OPINION:
With the price of crude oil breaking below $30 for Brent today, the Russian government announced it is stress testing the budget for $25 oil for the foreseeable future. This is a rational response but also one that will mandate cuts in social and defense spending. Russia simply cannot afford to continue to spend money to modernize its military as they have been. With oil collapsing and Western sanctions continuing to bite, the Kremlin simply does not have the money. How much this decrease in outlays will affect Russian military operations globally is yet to be seen.
Russian state news agency TASS reported today on comments by former Russian Finance Minister Alexei Kudrin while speaking at the Gaidar Economic Forum in Moscow: “Defense spending reductions cannot be avoided. Many are saying that in the current geopolitical situation they will be hard to make … They may be postponed for two or three years. I do not see any problems in this respect. I don’t think that defense spending is a sacred cow untouchable in any circumstance.
“The reason is defense spending is not meant for participation in current local or geopolitical situations. It is meant for strengthening Russia’s defenses along the perimeter borders, in all areas of potential combat operations,” Mr. Kudrin explained.
He also said that Russia’s operation in Syria was “not a very critical budget spending item”: “In the medium term Syria is not a super-heavy burden. There are far more military and political risks that leave a certain imprint on the investment climate and on the investors.”
What Mr. Kudrin did not say is that the Russian budget is hemorrhaging from outlays for stabilizing Crimea and the pro-Russian regions in East Ukraine. Kiev has stopped payments to the population in the Donbass region and Russia has had to pick up the tab. Saboteurs have destroyed the power lines from Ukraine into Crimea in a continually escalating conflict. This has proved prohibitively expensive for Russia. With the price of oil collapsing, this makes these expenses all the more difficult for the Kremlin to bear.
In addition to military cuts, social spending will have to take additional hits as well. This will not go over well with the public, Russians have already had to tighten their belts substantially. This entire scenario may make Kremlin geopolitical actions quite unpredictable.
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