Russia's Economy Faces Challenges as Military Spending Slows

Russia's economy is experiencing a significant slowdown attributed to various factors, including a reduction in military spending as the war in Ukraine continues. After two years of growth driven largely by military expenditure, the current economic conditions reveal declining oil revenues and an increasing budget deficit.

Oil revenues are reported to be down about 20% this year, primarily due to lower global prices, according to the Kyiv School of Economics Institute. The budget deficit has been adjusted upward from 0.5% to 2.6%, reflecting the strain on the economy.

This deficit is notable as Russia faces limitations on borrowing from international markets, relying instead on domestic banks for credit. Finance Minister Anton Siluanov has indicated that raising revenue through taxation is preferred over increased borrowing, which could lead to inflation and hinder investment.

To address the fiscal shortfall, the Kremlin is turning to ordinary citizens and small businesses for revenue. A proposed increase in value-added tax, from 20% to 22%, is expected to generate up to 1 trillion rubles, or around 12.3 billion dollars.

This increase is part of legislation currently moving through Russia's parliament, set to take effect on January 1. Additionally, the threshold for businesses to collect VAT will drop significantly, impacting many small enterprises that were previously exempt.

This change aims to curb tax avoidance but may unintentionally burden smaller businesses, leading to concerns about their viability. Other proposed tax increases include levies on alcohol and tobacco products, as well as potential fees for digital equipment.

These changes indicate a shift away from the more generous wartime economy of the past two years, where military spending injected cash into the economy. According to reports from The Independent, the economic slowdown and rising taxes will likely force difficult choices for both the Kremlin and ordinary Russians, balancing military expenditure against consumer welfare.

Interviews with Muscovites reveal a mix of dismay and resignation regarding the impending economic pressures. Pensioners and small business owners express concern that the tax increases could lead to the collapse of smaller businesses, which would ultimately reduce state revenue rather than increase it.

The economic forecast for Russia indicates a sluggish growth of around 1% this year, down from previous rates exceeding 4%. High central bank interest rates, currently at 16.5%, are also contributing to the economic malaise, as they aim to combat inflation that has been driven by extensive military spending.

While the Kremlin may not face an immediate financial crisis, analysts warn that the next 12 to 14 months will require tough decisions about prioritizing military efforts versus consumer needs. Alexandra Prokopenko from the Carnegie Russia Eurasia Center notes that while the government currently has enough funds to sustain its military activities, the long-term outlook necessitates careful management of resources to maintain public support amidst rising economic challenges.