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Friday, July 21, 2017

Defense spending will undergo major reductions in

The Ministry of Finance in the best traditions of the Ministry has prepared a tough draft Federal budget for the next three years. It is expected sharp decrease in defense spending and a small decline in spending on health care. However, the cost of social policy and education will grow. What accounts for such changes in the budget priorities?

The Ministry of Finance have laid the increase in expenditure on education and social policy in 2017-2019. The Agency proposes to reduce expenditures on national defense and health care.

“It seems that the budget was prepared by Mr. Kudrin. Financiers will like it. However, the Industrialists do not really have to taste”

In the project of the Ministry of Finance “Main directions of budget policy for 2017 and the planning period of 2018 and 2019 years” it notes that defense spending in 2017 is expected to reduce more than 1 trillion rubles: from 3.88 trillion to 2.84 trillion rubles. In the next two years defense spending also will not grow, she will spend almost the same as in 2017. In 2018, defense spending will total of 2.72 trillion and in 2019 – of 2.81 trillion.

Budgetary expenditure on health in 2017 will be reduced by 85 billion roubles: from 466 to 381 billion In the next two years until this year they never will return. In 2018, the costs increase slightly (17 billion rubles) and will be 398 billion rubles in 2019 will be the lowest for three years – 364 billion.

However, social policy and education in the next three years will receive priority. So, in 2017, the Finance Ministry proposes to increase spending on social policy from 4.6 to 5 trillion rubles. And this level of expenditure on sotsialku is scheduled to go in 2018 and 2019. Spending on education should also be increased, but not significantly so: in 2017 – 10 billion (up to 568 billion) in 2018 – another 21 billion in 2018 – will remain almost at the same level (586 billion).

“It seems that the budget was prepared by Mr. Kudrin. It is not, but the fact Kudrin lives, – said Alexander Razuvaev, Director of analytical Department of “Alpari”. – The budget is very rigid, monetarist. Financiers will like it, as ceteris paribus is a relatively strong rouble, low inflation. However, the Industrialists do not really have to taste. Artificial understating of income and, as a consequence, costs could lead to a recession. Russia can rely only on domestic demand. The situation will change only if oil prices will again be $ 100, and the raw model will work again”.

Defense spending

Reduction of spending on defense is due to two reasons: first, it is necessary to solve the problem with the budget deficit. Secondly, much of the rearmament and re-equipment of the army is coming to an end, and part of the costs can be deferred to a distant period of time.

“Large-scale reform of the army has to slow down for quite objective reasons. The budget deficit rose to 3.66% of GDP, despite the fact that the projected deficit was to be 3% of GDP. Fitch believes that by the end of the year the deficit will reach 3.9% of GDP. It is quite realistic”, – said the first Vice-President of “Russian club of financial Directors” Tamara Kasyanova.

Of course, the Ministry of defence will clearly be dissatisfied with this cost reduction. “If subordinates of Mr. Shoigu seek transfers from the budget 22 trillion rubles in the framework of the program of rearmament on 2018-2025 years (seven years), the team Anton Siluanov willing to sacrifice for the needs of the Armed Forces, only 12 trillion”, – says Daniil Kirikov, a managing partner at Kirikov Group.

However, the rearmament of the army really is part of the ends. In may, defense Minister Sergei Shoigu reported that the volume of the state defense order for three years has almost doubled. On Friday the defense Ministry reported that the defense put the troops 60% of weapons and equipment under the state defense order, 47% – on repair.

In this case, the number of enterprises is behind schedule, especially in terms of repair, I noticed Shoigu. This means that some of the costs can be reduced painlessly through the transfer of funding to a later date. “Major reforms in the army, Navy and air force have already been completed, it remains only to complete the program for retooling, but the process can be stretched up to 2019-2020”, – said Kirill Yakovenko from “ALOR Broker”.

In fact, the army has received substantial funding in previous years and the current reduction is observed only in comparison with the previous two years – 2015 and 2016.

