by Martin Armstrong, Armstrong Economics:
What began as a special military operation has turned into the start of the next world war, and Russia is paying heavily. Russian President Vladimir Putin passed a new budget over the weekend that will allocate 32.5% of the total budget (13.5 trillion rubles) for FY25 to defense spending, which accounts for 6.2% of total GDP.
The amount in proportion to the total budget spent on defense in FY24 was 28.3%. Notably, the budget is factoring in military costs for the next three years – this war will not simply end with Trump. Russia’s pre-war military expenditure was only 3.6 trillion rubles, rising to 5.5 trillion at the beginning of the war from 5.5 trillion rubles in 2022 to 6.4 trillion rubles in 2023.
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Russia must find a way to finance this war. The Kremlin estimates GDP for 2024 to come in at 195.8 trillion rubles, although last year’s GDP was 172.1 trillion rubles. The GDP for 2025 is anticipated to be 214.6 trillion rubles. The nation is confident it will continue earning but that is not enough to fund the growing war.
Putin has already raised taxes for the first time in nearly 25 years. The corporate tax rate will rise by 5% from 20% to 25%. The government expects to generate an additional 2.6 trillion rubles in revenue once the tax is implemented in 2025. Russia’s Finance Ministry believes that 2 million people, 3.2% of the working population, will see a rise in their taxes. Taxes on investments will not change. “The changes are aimed at building a fair and balanced tax system,” Finance Minister Anton Siluanov said, adding that the additional funds would bolster Russia’s “economic well-being.”
The flat tax rate of 13% that Putin implemented when he took over for Yeltsin in 2001 accounted for much of his popularity. Still, the people overwhelmingly have a sense of patriotism and support Russia as well as Putin. Even with the ongoing war, Russia still only spends about one-fourth of what America and China do on defense. Even India spends more than Russia on its military. We can obviously see where these nations believe the war effort is heading when looking at future budget forecasts. Three years from now brings us to the pivotal year of 2027/2028, where all bets are off, and it would come as zero surprise if/when Russia raises its military spending budget projections.
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