The Kremlin appears to be preparing for a long, drawn-out war in Ukraine by boosting defence spending by 70 percent next year, a move that promises to benefit depressed Russian regions and sectors related to the war effort.
During a highly choreographed awards ceremony for army personnel in the gilded St George’s Hall at the Kremlin, Russian President Vladimir Putin announced his candidacy for a fifth presidential term in the 2024 elections.
The announcement came as Russia's full-scale invasion in Ukraine approaches its second anniversary.
“They (the Russian government) initially expected this war to be short,” said Andrei Yakovlev, an economist from the Davis Center for Russian and Eurasian Studies at Harvard University.
The Kremlin now plans to increase spending on defence by almost 70 percent in 2024 compared to 2023. Both state-owned and private food, construction and pharmaceutical manufacturers – all of which receive contracts from the military sector – all stand to benefit.
Putin on December 1 ordered the country’s military to increase the number of troops by nearly 170,000 to a total of 1.32 million.
“All these people need to be armed, fed and provided with uniforms,” said Galia Ackerman, a historian and specialist on Russia, adding that companies providing prosthetics and mortuary services also stood to benefit as the war in Ukraine grinds on.
Bonanza for Russia’s far-flung regions
The far-flung, depressed regions where many of these industries are located have been seeing a boom since Russian’s February 2022 invasion of Ukraine.
“Since Soviet times, many defence industries have not been located in St Petersburg or Moscow but in small towns,” Yakovlev said.
Another source of wartime revenue for Russia’s depressed industrial regions comes from the financial compensation the government is offering to entice men to sign up to fight.
“The families of men contracted or drafted in the army last year are receiving [around] 200,000 rubles per month,” Yakovlev said. “This is four times the average salary in small towns and two-to-three times the average salary in large cities.”
The men enlisting mainly come from places like Buryatia, Tyva or Novgorod, regions that haven’t seen much prosperity in the past two decades, Yakovlev noted.
The bonanza triggered by government spending in the defence sector has also led to increased spending in other sectors of the economy including construction, domestic tourism, and restaurants and hotels.
The Kremlin has managed at the same time to continue paying public workers in the education and health sectors. Its vast oil and gas revenues have allowed it to continue the war in Ukraine while keeping domestic spending under control.
Unsustainable?
Before the sanctions from the United States and European Union were fully in place at the end of 2022, Russia’s oil and gas revenue was soaring, with proceeds increasing by 28 percent compared to 2021. Russia was able to compensate for a reduction in exports by raising prices.
The Western-led restrictions “had the opposite effect to what had been expected”, Yakovlev said, noting that Russian businesses and even ordinary Russians kept their money in Russia.
“After the initial shock of February 2022 the Russian central bank helped stabilise the situation, and both the Russian government and the banking system had enough money to lend to private companies,” which would have otherwise suffered from being cut off from the West, he said.
But Russia’s wartime economy may be unsustainable.
“The government still has some reserves for next year but there are doubts over whether it can cover the budget deficit after 2024,” Yakovlev said.
He also cited an imbalance between supply and demand in the Russian economy.
“Ordinary people are coming to the market with requests for consumer goods and housing,” Yakovlev said, noting that there is not enough labour or production capacity to meet the rising demand.
“Russia is getting by, but the country is in decline and ‘re-Sovietising’ itself,” said Russian historian Wladimir Berelowitch.
“Since the Kremlin has enough reserves at the moment, they are buying soldiers and deaths.”
Untouched
The Russian government is also counting on prisoners to sustain its war. The incentive to join the war is strong for convicts, who are being pardoned in exchange for fighting in Ukraine.
“The men who are suddenly released from prison to fight in the war come home as heroes because they fought for the homeland,” said Ackerman, noting that any casualties are buried with military honors while their families are compensated financially.
Meanwhile, the residents of large metropolitan cities like Moscow and St Petersburg, so far untouched by military conscription, have hardly felt the effects of Western sanctions or the war.
“One could say prices have risen but there are still shows and exhibitions opening in Moscow,” said Polina, a museum curator from Moscow whose name has been changed to protect her identity, when asked to describe the ambiance in Russia’s capital. “The only difference is that GPS (Global Positioning System) and Google Maps are no longer working, as a protection against drones and because of Western sanctions.”
Her 20-year-old son, who is currently in film school, cannot be mobilised to the front because of his status as a student. But Polina worries about him being drafted into the army one day.
“The laws aren’t respected, everything can change from one day to another,” she said.