Finally, Russia is betting on the growth of defense exports. Now the volume of orders is 60 billion dollars, and annual sales of about 15 billion dollars. “Russia should become a factory of defense technologies for BRICS countries. On the background of geopolitical tensions is a very good idea. Want to be in security from US and NATO – to buy Russian weapons. Usually Western weapons is not worse, but Russia does not set political conditions, plus Russian weapons are cheaper,” – says Alexander Razuvaev.

However, we cannot exclude that the reduction in defense spending is designed more for the foreign players, and in fact, funding can and will not change.

“Now, Western politicians are increasingly talking about the fact that the military potential of Russia is growing and is nearing the ratio of the military capabilities of Western countries, which was during the Cold war. This worries the West, and in terms of sanctions, the task of foreign policy is to remove these concerns, without reducing the readiness of the armed forces”, – says Dmitry Lukashov from IFC Markets.

“In terms of smoldering military conflict close to the borders to reduce defense spending would be weird”

Therefore, he does not exclude that the money for the army will be vydelyatsya, but in another way, or part of the cost will simply be kept secret and will not be included in official statements. “In terms of smoldering military conflict close to the borders to reduce defense spending would be weird. The rearmament of the Russian army and Navy is far from over, and only by 2020 will be possible to speak about a degree of completion of this process”, – says the source.

Health, education and social policy

The Finance Ministry is trying to balance between maintaining social stability and strengthening of the defence industry, especially in such a difficult political situation. The main objective of the Department has always been saving, and it can clearly be seen in the budget for the next three years.

However, interestingly, if the cost of education and social policy will increase, it health will decrease, though insignificantly.

Reduction of health care costs can be attributed to several factors. “On the one hand, the authorities expect that the optimization of medical institutions will allow them to maintain the efficiency of the health system, despite funding cuts. On the other hand, it may be due to the fact that “hardware weight” of the leaders of the Ministry of health decreased, and consequently their share of the budget was redistributed in favor of the departments, whose heads have great political influence,” – says Daniil Kirikov.

In addition, there now exists a project to address the lack of budgeted funds for medicine due to the MHI funds, so essentially, the picture should not change. Although we can not exclude that a number of programs, including those related to vaccination of the population may be reversed, or may be expanded the list of paid services provided by public medical institutions, does not exclude Yakovenko.

At the same time in the conditions of crisis the authorities are obviously trying to preserve the social orientation of the budget, hence the increase of expenses on social policy and education. We should not forget about the presidential elections in 2018. In light of the upcoming elections of the head of state the reduction of expenditures on social policy too would have a negative impact on the image of the current government, says Chirico.

“In the current situation, growing poverty, and to smooth the discontent of the population, it is planned to support education and social policy, which means, primarily, the military-Patriotic education of the youth, that is the spirit of stoicism and patriotism. And health care is a less critical point than education, that is an ideology,” explains the distribution of expenditures Tatiana Kasyanov.

However, in the growth of spending on education and social expenditures may have no ulterior motives – it’s just the growth of salaries of teachers and state employees. “The cost of education Department will increase by 1.7-2% per year, which is even below the inflation”, – said Lukashov.

The reality may be softer than the Ministry of Finance thinks

Overall, the budget is not much different from previous years. It still retains its social orientation. At the same time, the main goal obviously is to reduce costs as a whole and not to reallocate from defense to social programs. So, the budget of the defense Department wants to cut 1 trillion rubles, while expenditures on social needs and education will increase by only $ 400 billion.

At the same time, Razuvaev believes that the economic situation will be much better than the one which is waiting for the Ministry of Finance, so the government will get additional money. And, by the way, this extra money may well summon its defense.

Thus, the draft budget for 2017-2019 comes from the fact that the average price of oil will be $ 40, that sanctions will be maintained during these three years, and that new revenue sources will not. “However, sanctions are likely to be mitigated or even cancelled, and oil is now above $ 50 per barrel”, – said Alexander Razuvaev.


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