January 30, 2023:
Russia is having a difficult time paying for its military effort in Ukraine. The 2022 government budget suffered an unplanned $107 billion deficit because of lower-than-expected tax revenue and higher expenses in Ukraine. That was made up by borrowing, increasing taxes on gas and oil production and dipping into the National Wealth Find (foreign currency reserves used to stabilize the value of the ruble). The 2023 deficit will be larger because of the war in Ukraine. At the same time Russian costs for operations in Ukraine have grown much faster than expected. The 2023 military and national security was supposed to be $95 billion. Because of the war in Ukraine these costs escalated to over $150 billion and rising.
Much of this additional spending went to increasing production of high-tech military equipment. Many of those orders have not been filled because sanctions prevent Russian defense manufacturers from obtaining the special components they need. Much of the money is being spent seeking out other sources, which often turn out to be more expensive and unable to provide the quantities needed. So far the greater spending has not resulted in higher production. The government ordered this problem to be fixed at any cost. Imports are difficult or impossible to obtain and there is a growing shortage of skilled workers and experienced managers in the defense firms. This is an old problem made worse by the Ukraine war. Vladimir Putin has promised to ensure that defense workers will not be “mobilized” into the military. This helps, but not enough. A lot of those qualified Russians are seeking to leave Russia.
The Russia effort to carry out a “maximum mobilization” of military production has turned out to be an expensive failure.