the mobilisation was declared, Novaya-Europe published an article by Oleg Itskhoki and Maxim Mironov, two economists, about the economic and demographic losses Russia would suffer due to the mobilisation. 

They noted that the losses among the mobilised would be higher than those of the contracted army due to poor training and motivation. Since the British intelligence estimated the casualties among the mobilised in the “DPR” at as high as 55% in the first three months of the war, the two suggested that Russia’s casualties among the mobilised could reach 60-70% in the next six months, 15-20% of those killed and 45-50% wounded.

If we take the lowest estimate at 15% killed (48 thousand people) and 45% wounded (144 thousand) and assume that these casualties will span over an entire year, the budget will require to spend 1.44 trillion rubles [€22.7 billion] on compensations. If Russia drafts 130 more people to make up for the losses, the expenses will go to as high as 2.2 trillion [€34.7 billion]. One trillion [€15.77 billion] would be required to pay wages to 450 thousand conscripts.

Bottom line: the more “optimistic” scenario will require an additional 2.2 trillion on wages and compensations from the budget next year, the “pessimistic” one would require 3.2 trillion.

What else is included in the war budget

Russia’s government had submitted a budget bill to the State Duma shortly before the mobilisation was declared, and the draft expenses were not included there, the economists Novaya-Europe interviewed say. The bill was adopted on 24 November.

An army of conscripts would need more weapons, equipment, food, fuel, and so on. According to the Electronic Budget portal, as of 2 November (more recent data is unavailable since the Ministry of Finance declared such data classified), with a grouping of approximately 200 thousand people, 1.97 trillion rubles [€30.8 billion] have already been spent on the purchase of weapons this year, 387 billion [€6 billion] was spent on weapons repair, salaries for the Defence Ministry amounted to 840 billion [€13 billion], and 385 billion [€6 billion] were spent on food, fuel, clothing, various services and the purchase of goods. This data is still incomplete since many budget expenditures are usually only reported at the end of each year.

Sergey Aleksashenko, an economist, suggests that the cost of the war and the occupation of Ukraine be estimated by the increase in expenditures on “national defence” and “national security”.

The expenditures on national security will rise by 58% in 2023 up to 4.41 trillion. This increase in expenditures on law enforcement is needed to “put things in order” on the occupied territories of Ukraine, Aleksashenko believes. 

The overall increase in both areas combined is going to be 3.5 trillion [€54.5 billion] compared to 2021, or 3.2 trillion [€49.9 billion] deducting the 8% inflation. An additional 139.4 billion [€2.1 billion] is planned to be spent on reconstructing infrastructure on the occupied territories. Thus, the overall war and occupation budget, including wages and compensations for the mobilised, might go up to 5.5-6.5 trillion [€85.7 billion-101.2 billion] in 2023, or 7 to 8 trillion [€109 billion-124.8 billion] in 2022 and 2023 combined. 

By way of contrast, it was planned to spend 6.4 trillion rubles [€99.9 billion] from the federal budget on social policy (this includes retirement money and welfare) in 2022.

At the same time, the authorities have a way to avoid a critical debt increase, which also looks quite risky given that there are riots among the conscripts. It will be easier for the government to partially refuse to fulfil promises on payments to conscripts, economist Maxim Mironov believes. One of the options is to pay the high wages only for participating in battles, something that will be difficult to prove to the officials a posteriori.

According to the Electronic Budget portal, as of October 27, the state allocated 189.7 billion [€2.9 billion] rubles to the Defence Ministry and the National Guard for compensations for the killed and wounded. The number of compensations remains undisclosed, but this money would be enough for 9,000 killed and 18,000 wounded soldiers, for example. This may not be the full amount since some of the killed soldiers are normally considered missing for several months. In addition, payments to the killed PMC mercenaries and conscripts from the DPR and LPR did not come directly from the Russian budget.

‘It’s an insane construct’

The next year’s budget deficit may be significantly higher than the forecasted 2.9 trillion [€45.1 billion], not only because of the mobilisation, but also because it relies upon an unrealistically optimistic revenue forecast, economists Sergey Aleksashenko and Igor Lipsits tell Novaya-Europe.

This is confirmed by Russia’s Accounts Chamber which criticised the budget bill. According to auditors, the volume of energy supplies and the price of Russia’s Urals oil may be lower than the bill predicts. 

Russia’s oil and gas revenues hit record highs in April. The country’s budget was also in surplus in the early months of the Ukraine War, meaning that Russia’s income exceeded its expenditures due to the rising energy prices. In July, August and September, the oil and gas revenue were below pre-war levels, and the budget was in deficit. 

