Daily Archives: January 14, 2011

Is the GPV Doable?

This post is dedicated to a friend and mentor who highlighted the source material . . . .

Do I Look Happy About the GPV? (photo: RIA Novosti)

Is Russian Finance Minister Aleksey Kudrin on-board with plans for increased military spending contained in the State Program of Armaments, 2011-2020?  The economic press seems to think he’s not, and his reticence leads one to ask if the new GPV will fit Russia’s economic and budgetary realities in coming years.  One thing’s certain (if you read on), 2011 is the first year of this GPV, and already, for a variety of reasons, many new arms will be bought with state-backed credits and loans.

The GPV came into the headlines last spring when Kudrin and his ministry offered 13 trillion rubles, and the uniformed military replied that 36 trillion would be about right.  Not much was heard about negotiations over the GPV until mid-July, when First Deputy Defense Minister Popovkin announced the figure would be about 20 trillion.

Then, President Medvedev described the GPV in his annual Federal Assembly address (Poslaniye) on 30 November:

“Today the fundamental task of creating a new high-technology mobile army stands before us.  We are setting out to spend more than 20 trillion rubles on these aims.”

The same day, Moskovskiy komsomolets published Kudrin’s reaction from RIA Novosti:

“The country is living with a deficit . . . .  The redistribution of expenditures from other areas is required.”

And from a television interview:

“The task of strengthening defense capability was set down very seriously, and a figure of 20 trillion rubles was named, and it will need to be directed at strengthening defense capability over the course of 10 years.  This is a new task, financial sources still haven’t been considered sufficiently, this could be an additional burden for the economy.  In this case, the president believes it’s essential.”

Kudrin didn’t mean new as in news to him, but in the sense that it hasn’t been factored into the federal budget. 

On 3 December, in MK, Nikolay Vardul critiqued Medvedev’s explanation of the GPV.

Vardul said we’ve heard about the high-technology army and using defense industry as an economic locomotive before, but this no longer fools anyone.  Large military expenditures ruined the Soviet economy, although falling oil prices were the coup de grace.  He continues:

“And here again is Medvedev talking about how investments in military technology will pay for themselves in the production of ‘dual-use products.’  Stepping on the same rake, as if we didn’t have sad experience.  The army passage in the Poslaniye is generally contradictory.  Medvedev drew an alternative:  either Russia and NATO manage to agree on joint missile defense, or a new arms race.  And then how do expenditures of 20 trillion rubles on military-technological needs by 2020 present themselves?  Is this just a running start?  In order to understand the scale of the spending, the entire Russian GDP in 2010 is on the order of 51 trillion rubles, and all federal budget expenditures for 2011 should be 10.8 trillion. There you have it.  But the questions continue:  who is now the potential enemy?  Can it be NATO again?  Too many questions and very few answers.”

“There is, by the way, one clear answer.  From the point of view of the economy, the main threat to its relative equilibrium is precisely inflated military, not social expenditures.”

“And there’s no doubt:  the higher the state expenditures, the greater the chances of inflation.  But military expenditures are distinct from investments in education or health care by the fact that the path to recouping them is more thorny and tortuous, if it’s even possible.  On the other hand, the road leading from them to inflation is as straight as a pipe.”

He concludes it’s true Russia’s economy needs a more modern engine to replace oil and gas revenues, but: 

“Instead of this, huge resources  are diverted to military spending, even though armaments not only won’t lift the economy, but drain it further.”

On 10 December, Nezavisimaya gazeta’s Anatasiya Bashkatova addressed Kudrin’s comments that redistributing federal budget to the regions and increasing the country’s defense capabilities will be very difficult to do simultaneously.  As Bashkatova put it, “there isn’t enough money for everything,” and “a high-technology defense sector interferes with regional development.”

Kudrin also said: 

“This program [GPV] is now being prepared.  It will soon be adopted, and the main expenditures will fall not in 2011, but in subsequent years.”

NG chief military correspondent Viktor Litovkin explained that it was simply too late for changes in the defense budget for 2011 with expenditures already starting according to the adopted budget law.

Then President Medvedev met with Kudrin meeting on 13 December.

Medvedev and Kudrin (photo: Kremlin.ru)

Medvedev told him his priorities are economic modernization and social spending, and regarding the latter:

“I consider that this is very important for preserving social peace and stability in our country.”

But with his very next breath, Medvedev said:

“And, of course, we must devote attention to issues of guaranteeing the security and defense of our state.”

And, of course, after wishing it weren’t necessary, he said:

“Therefore, the corresponding state program of armaments, and the Armed Forces modernization program need to be fulfilled in the specified parameters.”

The same day, Prime Minister Putin conducted a government conference in the submarine-building capital Severodvinsk to review the GPV, and even he confessed:

“For me it’s terrible even to say this amount [20 trillion rubles].”

Later in December, Vedomosti quoted one of Kudrin’s deputies who said, many expenditures which have “already been announced – and first and foremost these are defense expenditures” have not been figured into the 2011-2013 budgets, and it’s “still unknown” how these obligations will be financed.

Dmitriy Butrin in Kommersant quoted Duma Defense Committee Chairman Zavarzin to the effect that, in 2011, 30 percent (about 500 billion of 1.5 trillion rubles) will be financed by state-guaranteed credits rather than by budget funds.  Butrin went on to repeat Kudrin’s warning that the GPV can’t be covered by the projected budget income level, and the 20 trillion could make increased taxes unavoidable.

The Kudrin deputy also said that, without growth in the income portion of the budget, new budget obligations – like the APEC summit, Sochi Olympics in 2014, Skolkovo, World Cup soccer in 2018, and the State Program of Armaments – appear unrealizable.  He concludes, “We’ve set out on a trajectory for higher taxes.”

So where does this leave the GPV.  These economic commentators describe the same general picture . . . the GPV is extra spending for which financing has not been identified, at a time when key categories of budget income (i.e. oil and gas revenues) will decline (from 17 percent in 2009 to 13 percent by 2020) and the prospect of higher deficits already looms.

Russia also faces lower receipts and more payouts for pensions and health care over this period.

Kudrin and company are looking at possibilities, mainly increasing some taxes, but also maybe raising the retirement age.  None of this will help economic growth or make people happy.

No wonder the Finance Minister has resisted extra military spending to the extent that he can.

This GPV, if implemented, will impede the economic modernization President Medvedev wants.

But history says this GPV’s not likely to happen.  Even its most recent predecessor, started under favorable economic conditions, was superceded rather than completed.  And now is definitely not a favorable time like that.