Home World Business Russia May Need to Raise Taxes, Debt to Fund Ukraine War: UK Intel

Russia May Need to Raise Taxes, Debt to Fund Ukraine War: UK Intel

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The Kremlin will likely need to impose austerity measures to resolve Russia’s budget deficit amid the growing cost of its invasion of Ukraine, according to UK intelligence.

The UK Ministry of Defence said in an intelligence update on Monday that Russia will likely miss its revenue targets for 2024, forcing it to find new ways to fill the gap.

The Kremlin intends to increase state spending by 26% this year, the MOD said. But it added that this was on the basis of “optimistic” estimates, including a 22% increase in revenue, with over 25% growth projected in oil and gas earnings.

But these sources may not be enough to cover Russia’s planned expenses, it said.

“It is likely that the government will need to reduce its contributions to the National Wealth Fund and increase domestic taxes and debt to fund its planned expenditure,” the UK MOD said.

The state of Russia’s economy matters as the Kremlin has been trying to fund its military efforts in Ukraine while also limiting the impact on its citizens of the cost of the war and of Western sanctions.

Russia is spending so much on its war in Ukraine that it is draining resources from the rest of the economy and overshadowing social spending for the first time since the fall of the Soviet Union, according to Alexandra Prokopenko, a former Russian central bank official.

“This pivot toward a militarized economy threatens social and developmental needs,” Prokopenko, who’s also a scholar at the Carnegie Russia Eurasia Center and a researcher at the Center of Eastern European and International Studies, wrote in Foreign Affairs last month.

A key risk, she said, is inflationary pressures and Russia’s economy overheating as a result of the Kremlin using all its resources to fund its war effort and keep the economy running.

A government document seen by Reuters showed that Russia doubled its 2023 defense spending target to over $100 billion — a third of its state expenditure.

According to a Bloomberg report, based on Russian finance ministry data, the Kremlin has been forced to drain Russia’s national wealth fund by over 44% since Moscow’s full-scale invasion in February 2022.

Such policies will have negative medium-to-long-term impacts, the UK MOD said on Monday.

Russia’s National Wealth Fund is “ostensibly for the long-term economic welfare of the Russian people,” but it’s now being increasingly used to fund the invasion of Ukraine, with a 10% drop in asset values in 2023, the MOD said.

But despite the considerable resources invested, the war is actually boosting Russia’s overall economy, according to the International Monetary Fund.

In January, the IMF revised its economic outlook for Russia and increased its growth estimate to 2.6% in 2024, from 1.1%. This was the largest increase for any country. It cited Russia’s large military expenditure as one key driver of growth.

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