Vladimir Putin Is Writing Checks His Government Just Can't Cash

Russian President Vladimir Putin chairs a Security Council meeting via a video link at the Kremlin in Moscow on March 1, 2024.

Vladimir Putin has made pledges to improve Russians’ lives that will cost tens of billions of dollars although a sanctions-hit economy may struggle to find the cash.

Two weeks before Russians go to the polls in a controlled election that will surely return him another six-year term, Putin pledged in his state-of-the-nation address policies to boost infrastructure and tackle the country’s demographic crisis.

But one market expert told Newsweek that with wartime Russia so reliant on government spending, the price tag of Putin’s pre-election promises will risk the economy “overheating” and make it dependent on avoiding further international sanctions.

Another expert said that Russia will continue to face difficulties in selling oil, its key revenue generator as sanctions put off buyers in new markets.

Putin’s social program

In his speech to Russia’s Federal Assembly on Thursday, Putin announced big ticket investment in public infrastructure that Reuters reported was worth 4.5 trillion rubles ($49 billion) with 1 trillion rubles ($10.9 billion) planned for hospitals and 400 billion rubles ($4.4 billion) for schools and kindergartens.

There was also a 75 billion-ruble ($820 million) family-friendly plan to boost birth rates and life expectancy. Other programs included 700 billion rubles ($7.7 billion) for digital platforms, 360 billion rubles ($3.9 billion) for public spaces and 250 billion rubles ($2.7 billion) to modernize airport infrastructure.

Taking into account budget spending allocated for the next two years, and the additional cost of Putin’s initiatives, spending could reach 15 trillion rubles ($164 billion) over the next presidential term, Russia’s Rosbank, wrote in a note, Bloomberg reported.

“A hefty tag on the pre-election promises increases the risk of overheating and makes the budget even more dependent on the ability to successfully dodge international sanctions in the future,” Bartosz Sawicki, market analyst at Conotoxia fintech told Newsweek.

Sawicki said that increased spending is not possible without revenues from the sale of energy commodities but sanctions and the normalization of commodity prices last year meant that budget revenues were down compared with the record year of 2022.

“However, the drop was not large enough to prevent increased spending on army, security and social benefits,” Sawicki added.

Putin usually makes pre-election pledges of more funds for groups such as pensioners, veterans and families to shore up support. But unlike in 2018 when he was last returned to power, the economy is buffeted by Western sanctions that followed Russia’s full-scale invasion of Ukraine.

Moscow has managed to weather many of the measures, with the IMF and other agencies predicting GDP growth of around 2.5 percent this year, but the economy is driven by high military spending and revenues from its main exports of oil and gas are harder to come by.

Last year, Russia posted a fiscal gap for the second year in a row and expects 2024’s shortfall to come in at 1.6 trillion rubles.

Meanwhile, the liquid part of Russia’s rainy day National Welfare Fund (NWF)—which accumulates oil revenues—has more than halved over the two years of the war, falling by $58 billion from the pre-war level of $112.7 billion to $55 billion, according to government figures.

As the war in Ukraine drains state coffers, lawmakers from the ruling United Russia had been instructed to “urgently” submit proposals by Monday, which detailed how to implement Putin’s plans, two sources in the lower house of parliament told business newspaper Vedomosti.

Putin has said higher taxes for companies and wealthy individuals could be the answer. A presidential administration source told The Moscow Times’ Russian edition that a progressive scale of personal income tax (PIT) was being considered.

At the moment, income is taxed at 13 percent, although this rises to 15 percent for those earning more than five million rubles a year ($54,000).

Oil export difficulties

Revenues from Russia’s exports of oil are hampered by a price cap imposed by the G7, the EU and Australia that bans firms from insuring, financing and shipping Russian seaborne oil exports sold above $60 a barrel.

Moscow has pivoted away from the West and sold discounted oil to China, India and Turkey but payment difficulties and Western sanctions cause problems for the key revenue generator for the Kremlin.

“It seems likely Russia will be able to continue to export its oil, but with significantly more difficulty,” said Mary Melton, freight analyst at Vortexa, which provides energy market analysis.

More onerous rules on the price cap mean tanker operators have to submit attestation documents per voyage instead of annually to prove compliance. India has increased its purchases of oil over the last two years, but it has “indicated an unwillingness to work with sanctioned vessels.”

“As the biggest importer of Russian crude since the price cap mechanism went into effect, increased sanctions enforcement plus a shrinking fleet will affect this,” Melton told Newsweek.

“Coming in to fill this gap in available tankers to transport Russian crude are tankers operating in the sanctioned Iranian and Venezuelan trades,” Melton said. “However, if the U.S. reimposes sanctions on Venezuelan crude in April, this might stop some of these tankers from continuing in the Russian trade.”

Newsweek has contacted the Kremlin for comment.

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