Putin’s Outrageous Defense Spending Puts Russia Back in the USSR
One
of the prevailing narratives about the fall of the Soviet Union in the
1980s was that the Kremlin destroyed its own economy from within by
dedicating scarce resources to the arms race with the United States. Not
all historians of the period agree on that explanation, but many
believe that…
The Fiscal Times
Putin’s Outrageous Defense Spending Puts Russia Back in the USSR
By Rob Garver
12 hours ago
One
of the prevailing narratives about the fall of the Soviet Union in the
1980s was that the Kremlin destroyed its own economy from within by
dedicating scarce resources to the arms race with the United States.
Rather than investing in necessary technologies and infrastructure, the
story goes, the Kremlin poured money into a self-destructive military
build-up that eventually hollowed out the rest of the economy.
Not
all historians of the period agree on that explanation, but many
believe that military spending to the exclusion of other investment at
least contributed to, if not directly caused, the collapse of the Soviet
Empire.
So,
one might expect that Russian leaders who lived through that period,
such as current President Vladimir Putin, might be somewhat sensitive to
the possibility that starving other parts of the economy in order to
feed a growing military is potentially dangerous.
However,
Sergei Alexashenko, former deputy chair of the Central Bank of Russia
and former chair of Merrill Lynch Russia, doesn’t seem to be the case.
Now a senior fellow at the Brookings Institution, Alexashenko wrote in an op-ed published Thursday in the Moscow Times that in a time of particular economic peril, the Kremlin is once again going down that same road.
“It
is well known that only the upsurge in military production is keeping
Russian industry afloat, even while it wastes precious resources needed
for moving the economy forward,” he wrote.
“The most
discouraging outcome of 2015 is the continued decline in investment,”
he continued. “The latest sequestration in the federal budget has led
to a new round of investment cutbacks in non-military sectors.
The volume of investment in both industrial and residential construction
has fallen. In 2016, budget expenditures will drop by at least 3
percent to 5 percent in real terms. Two-thirds of all profits are earned
by raw materials export companies, whose owners — according to the
Finance Minister — prefer paying dividends to investing in development
because they ‘lack confidence that investing profits in Russia would
ultimately produce revenues.’”
It’s
a grim picture indeed for Russia, which is suffering under multiple
burdens. Stung by international sanctions imposed after its invasion of
Ukraine’s Crimean peninsula, Russia has also had to deal with plummeting
prices for oil and natural gas. The Russian economy is
disproportionately dependent on income from oil and gas sales, and the
price of crude oil, which has plummeted by nearly two-thirds in the last
18 months, has had a devastating effect on the government’s finances
and on the ruble. After the oil-pricing cartel OPEC announced this week
that it would not cut production, crude prices dropped even further and
the value of the Russian ruble against international benchmark
currencies like the U.S. dollar moved toward record lows.
The
ruble is worth about half as much as it was when oil was selling at
$100 per barrel rather than its current level in the mid $30s. Russia
has spent down a large fraction of its foreign currency reserves to
protect it, but with little success.
The
only certainty in the Russian economy these days appears to be that
ordinary Russians will continue to suffer. One of the most popular
investment vehicles in the country today is a derivative tied to the rate of inflation that rises in value as the already punishing inflation rate increases.
However, even in the face of bad economic news – and partly because of it
– Putin remains wildly popular in Russia. How long he can maintain that
level of popularity in the face of a flagging economy is anybody’s
guess. But given the resilience of Putin’s image through Russia’s recent
setbacks, it may take more than the current level of privation faced by
ordinary Russians to generate real public anger.
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