A new surplus emerged again in October due to a one-time tax payment by Gazprom for the past year. Nonetheless, the budget that was planned this year implied that expenditure would exceed revenue by 1.3 trillion rubles [€20.2 billion]. This margin is most likely to be even higher because of the “new challenges”, Anton Siluanov, Russia’s Minister of Finance, said earlier. 

Surprisingly enough, the government included a growth of all other revenues, i.e., non-oil and gas ones, into the 2023 budget. “This prediction lacks any proof; it’s an insane construct for the budget. It is most likely that non-oil and gas revenue will decrease,” Lipsits believes. 

Where to get money for the war

The government was planning to cover the budget deficit mainly with the help of the National Welfare Fund.

This fund was intended to be a money stock for the future generations. Excess profits from oil exports had been added to it over years; some of this money was invested in various projects. Its liquid part (not invested in projects or stocks) was 7.5 trillion rubles [€116.8 billion] less in September, down more than 2 trillion [€31.1 billion] since the start of the war. An additional 2 trillion is planned to be spent in 2023. 

The government expects additional budget revenues to come from an increase in the export duty and severance tax on gas, higher taxes on the oil industry, the introduction of an export duty on fertilisers and coal, an increase in revenue from tobacco excise tax, and a new excise tax on sweetened beverages. 

As taxes rise and oil and gas exports revenue drops, the government has decided to index utility rates eight months ahead of schedule. The prices of utility services will rise starting 1 December 2022 instead of July 2023 as it was planned before. The maximum increase will not exceed 9% nationwide. This will be the second indexation of utility rates in one year.

Lending money to the motherland

Since reserves, tax hikes and already planned spending cuts are not enough to cover the deficit, the government will actively borrow money. “The holes in the budget will be patched up using two sources: the sale of federal loan bonds and inflation through excessive cash emission,” says Lipsits.

Russia’s treasury borrowed money at a record pace in November, fearing that the budget deficit would be much higher, and made record discounts after earlier attempts of borrowing money had failed. This may as well be described as “desperation”, says Dmitry Polevoy, an economist.

Russia’s pre-war national debt was 20.8 trillion [€325.8 billion], and it is planned that it will grow to 23.4 trillion [€367.4 billion] in 2022. Prior to the mobilisation, the government also budgeted for the growth of the national debt to 25.3 trillion [€394.2 billion] in 2023, and to 29.5 trillion [€459.7 billion] in 2025. According to the government’s plan, when the debt rises to this amount, its service will cost 1.8 trillion rubles [€28 billion] a year, exceeding the federal budget’s annual spending on education and healthcare. 

However, the things that the government is doing now may significantly increase the costs of debt service. The government borrows money at a more than 10% interest rate, so debt service costs could potentially rise to 3 trillion [€46.7 billion] a year, Lipsits said. The rate might become even higher should the inflation increase.

“Many economists said that a default was impossible because there were large reserves of foreign currency, and the budget was not very much in the red, but that was before February. Now Russia is on a track that could lead it to default,” says Lipsits. 

The state may also present the failure to fulfil debt obligations, for example, as a bond freeze, as was the case with debt securities issued under Stalin, Lipsits believes. In 1957, Nikita Khrushchev suggested postponing bonds repayment for 25 years. The Soviet propaganda said that workers met the proposal with applause, and that the support among the people was ubiquitous.

Russia’s treasury will still insist on not allowing too much of a hole in the budget, Aleksashenko thinks.

“I don’t believe they would use up the entire National Welfare Fund or let the deficit go down to 7 trillion [€109 billion]. I think Siluanov will go out on his shield not to let this happen. I don’t know what expenses he will be cutting. They will cut all sorts of expenses, investment ones to begin with, excluding those connected with [Vice PM] Marat Khusnullin. The usual thing the treasury does is that it tells all ministries to cut expenses by 7-10%. The ministries are up to decide what things they need to cut. Then each ministry starts complaining and asking not to cut expenses,” Aleksashenko says.

Mironov believes that the government may also start cutting expenses even more, including social benefits which are still being saved. 

According to Lipsits, if Russia’s economy continues to go the same way it does now, then the risk of the government defaulting on its debt obligations may become true in 2025 or 2026. But if the sanctions work effectively next year, and war losses are high, this will happen even sooner, Lipsits believes, noting that the general picture will become clear in February or March 2023. “What we can see now are the first signs, first sketches of this disaster, but not the final outline,” he says.