Russian Military Expenditures: What’s Behind the Curtain

10th Annual Conference on Economics & Security, Thessaloniki, Greece, June 2006

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Russian Military Russian Military Expenditures:Expenditures:What’s Behind What’s Behind the Curtainthe Curtain

Vasily Zatsepin

The Institutefor the Economyin Transition


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ObjectiveObjectiveTo present an analysis of Russia’s current

practice in military expenditures field based on experience accumulated by the Institute for the Economy in Transition (Moscow)



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OutlineOutline

Russian military Russian military expendituresexpenditures

Underlying institutional Underlying institutional factorsfactors

Prospects for the futureProspects for the future



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Part IPart I

Russian Military Russian Military ExpendituresExpenditures



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Learning the Lessons of HistoryLearning the Lessons of History


CIACIA

WesternWesternAcademiaAcademia

InternationalInternationalOrganizationsOrganizations

The SovietThe Soviet

DefenceDefence

EnigmaEnigma


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Components of Military ExpendituresComponents of Military Expenditures


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What Follows from This?What Follows from This?


DefExDefExtill1998 till1998 – MP– MPtill1998 till1998 DefEx DefEx19991999–2004–2004

DefEx DefExafter2004after2004 + CTEx+ CTExafter2004after2004,,

Conformity equation*:Conformity equation*:

where MP where MP – military pensions;– military pensions; CTEx CTEx – civilian-type expenditures.– civilian-type expenditures.

* Valid for any from index years at least since 1994. * Valid for any from index years at least since 1994.

Civilian-type expenditures Civilian-type expenditures size problem:size problem:1998 Military Health & Education 1998 Military Health & Education 0.01% GDP 0.01% GDP

2006 Military Health, Sport & Education 2006 Military Health, Sport & Education 0.26% 0.26% GDP GDP


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Russian Military Expenditures Russian Military Expenditures in Current in Current RoublesRoubles


** **

* in 2004 budgetary classification.* in 2004 budgetary classification.

Average annual nominal growth Average annual nominal growth rate 34.1% (rate 34.1% (DefExDefEx))


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Russian Military Expenditures in Russian Military Expenditures in Real Terms (Base Year 1999)Real Terms (Base Year 1999)


** **

* in 2004 budgetary classification, using GDP deflator * in 2004 budgetary classification, using GDP deflator for 2005 for 2005 = 119.7%, for 2006 = 123.3 % (own estimate).= 119.7%, for 2006 = 123.3 % (own estimate).

Average annual real growth Average annual real growth rate 11.3% (rate 11.3% (DefExDefEx))


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Russian Military Expenditures Russian Military Expenditures in Current US $in Current US $



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Calculated Calculated using official using official 19991999–2004 –2004 purchasing purchasing power parity power parity datadataOwn PPP Own PPP estimates for estimates for 2005 = 13.09 2005 = 13.09 roublesroubles/$,/$,2006 = 14.34 2006 = 14.34 roublesroubles/$ /$


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Russia’s Defence & Military Russia’s Defence & Military BurdenBurden



** **


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2005 Structure of Russia’s Military 2005 Structure of Russia’s Military Expenditures Reported to UNExpenditures Reported to UN



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Part IIPart II

Underlying Underlying Institutional FactorsInstitutional Factors



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What’s Under the Hood?What’s Under the Hood?



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Under the Hood areUnder the Hood are

Federal budget and budgeting Federal budget and budgeting processprocess

Secrecy problemSecrecy problem DefenceDefence planning planning Quasi PPBSQuasi PPBS Actors and goalsActors and goals



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Federal Budget and Federal Budget and Budgeting ProcessBudgeting Process The budget system is a subject to

annual changes in its legal framework

Formal and openly published budget request of the Ministry of Defence is lacking

Weak or lacking parliamentary control



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Secrecy ProblemSecrecy Problem



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Secrecy in Russia’s Federal Secrecy in Russia’s Federal Expenditures in 2003–2006Expenditures in 2003–2006



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Secrecy in Federal Expenditures for Secrecy in Federal Expenditures for Public Order and Safety in 2003–2006Public Order and Safety in 2003–2006



