Russia to hike defence budget by 25% amid Ukraine war: Where does this money come from?

The Russia-Ukraine war is slowly inching towards the 1,000-day mark and it seems that Russian President Vladimir Putin isn’t anywhere close to ordering the stop of the war. In fact, if budget documents are to be believed, then Moscow is hiking its defence spending to a record high.

Russia in the midst of the Ukraine war has already hiked its defence spending to levels not witnessed since the Soviet Union era, launching missile after missile, drone after drone on Ukraine, and paying lucrative and hefty pay packages to soldiers, internal as well as foreign, to fight on the front lines.

Such spending allocations have many asking — Where does Russia have this kind of money to spend?

We analyse and decipher the true state of Russia’s economy and how it is able to continue financing its war against Ukraine three years in.

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Russia raises defence budget

Draft budget documents published on the parliament’s website on Monday have revealed that Russia will increase its defence spending by 25 per cent, to a record 13.5 trillion roubles ($145 billion) in 2025. This is about three trillion roubles more than was set aside for defence this year, which was the previous record.

As per the documents, spending on defence and security will account for about 40 per cent of Russia’s total government spending – or 41.5 trillion roubles in 2025. Moreover, the draft budget has revealed that social spending will decrease by 16 per cent from 7.7 trillion rouble this year to 6.5 trillion roubles next year.

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The Bell, which is an independent Russian news outlet, has written, “This increase is confirmation the economy has switched a war footing, and, even if the war in Ukraine ends soon, channeling money to the army and a bloated defense sector will remain a top priority.”

Apart from defence, the government will allocate 1.58 trillion roubles or 0.7 per cent of its GDP to education and 1.86 trillion roubles — 0.87 per cent of GDP — to healthcare in 2025.

State of Russia’s economy

Since Russia began its invasion of Ukraine in February 2022, several Western countries and its allies across the world have slapped sanctions on the Putin-led nation. Reports state that Russia holds the record, having been slapped with more individual sanctions than Iran, Cuba, and North Korea combined.

However, despite these several sanctions, Russia’s economy seems to be chugging along with the International Monetary Fund (IMF) forecasting in April that the Russian economy will grow faster than all of the world’s advanced economies. The International Monetary Fund (IMF) said it expects Russia to grow 3.2 per cent this year, significantly more than the UK, France and Germany.

Later, in July, the World Bank promoted the Russian economy from an ‘upper-middle-income’ country to a ‘ high-income’ one . The World Bank report credited several factors – including trade growth (6.8 per cent), an increase in construction activity (6.6 per cent), and a booming financial sector (8.7 per cent) – for the increase in the real gross domestic product (GDP) (3.6 per cent) of the nation.

Source of Russia’s money

But how is it that Russia has been able to keep its economy not only afloat but thriving amidst the war? Where does it get its money?

Analysts believe that the Putin-led nation has multiple sources of income and it has been through these channels that the country’s economy has rapidly grown.

Oil and gas exports, is perhaps, Russia’s biggest earners. The West and its allies levied many sanctions on Russian oil and gas exports. However, keeping their own interests in mind, they have created enough elbow room that Moscow can continue to produce fossil fuels and even sell them.

Interestingly, since the sanctions were slapped on Russia’s oil, India and China have become its biggest importers. In February, an analysis revealed that Russia had earned a whopping $37 billion in crude oil sales from India in 2023. The Centre for Research on Energy and Clean Air (CREA) in its report revealed that India had increased its purchases of Russian crude by over 13 times its pre-war amounts.

In June, a Reuters calculation revealed that Russia’s oil and gas revenues would rise more than 50 per cent year on year to $9.4 billion. These revenues have been the most important single source of cash for the Kremlin, accounting for around a third to a half of total federal budget proceedings for the last decade, reported Reuters.

Another huge source of income for Russia is taxes . At the beginning of 2024, Russia announced a hike in taxes. As per the new tax structure, a 13 per cent tax is levied for incomes of up to 2.4 million roubles ($27,500) a year. For incomes over that amount, a steadily higher tax rate applies, with a maximum rate of 22 per cent for incomes exceeding 50 million roubles ($573,000).

The country’s company income tax rate has also increased from 20 per cent to 25 per cent. Through this reform, the country is estimated to bring 2.6 trillion roubles ($29 billion) in additional federal revenues in 2025.

Moreover, the Kremlin is also looking at increasing the mineral extraction tax (MET) in certain industries. And as per a study conducted by Carnegie Endowment, the increased rates of profit tax, personal income tax, and MET could bring next year’s consolidated budget an increase of up to 1.6 per cent of GDP: about 2.5–2.7 trillion roubles ($27.7 billion).

Russia has also been ramping up its industrial production over the last two years. Its factories are producing everything from boots to ammunition, running around the clock, often on mandatory 12-hour shifts with double overtime, to sustain the Russian war machine. This production only adds up to its GDP.

It is left to be seen how long Russia can sustain this. However, as of now, the Russian economy seems resilient.

With inputs from agencies