Russian $2.7 Billion Defense Spending Push Raises Deficit Target

Russia rolled back cuts to defense spending next year, undoing reductions after embarking on its first military foray outside the former Soviet Union in three decades.

The government will reinstate 165 billion rubles ($2.7 billion) in spending on defense and security for 2016 and provide another 10 billion rubles to fund housing for World War II veterans, Finance Minister Anton Siluanov said at a government meeting Thursday. That will swell next year’s deficit to 2.4 trillion rubles, or 3 percent of economic output, according to Siluanov. A draft budget, prepared by the ministry and published on Wednesday, projected the deficit at 2.8 percent.

“This money will be spent as compensation to the Defense Ministry’s budget,” First Deputy Prime Minister Igor Shuvalov told reporters. The move would restore most of the 200 billion rubles previously lost by the ministry as Russia scaled back expenditure, he said, adding that the decision isn’t related to the military campaign in Syria that began last week.

The changes highlight the risk that Russia’s commitment to defense spending will remain a drain on the budget already stretched by slumping oil prices, sanctions over Ukraine and the country’s first recession in six years. Russia, which is bombing Islamic State and other jihadist groups in Syria, is also in the midst of its largest rearmament program since the 1991 collapse of the Soviet Union. The nation was the world’s third-biggest military spender in 2014 after the U.S. and China, according to the Stockholm International Peace Research Institute.

Raiding Fund

To make up the bulk of next year’s shortfall, the Finance Ministry plans to use 2.1 trillion rubles from one of Russia’s two sovereign wealth funds, and may tap an additional 500 billion rubles from it if needed, according to Siluanov.

Russia’s government is running its widest deficit in five years in 2015 after the collapse in the price of oil, which together with natural gas contributes almost half of Russia’s budget revenue. The economy of the world’s largest energy exporter is at threat of the longest recession in two decades, with the ruble weakening about 35 percent against the dollar in the past 12 months.

The Syrian campaign will carry no additional budget costs this year because the operation is within funding limits allocated to the Defense Ministry, Siluanov said Friday. Spending on defense and security is among items that will remain protected in the budget, according to Prime Minister Dmitry Medvedev.

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