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DefenceDefence Planning Planning



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Russian Russian MilitaryMilitary Planning Planning



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Quasi PPBSQuasi PPBS



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What is State Armament What is State Armament Program?Program? Inherited from Soviet times Introduced in 1980s when Soviet

leadership had to react to PPBS success in the US

Instead being a means of control over military-industrial complex became a tool of special interest groups for control over considerable share of military expendituresThe Institute

for the Economyin Transition


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Comparison of Two Military Comparison of Two Military Programming SystemsProgramming Systems

PPBES (USA)PPBES (USA) State Armament State Armament Program (Russia)Program (Russia)

Cycle duration, years 2 (was 1) 5

Depth, years 4 (was 5) 10

Moving time horizon Yes No

Accountability Transparent Opaque

Secrecy Minimal Full



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Actors and goalsActors and goals



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Actors on Russian Actors on Russian DefenceDefence Management StageManagement Stage

Ministry of Finance; Ministry of Economic Development

and Trade; and at last Ministry of Defence


Not only size of military expenditures but its structure are determined by:


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One More ActorOne More ActorChief of Russian General Staff Yuri Chief of Russian General Staff Yuri

Balouevski in November 2005:Balouevski in November 2005:

“All the world develops according to the outline: about 60 per cent is spent on procurement, research and development; and about 30–40 per cent—on salaries and matters, connected with logistics and combat training of forces”.


SourceSource: Rossiyskaya gazeta, 1: Rossiyskaya gazeta, 1stst November, 2005, November, 2005, translated.translated.


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GoalsGoals Back in 2000 the Security Council

of Russian Federation has set a prospective goal for the MoD to achieve 50% share of capital costs in defence budget by 2010 following “best international practices”

In 2005 the goal was extended: to achieve 75% share of capital costs by 2015



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Comparative Military Expenditures in Comparative Military Expenditures in 2004: Operating vs. Capital2004: Operating vs. Capital



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Part IIIPart III

Prospects for the FutureProspects for the Future



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Future of Military Future of Military Expenditures in RussiaExpenditures in Russia

Military expenditures in observable future will be determined not by level of threats or international environment but by interplay of group interests and inefficient defence management due to secrecy obsession and lack of high-grade military statistics i.e. by government failures



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Tail Wagging the Dog Tail Wagging the Dog or or

Limited Control over Limited Control over BureaucracyBureaucracy



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Russia’s Military-Industrial Russia’s Military-Industrial Complex DreamsComplex Dreams


Prospective structure of RF expenditure for Armed ForcesProspective structure of RF expenditure for Armed Forces

SourceSource: Russian Military Review, 2006, : Russian Military Review, 2006, № 1№ 1, p.18, , p.18, translated.translated.


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……and Realization of the Dreamsand Realization of the Dreams


SourceSource: Military Industrial Courier, 2006, : Military Industrial Courier, 2006, № 1№ 12, p.6, 2, p.6, translated.translated.


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Pestilence 2005Pestilence 2005 or or

Limited InformationLimited Information



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Mysterious Disappearance of Mysterious Disappearance of Russian Military Pensioners in 2005Russian Military Pensioners in 2005


(according to publications in mass media)(according to publications in mass media)

Sources: Sources: Rossiyskaya gazeta, 4Rossiyskaya gazeta, 4thth May; Independent Military May; Independent Military Review, Review, 2020thth May; Red Star, 19 May; Red Star, 19thth October; Red Star, 29 October; Red Star, 29thth December December


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Conclusion Conclusion



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Instead of Military Reform Instead of Military Reform Still Trying to Be as BeforeStill Trying to Be as Before

FederalFederalAssemblyAssembly Chamber ofChamber of

AccountsAccounts

ExpertExpertCommunityCommunity

RussianRussian

DefenceDefence

EnigmaEnigma


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Any Questions?Any Questions? Vasily B. ZatsepinSenior Research FellowDepartment for Military Economics

Phone: +7-(495)-629-0971E-mail: [email protected]

5, Gazetny LaneMoscow 125993Russian Federation


Russian Military Expenditures: What’s Behind the Curtain

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