The cut in 2017 (Russian defence budget – ed.) is smaller than appears at first sight. (…)In sum, Russia’s military capabilities will almost certainly continue to increase over the next few years. – as Edward Hunter Christie, NATO Defence Economist has said in an interview with Defence24.com.
Małgorzata Krakowska: Based on analysis of returns from Russia’s Federal Treasury, it is estimated that in 2017 the Kremlin is planning massive cuts in Russian defence budget. Is Russia curbing expenses on defence industry?
Edward Hunter CHRISTIE, Defence Economist, NATO: The cut in 2017 is smaller than appears at first sight. 2016 defence spending was boosted at the end of that year in order to reimburse state-guaranteed loans to Russian banks. This loan reimbursement did not correspond to any actual defence spending in that year. So, while official federal defence spending was 3.776 trillion roubles, actual defence spending is estimated to have been 2.983 trillion roubles. As of 1 September 2017, the amount budgeted for 2017 was 2.872 trillion roubles. This is 3.7% less than the 2016 level (in nominal terms), so indeed a small cut.
What is more relevant is that a longer trend of annual decreases may be emerging. The Russian Ministry of Finance proposed, in its planning document of 3 October 2017, to bring defence spending to 2.808 trillion roubles in 2020. This looks like a small reduction compared to the 2016 level, but if one accounts for the likely future level of inflation (I do so using IMF forecasts), the 2020 defence spending level would be 26.5% lower than the 2016 level in real terms, i.e. a substantial cut. Under this scenario, defence procurement, so spending on equipment including weapons systems, could decrease by a similar extent, in real terms, over the next few years.
What would be the impact of these cuts on Russian defence?
Because the level in 2016 was quite high, a cut of around one quarter in real terms would still allow for a large volume of annual purchases of new or upgraded equipment. The volume in question would still mean that Russia’s stock of military equipment continues to improve, as the proportion of modern equipment would continue to increase. In sum, Russia’s military capabilities will almost certainly continue to increase over the next few years.
To what extent Western economic sanctions against Russia (negatively) influenced the condition of Russian defence potential? Which areas are vulnerable and which ones remain strong?
Western economic sanctions have impacted Russia’s defence potential both directly and indirectly. Indirectly, there was a negative macroeconomic impact on Russia. Economic growth was lower than it otherwise could have been, even considering the fall in oil prices, due to the financial sanctions against Russian banks. As a result, tax revenues were lower than they otherwise could have been, and this strengthened the need for the budget cuts that were discussed earlier. A second indirect effect was that the extra pressure on Russian banks probably accelerated the decision to reimburse defence-related loans.
Direct effects on Russia’s defence industrial complex also occurred. The sanctions included restrictions on the exports of both military goods and dual-use goods to Russia, thus forcing Russian companies to look for alternatives, or develop alternatives by themselves, thus leading to costs and delays. One example has been diesel engines for ships, which Russia would have obtained from Germany, and which had to be replaced by a modified Russian engine. Over time, Russia has found, and will continue to find, alternatives from other nations or from new domestic production. But there is still a net negative impact on Russian production, which can be seen as a justification for keeping the sanctions in place.
What kind of criteria were designed for the Western sanctions that hit Russian defence industry?
The sanctions on the Russian defence industry were of a broad nature, barring the export of a large range of military and dual-use goods. In addition, the most important defence industry companies were targeted by financial sanctions. The goal was to cause impediments for the entire sector.
President Donald Trump has been under fire for pressuring member states to increase defence spending. Would you agree with the view that US is building too much pressure on the members as to the financial contribution?
No, I would not agree. All Allies agreed to what we call the Defence Investment Pledge at NATO’s Wales Summit in Wales in 2014. The declaration – approved by the Heads of State and Government of all Allies – sets out that all Allies currently not meeting the NATO guideline of spending 2% of GDP on defence should aim to move towards that guideline by 2024. And we are making progress.
After years of decline, in 2015 we saw a real increase in defence spending across European Allies and Canada. In 2016 this continued, and in 2017 we foresee an even greater annual real increase of 4.3%. Twenty-five Allies plan to increase defence spending in real terms this year. Investing in our defence is in the interest of all NATO Allies, and it is even more necessary to keep us safe as we face the most complex security environment in a generation.
Thank you for the conversation.