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Putin lures Russians with expensive promises – but does he have the money?

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Putin lures Russians with expensive promises – but does he have the money?

Russian President Vladimir Putin. Contributor via Getty Images

Russian President Vladimir Putin promises Russians major government support to improve their living standards. “The Russians are drinking and eating away their problems,” said a Russian economist. The crucial question now becomes where Putin can find the money to cover rising war costs and high social spending while income from energy exports is falling.

Russian President Vladimir Putin has promised Russians to improve their living standards with the help of government programs. The promises cost many billions that have not yet been included in the budget. Russia’s war economy remains stable. But the state budget is under pressure because of the costs of the war and lower income from oil and gas exports.

Putin made the comments during his annual State of the Union Address He spoke two weeks before the presidential elections in Russia, which he will win without serious opposition. A presidential term in Russia lasts six years.

According to analysts, Putin’s promises could make Russia louder Bloomberg Cost 120 billion euros more than planned in its current budget.

Putin’s biggest promises include 4.5 trillion rubles (45 billion euros) for improving infrastructure and around ten billion euros for building and renovating hospitals.

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There is also a 75 billion ruble plan to increase birth rates and life expectancy. Putin has previously called on Russians more children in order to “survive as an ethnic group”.

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It is still unclear where the additional budget will come from. On Friday it proposed higher taxes on high-income individuals and companies.

Where does Putin get the money for the programs?

Analysts attribute Russia’s resilience to war spending, as well as government subsidies and aid. As a result, Russia has since invaded Ukraine a budget deficit for two years recorded.

Dmitry Polevoy, investment director at Astra Asset Management in London, told Bloomberg that Russia can afford the extra spending promised by Putin – unless the country’s economy deteriorates.

“At first glance it does not seem that it is unaffordable, but if the economic situation is worse than officially forecast, additional sources of financing will have to be sought,” Polevoy said.

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Now it will be very important for Russia how state revenues develop, Russian economist Natalia Subarevich told “Welt”. “Will we be able to generate as much revenue as we have planned to spend on armaments and social programs?” The focus is on Russia’s oil exports, namely the quantity and the price. She also expects tax increases for companies.

“The Russians drink and eat away their problems”

Subarevich pointed out that many population groups are currently doing better economically than before Russia’s attack on Ukraine. In 2023, disposable income would have increased by 4.4 percent, more than offsetting the losses of 1.5 percent from the first year of the war in 2022.

When asked which groups were doing better now, she replied: “Poor people, families with children. Since March 2022, they have been receiving additional aid, which affects ten million children. Incomes in the soldiers’ families have risen sharply. “They have never seen wages like this in their lives. And for those who work in the defense industry, wages rose by 100 to 150 percent in autumn 2022.” Consumer spending also increased accordingly. “The Russians are eating and drinking away their problems,” said the economist.

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The sanctions affected many areas of industry, such as the automotive industry, the gas sector and the timber industry. The reorientation away from Europe to the East is logistically not possible here.

There is no new prosperity in Russia. “Between 2013 and 2019, real disposable income fell by six percent. Then came Covid. We have not yet returned to 2013 levels.

“The creeping poison of sanctions”

Regarding the sanctions, she said: “If the goal was to harm the Russian population, it will backfire because people will go into a defensive posture.” The consequences for Russia’s economy were underestimated in three points: flexibility of the global markets for many products because half the world is not participating in the sanctions. The strength of the Russian central bank and also the adaptability of Russian companies.

Berenbank chief economist Holger Schmieding pointed out in his podcast that Russia quickly switched to a war economy. But it is also true that export revenues will have fallen from $640 to $460 billion in 2023. Russia’s growth comes solely from the war economy, but it brings no benefit. The unproductive production creates enormous inflationary pressure, as in all war economies. The sanctions, even if they did not work as quickly as hoped, still seemed like “a slow poison”.

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