Putin’s Budget Math Gets Ugly as Election Looms After Mutiny

An aborted armed mutiny by Wagner mercenaries exposed Russia’s porous home front, shook President Vladimir Putin’s authority and resulted in the removal of thousands of seasoned fighters from the battlefields of Ukraine.

(Bloomberg) — An aborted armed mutiny by Wagner mercenaries exposed Russia’s porous home front, shook President Vladimir Putin’s authority and resulted in the removal of thousands of seasoned fighters from the battlefields of Ukraine.

Remedying the fallout will be costly, especially with elections looming next March in an economy worn down by almost 17 months of war and sanctions. And in a reminder of the threats Russia now faces, authorities on Monday said two Ukrainian drones caused explosions that killed two people and damaged the symbolic bridge to Crimea, the peninsula Putin annexed from Ukraine in 2014.

The implications for the budget will go far beyond the sheer price of fortifying positions in Ukraine that were manned by a group of Wagner fighters estimated at 50,000. 

Building a larger security presence around Moscow — alongside committing more resources to the war effort — may prompt the government to increase spending by 5% relative to its current budget plan, according to Bloomberg Economics, meaning an extra 1.3 trillion rubles ($14 billion) of expenditure this year.

Another likely priority for Putin, as he looks for another six-year term in office, will be to buy off the electorate. A surge of around 12% in real wages accompanied previous election periods, Bloomberg Economics estimates, primarily as a result of pay hikes in the public sector.

The changing calculus caused by the rebellion will end up swelling what are already some of the biggest-ticket items in a budget that ran a deficit of 2.6 trillion rubles in the first half of 2023, or more than three-quarters of the total targeted by the government for the entire year.

The fiscal taps have been fully opened this year. Months before the mutiny, Putin announced an increase of 18.5% in the minimum wage from 2024, a hike that will extend to nearly 5 million people in Russia.

“There will be other handouts but they are likely to be very precisely targeted to alleviate poverty and reward those fighting in Ukraine and compensate their families,” said Tatiana Orlova of Oxford Economics.

What Bloomberg Economics Says…

“The mutiny deepens fiscal stress and will derail government attempts to stabilize its budget balance. The public wage bill will rise as well to keep core voters’ support heading into elections.”

—Alexander Isakov, Russia economist. For more, click here

Wagner didn’t come cheap before the uprising, with over $3 billion in outlays from the state budget in the past year to finance its military operations in Ukraine and pay its leader Yevgeny Prigozhin’s catering company for supplying food to the army.

But a response to the critical threat posed to Putin’s 24-year rule will make it a major new drag on the budget, adding to pre-electoral largesse. 

Although the Russian leader still had an enviable approval rating of 76% in early July, according to a Public Opinion Foundation poll, that level of support is the lowest since last September, when the Kremlin announced a partial call-up of men to fight in Ukraine.

“The greater sense of uncertainty introduced by Prigozhin’s mutiny might make the Kremlin willing to plough even more resources into buying the people’s fealty to Putin’s system, with the aim of reducing future surprises,” said Ben Noble, associate professor of Russian politics at University College London’s School of Slavonic and East European Studies. 

“I wouldn’t be surprised if, especially following the mutiny, the Kremlin were aiming for an even higher percentage of votes for Putin and a record turnout in the 2024 election – but that will be very expensive to secure,” Noble said. 

Redrawing the budget will be a challenge as sanctions and other restrictions imposed by the US and its allies over the invasion chip away at Russia’s earnings from energy exports. Russia is also selling foreign currency while energy revenue is below the target set in the budget.

Rather than an increase in outlays on the military, “rejigging existing spending in favor of the regular army seems a more likely outcome,” Orlova said.

“The Wagner episode discourages the state from outsourcing its military activities to private companies,” she said. 

Besides changing how the government calculates taxes on oil, efforts to stabilize public finances have largely relied on one-off measures such as levies on businesses and foreign companies preparing to pull out of the country.

But a more painful reckoning could be under way. 

On the same day that Putin held extraordinary talks with Prigozhin and Wagner commanders after the uprising, a government meeting featured Finance Minister Anton Siluanov’s suggestion of across-the-board spending cuts of 10% in next year’s budget, according to the Russian business daily Vedomosti.

The proposal covers so-called unprotected expenditures — such as outlays on the environment and the economy — while sparing money earmarked for security and social support, Vedomosti reported.

Apart from sustaining Russia’s ability to carry on with the war, government policies in the months ahead will filter through the economy in other ways, as a rapid build-up of military production already skews growth.

A push to stiffen the defenses after Wagner’s march within 200 kilometers (124 miles) of Moscow will require enlisting more men for security forces. The risk is it will worsen labor shortages by crowding out the private sector, which is among reasons why Bloomberg Economics is reducing its estimate of Russia’s potential growth.

Putin’s priorities will be on display in the budget, adding to the high price tag in an election year.

“The pre-election period is a time of high tension for the budget,” said Kirill Rogov, a former Russian government adviser who now heads Re:Russia, a Vienna-based think tank. “Social spending has to compensate for dissatisfaction with the war.”

(Updates with attack on bridge to Crimea in second paragraph.)

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