Putin’s Military Buildup Not Sparking Predicted Economic Growth in Russia

Numerous governments have historically sought to use military spending as a means to solve domestic economic problems and generate growth. Indeed, this pattern has been so widespread that, in Russia, many in the defense establishment have long argued that spending more on the military and the military defense industries is justified not only for national defense but as a means to expand the Russian economy and produce a better life for Russians (see EDM, September 23, 2010; October 21, 2011; December 1, 2014). Consequently, many had expressed confidence that President Vladimir Putin’s trillion-ruble expansion in military spending would have a positive impact on the Russian economy. That has not happened, and the reasons say a lot about both the nature of the Russian Armed Forces as well as the country’s economy. Moreover, in Russia’s case, higher defense budgets may have an even more serious downside: the spending going to the military could be preventing the modernization of the economy as a whole—whether or not there has been any notable improvement in military readiness.

But two developments in recent days—an interview Novaya Gazeta carried out with Vasily Zatsepin, the head of the military economics laboratory of Moscow’s Gaydar Institute (Novaya Gazeta, October 29), and a debate about whether to build a naval base in the Kuril Islands (Nezavisimaya Gazeta, Pravda.ru, October 26)—shed some much needed light on the Russian military’s impact on the economy and equally the Russian economy’s increasing impact on the military.

The Gaydar Institute expert points out that the size of the Russian military-industrial complex is vastly overstated. His research suggests that it forms only 1.5 percent of the country’s overall economy, not the 15 percent Moscow routinely claims. He argues that those who talk about the positive economic impact of increased spending on the defense sector and the military are thus overstating what those portions of the system can do. And he notes that if these sectors are providing the same level of employment as they always did, then that sector is demonstrably not modernizing and thus will not help the economy much as a result.

Military spending, Zatsepin says, can therefore be defended only on the basis of how much it contributes to the country’s ability to defend itself or pursue its foreign policy goals. At the same time, he argues Russia needs to reduce its Armed Forces to about 500,000 and shrink its defense establishment more generally because of the poor economic situation. Yet, he concedes that is a difficult argument to make in Moscow at present, given Russia’s enormous size and hence enormous perimeter of potential enemies. Still, he concludes that situation is nothing new, though it does continue to cast a dark shadow on Russia’s economic possibilities (Novaya Gazeta, October 29).

Just how dark that can be is reflected in the debate about whether Moscow should or will build a naval base in the Kurils. A senior Russian lawmaker has declared that the issue has already been decided in the affirmative. But experts, including senior retired admirals, say they have heard such promises before and that there are reasons—both military and economic—that argue strongly against an effort to create a third Russian naval base on the Pacific (the other two are at Vladivostok and Kamchatka) (Nezavisimaya Gazeta, Pravda.ru, October 26).

On the one hand, they say, there is a great danger that so much money will be spent and possibly wasted on the construction of the base that there will not be enough left for fleet operations, thus leaving the base an expensive but useless bauble. And on the other, they suggest, Moscow must recognize that even if it can build such a base, it nevertheless lacks the ships, icebreakers and infrastructure that can cope with the high winds and tides there that would allow such a base to make a serious contribution to Russia’s national security. According to one retired Russian admiral, “the financial factor is going to be the defining one” (Pravda.ru, October 26)—yet another indication that the Russian navy is going to be less a contributor to economic growth than a hostage to Russia’s lack of it.

Russian and Western analysts have long speculated about the link between Russian defense spending and economic development. But most such efforts have foundered due to a dearth of unclassified data about the Russian military. Nevertheless, three things are clear: First, despite the massive increase in spending on the defense sector, it is still small relative to the size of the (even depressed) Russian economy. Consequently, defense spending, at least by itself, cannot serve as a sufficiently large stimulus to propel the Russian economy anytime soon. For that to happen, other factors besides growing military budgets would also have to come into play.

Second, a significant portion of defense spending, just like all Russian government spending, is drained away by corruption. A substantial portion ends up not in the Russian economy but rather in foreign accounts, which are now estimated to amount to more than $1.3 trillion. Some evidence of this was highlighted by Accounting Chamber reports in earlier years; but as of 2014, when Putin launched his invasion of Ukraine, those reports have ceased to appear (Ach.gov.ru, accessed October 31). It is unclear whether they are still being prepared but are only being circulated among Russian officials.

And third, the Russian military and especially military industry is so intertwined with the Russian economy that it is almost impossible to parcel out what is military spending and what is not. As a result, it is difficult to say with any confidence what the military spending is doing as compared to all government expenditures or the Russian economy as a whole. These issues remain extremely murky, as the Kremlin no doubt intends, thus forcing officials and analysts to continue to debate the situation with little chance that one or the other side will be entirely discredited.