Johnson's Russia List
#5086
11 February 2001
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#8
Center for Strategic & International Studies (CSIS)
Russian and Eurasian Program
Washington DC
How Much Does Russia Spend on Defense?
Highlights of a briefing given by Dr. Christopher Hill, British Ministry of
Defence, London, on January 31, 2001

1. The formal Russian defense budget allocation has risen massively since
the break up of the Soviet Union, from 0.4 billion rubles in 1992 to 143
billion rubles last year. These figures are, however, a poor guide to
actual outlays. Funding is often revised during the course of the year as
expectations about inflation have changed, problems in securing budget
revenues have deepened or eased, and perceptions of Ministry of Defense
requirements have altered. Moreover, many categories of expenditure, which
in the west would be met through the defense allocation, are in Russia
provided through other parts of the state budget or from non-budgetary
sources. The authorities in Moscow provide little information on this
hidden funding but, on our estimates, the official defense budget in some
years probably accounts for little more than half of true defense spending.

2. Another problem with defense budget reporting is that the relevant
financial statistics are given only in the prices of the year under
consideration. These are of little worth in determining real trends in
defense spending unless the scale of price rises can be identified. The
Russian government, however, does not publish, and probably does not
calculate, an inflation rate specific to the defense sector. Western
attempts to substitute other inflation indices, such as that for consumer
goods, have proved to be of uncertain worth.

3. Ruble valuations are, in any case, less than illuminating to most
westerners who want to see numbers presented in their own currency or in US
dollars. Conversion of Russian defense budget data into dollars using
market exchange rates, though frequently undertaken, is hopelessly
misleading. For 1999, for example, it implies that Russia spent under $4
billion on defense compared to US outlays  approaching $300 billion.

4. For all of these reasons, the UK Ministry of Defence makes its own
computations of Russian defense expenditure. These suggest that, in
constant 2000 prices, outlays fell from $130 billion in 1992 to a nadir of
$42 billion in 1998. Since then, spurred on by the accession to power of
President Putin, by concerns over NATO policies fuelled by the intervention
in former Yugoslavia, by the war in Chechnya and by economic recovery,
spending has increased to nearly $50 billion.

5. Last year around two thirds of funding went to regular forces, with the
remainder split between various paramilitary organizations (border guards,
internal security troops and the like), MOD civilians and certain
centralized functions which cannot sensibly be allocated to a particular
service. The tendency, evident in recent years, for the strategic forces to
secure a greater proportion of defense resources started to be questioned
in 2000 as the continuing challenge of Islamic militants in Chechnya and
the near abroad emphasized the requirement for better trained and equipped
ground and air forces.

6. The last decade has witnessed a major reorientation in the functional
distribution of defense spending, with the share taken by personnel related
items (pay, allowances, pension, food, clothing, accommodation, etc.)
rising from a quarter to well over a half. This has not prevented either
the real value of military salaries from falling sharply or the build-up of
significant pay arrears but it has had a catastrophic impact on the amount
of money available for equipment procurement and maintenance. Orders for
new weapons dried up and, despite continuing overseas purchases,
particularly by China and India, the total value of weapons production had,
by the late 1990s, fallen to less than a tenth of what it was at the start
of the decade.

7. Lacking orders and with the Ministry of Defense unable to settle past
bills, the defense industries fell deeply into debt, unable to pay their
own workforce or their suppliers. Many, perhaps most, were by the mid-late
1990s, effectively bankrupt. In a market economy they would have been
closed. In Russia they were left to stagger on as several restructuring and
rationalization plans were first heralded and then abandoned once the
social costs became apparent. The average age of workers climbed to over
fifty and production machinery became increasingly obsolescent. Although
the government has reportedly now promised to discharge the Ministry of
Defense's debts to enterprises out of the state budget surplus, factories
remain ill-placed to foster any rapid or sustained increase in production
levels.

8. Recovery in the defense sector generally depends largely on whether the
government will be able and willing in the future to pour enough resources
into it. This will in turn be heavily influenced by the state of the
economy overall and of government finances in particular. In 2000, defense
spending accounted for just over 5% of GDP, a high proportion by NATO
standards. Our view is that, unless there is a major deterioration in the
international environment, Putin will not support any significant increase
in this burden. Defense outlays will thus, we predict, grow only in line
with the economy i.e. by around 3 percent a year on average over the next
decade.

9. There are an almost infinite number of ways in which this financial cake
can be cut but none is likely to lead to any massive resurgence in Russian
military capability. Indeed, further substantial cuts in both personnel
numbers and equipment holdings are likely. We predict that, given the need
both to cut the share of defense spending allocated to personnel related
items and to increase military salaries at least in line with, and probably
slightly more than, those in the rest of society, the number of MOD
servicemen will fall from nearly 1.2 million today to around 850,000 by
2010. Any large-scale effort to replace conscripts with professional
soldiers, as widely advocated, would necessitate an even greater reduction
in force numbers. Similarly, with an increasing proportion of existing
weapons systems becoming obsolescent and with the cost of developing and
manufacturing replacements so high, we expect the number of tanks and
armored fighting vehicles to decline by a quarter over the next decade and
the numbers of combat aircraft (including helicopters) and major naval
platforms to be cut by a third.

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