The Skyrocketing Costs for Russia’s War Effort

The final deficit of the Russian federal budget for 2022 appeared to be 3.35 trillion rubles, almost $48.8 billion according to the average exchange rate during the year. Although, the ruble became a partially convertible currency after the beginning of Moscow’s aggression against Ukraine, and therefore, the exchange rates must be treated carefully. The Russian government’s total revenue for 2022 was 27.77 trillion rubles (about $409.68 billion) and total spending was 31.11 trillion rubles (just under $459 billion) (RBC, January 10, 2023). However, the original government budget had accounted for 25 trillion rubles ($368.81 billion) in revenue and only 23.78 trillion rubles ($350.81 billion) in spending (Minfin.gov.ru, December 2021). Thus, the additional and unplanned spending of 2022 came out to be 7.33 trillion rubles, or $107 billion, and an undefined share of this amount, presumably somewhere between 3 trillion and 4 trillion rubles ($44 billion to $59 billion), belongs to the national defense, national security and law enforcement budgets. Meanwhile, the additional 2.77 trillion rubles ($40.86 billion) of revenue came from increased taxes on Gazprom and the Russian National Wealth Fund, which de facto means an emission of rubles (Kommersant, September 28, 2022; Minfin.gov.ru, November 8, 2022; TASS, December 27, 2022).

Russian government budget planning for 2023 presumes 26.13 trillion rubles ($385.48 billion) in revenue and 29.06 trillion rubles ($428.71 billion) for spending (Budget.gov.ru, December 5, 2022). The share of national defense spending is planned to exceed 5 trillion rubles (almost $74 billion), and the share of the budget dedicated to national security and law enforcement is planned to exceed 4.4 trillion rubles ($64.9 billion). These figures were updated from the original estimates of 3.47 trillion rubles ($51.19 billion) and 2.97 trillion rubles ($43.82 billion), respectively (Minfin.gov.ru, December 2021; Duma.gov.ru, October 26, 2022; Duma.gov.ru, November 10, 2022). However, the current budget plan is not final and will probably be revised throughout 2023. Therefore, if the estimated immediate costs of Russia’s war against Ukraine during 2022–2023 grew from 5 trillion rubles (almost $74 billion) to 8.3 trillion rubles ($122.4 billion) as of November 2022 (see EDM, November 17, 2022), now it definitely exceeds 10 trillion rubles (147.5 billion) and promises to further increase.

Nevertheless, all these additional trillions of rubles in 2022 did not led to a significant increase in arms manufacturing. For instance, total manufacturing rate in Russia for the period running from January to November 2022 was 99.2 percent when compared to the same period in 2021. Even if the manufacturing of transport vehicles, including all types of aircraft and vessels but excluding automobiles, increased by 16.5 percent in November 2022, as compared to November 2021, and by 18 percent, as compared to October 2022, the total production index for manufacturing of transport vehicles from January to November 2022 was 98 percent of that for January–November 2021 (Rosstat.gov.ru, December 28, 2022; Rosstat.gov.ru, December 28, 2022).

Even so, some indexes did demonstrate a significant increase in production and are related to the defense industry: from January to November 2021, the manufacturing of computers, electronics and optical devices was 104 percent and the manufacturing of non-specified machinery and equipment was 102.9 percent of production values for the same period in 2021. Particularly, in 2022, the increase for the manufacturing of radar, navigation hardware and radio equipment was 117.6 percent (in rubles); for the manufacturing of computers and their parts was 148.1 percent (in rubles); and for the manufacturing of semiconductor devices was 113.2 percent when compared to the same period of 2021. However, the manufacturing of electricity in Russia was only 100.8 percent (in billions of kilowatts per hour) of production in 2021, which also confirms the presumption that no significant increase in Russian arms manufacturing transpired in 2022 (Rosstat.gov.ru, December 28, 2022).

Moreover, at least one of the leading Russian state-owned defense corporations, Roscosmos, confirmed that it did not fully execute its contracts in 2022 (Vedomosti, December 21, 2022). This reflects the notion that increasing arms manufacturing remains challenging for the Russian authorities.

Despite these facts, the Kremlin is trying to solve this problem at any cost. And the main option considered here is, in 2023, using storages of components and materials that are aimed for arms manufacturing in 2024–2025. Traditionally, the Russian defense industry creates such storages before the long-term arms contracts start (Mil.ru, December 21, 2022). Consequently, the Russian defense industry may produce as many arms as possible in 2023, instead of adhering to the previously scheduled work for 2023–2025. The immediate result would be a cost-plus inflation, with the inevitable prospect of further inflation and a decline in production in coming years, which means that the average arms manufactured annually will either stay the same or decline. Nevertheless, the Russian leadership prefers to ignore this prospect.

Another serious challenge comes in the form of a severe deficit of personnel in Russia’s defense industry, which is officially estimated at 400,000 workers and engineers (VPK, June 30, 2022). In an aim to alleviate this challenge, the management of all defense factories have the option to make Saturdays working days and to cancel employees’ vacations, as was the case with Kurganmashzavod, the only Russian manufacturer of tracked armored fighting vehicles (Ura.ru, December 20, 2022). The inevitable prospect of decreasing quality of production is also being largely ignored by the Kremlin (see EDM, January 6). Yet, another option is possible here: the decrease in Russian arms exports means that production lines may be partially used to manufacture arms expressly for the Russian Armed Forces. For instance, by the end of November 2022, Russian arms exports stood at $8 billion (TASS, November 25, 2022). Consequently, total arms exports for 2022 were definitely much lower than in 2021, when they totaled $14.6 billion (Kommersant, August 15, 2022). Although, this source of increase is limited somewhat considering that 40 percent of Russian arms exports in 2022 were attributed to aviation and 30 percent to arms for ground forces and the navy (RBC, November 26, 2022).

As a result, even if the Russian leadership increases defense spending and does not care about the war’s rising costs, the actual opportunities for Russia to improve arms production are limited. The Kremlin faces a lack of time and long-term economic sustainability. Therefore, it may be sowing the seeds of its own defeat this year, especially if the combat and economic pressure on Moscow continues to ramp up. However, before suffering defeat, the Russian authorities may choose to mobilize all available means to prevent this—a prospect that is growing ever-more bleak in the face of persistent failures to carry out a complete mobilization of the domestic economy (see EDM, October 31, 2022).