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. Last Updated: 07/27/2016

Balancing the Budget

Russia may not be able to pay its soldiers or pensioners, but it has plenty of money to finance hemp farming, free education for nannies and new loans to Cuba.

While everyone from the IMF to the Yabloko political party has called Russia's 1999 federal budget pure fantasy, it is important to remember that planned expenditures for the year equal what the United States will spend in one week.

This may be a foolishly optimistic budget when it comes to tax collection and inflation, but it is not particularly fat. Scanning the pages and columns of numbers of the budget law published in Rossiiskaya Gazeta last week reveals few Star Wars defense programs or thousand-dollar toilet seats.

Still, the need to slash expenditures further looms. Should annual inflation surpass the unrealistic 30 percent assumed in the budget, or should the ruble sink below the wishful 21.5-to-the-dollar exchange rate (it already has), Russia will have two choices: raise the knife against spending, or print more money and risk sparking further inflation. Those same two choices also come up if the International Monetary Fund fails to deliver vital new loans Russia has already written into its revenue column.

Article 2 of the budget sets Russia's 1999 expenditures at 575 billion rubles ($24.9 billion at Monday's exchange rate) and revenue at 473.7 billion rubles. That leaves a 101.3 billion ruble deficit f an overhang that irritates the IMF and other Western and Russian liberal economists.

But a balanced budget is easier said than done. Going through the document line-by-line, even an amateur with plenty of patience can find excesses. But they add up to small change, and in the end, success here calls for more creative trimming: What would happen if, say, Russia eliminated its entire foreign affairs budget? Or opted not to fund agriculture this year? Can the Russian army afford further cuts? Let's take a look.


Duma Deputy Alexei Arbatov threw up his hands in disgust during a particularly noisy round of budget debate last year. "The draft budget means the military budget of a great nuclear power is about $2 billion smaller than that of Turkey," he protested.

Arbatov is a member of the liberal Yabloko faction, but even liberals have reason to fear a shrinking defense budget. The 93.7 billion rubles ($4 billion) allocated to the military this year will do precious little to keep Russia's 1.2 billion servicemen fed and warm or its vast nuclear arsenal from malfunctioning.

To keep it in perspective, Russia this year will spend 75 times less than the $300 billion the U.S. has earmarked for defense to protect a far greater land mass bordered by much more hostile neighbors.

The biggest line item in Russia's defense budget f 43 billion rubles f covers salaries and living expenses for soldiers. Considering the average officer earns less than $100 per month and wasn't paid for six months last year, cutting salaries would be inhumane f and dangerous.

"It will increase social unrest and increase the risk of various accidents in the army," said Alexander Pikayev, a defense analyst with the Carnegie Moscow Center. "Last year for the first time in history we had several dangerous incidents which were due to low salaries and not paying salaries for a long period of time."

Particularly frightening to the Kremlin was a Krasnoyarsk officer's decision to hijack a tank from the local armory and drive it onto the main square to protest unpaid wages. Continued delays or cuts could give soldiers more reason to pinch nuclear weapons and sell them to smugglers or domestic terrorist groups, Pikayev said.

Even if that weren't true, the immediate problem f balancing the budget in 1999 f is not solved but aggravated by reducing the number of servicemen: Russia has promised laid-off soldiers benefits of about 100,000 rubles per year, which for the short term makes it cheaper to keep soldiers in uniform than discharge them.

Salaries aside, the bulk of the remaining defense budget will go toward maintaining or dismantling current weaponry. Only two new Topol-Ms, an intercontinental ballistic missile, will be built this year, Pikayev said. A single nuclear submarine f the Yury Dolgoruky f will be constructed over the next several years.

Meanwhile, 100 decommissioned nuclear submarines are still floating off Russia's coastlines, threatening hazardous leaks. And the risk is increasing that missile launch commands could spontaneously be given.

"Under the current budget expenditures it is impossible to ensure the safety of dozens of nuclear facilities," Pikayev said.

Luckily, Russia is ahead of schedule in implementing START I, the Strategic Arms Reduction Treaty. But it has nowhere near the money necessary to meet reduction targets in the Chemical Weapons Convention, a treaty signed in April 1997 by 100 nations.

Destroying the required chemical stockpiles over the next 10 years will cost Russia about $6 billion, or one and a half times the total 1999 defense budget.

Defense may be the fattest target in the federal budget, but further cuts, Pikayev says, are nearly "impermissible." And it's hard not to agree.



Russia may need every kopek to keep its missiles from indiscriminately firing, but does it really need to pay its United Nations dues, maintain 171 embassies overseas or issue new loans to Cuba?

Entirely scrapping the 1999 Foreign Affairs budget would save Russia 36.6 billion rubles f about one-third the amount needed to balance the budget. To be fair, Russia probably couldn't do without a foreign minister f if only because somebody has to apologize to U.S. Secretary of State Madeleine Albright for Communist leader Gennady Zyuganov's embarrassing assertion that she is not a woman.

Allowing Foreign Minister Igor Ivanov to keep his job and maybe a small staff and plane for overseas trips would still save, say, 30 billion rubles f a significant sum.

Not surprisingly, a Foreign Ministry spokesman didn't want to speculate on the consequences of his workplace disappearing. "We don't comment on hypothetical questions," he said.

But a foreign affairs expert with the Academy of Science's European Institute seemed to think some expenses could go, such as contributions to international organizations, which will cost $258 million this year. (Foreign expenses are set in hard currency in the budget. Many are not detailed in the published budget law but are listed in related budget documents obtained from a Russian economist.)

"We would not be the only debtor to the UN f there are many others, including the U.S. and 20 to 30 other nations," said Yury Borko, an analyst with the European Institute. The UN, after all, wouldn't simply eject one of the chief members of its Security Council for unpaid dues.

Borko stopped short of advocating a shutdown of Russia's 171 embassies, however, which will cost $181 million to support this year. "The savings would not be big, and the consequences would be the same as if I decided to cut off all relations tomorrow with my friends and family," he said. "They would eventually forget about me."

But times are tough, and have those embassies really been fostering the harmonious relations they should? Russia is at odds with the rest of the world's superpowers on a host of key issues, from Kosovo to Iraq to NATO expansion. If the embassies were closed, Ivanov could continue to stay abreast of world events with a simple subscription to Kosmos TV, paid for from his 6.6 billion ruble budget.

Most curious in the 1999 plan is the $400 million in "new credits to foreign governments." The Foreign Ministry could not immediately comment on the nature of the loans, but an economist and budget expert said he believed the money will be lent to former Soviet dependents such as Cuba.

How can Russia afford such lending when it can't even meet its own staggering foreign debt obligations f or even pay pensions? The Cold War is over, and Cuba will have to fend for itself, particularly now that its relations with North America are warming up.

Finally, the foreign affairs budget allocates $218 million "to ensure the safety of the country." Foreign intelligence budget? Very likely, the budget expert said. To be sure, keeping track of outside threats is a worthwhile cause, but when weighed against domestic social needs such as healthcare and education, supporting a force of Cold Warriors seems, well, outdated.




In the hunt for budget excess, the discerning eye will inevitably turn to the small but largely indefensible agriculture budget.

Spending on agriculture and fishing this year amounts to a measly 9.3 billion rubles, much of which will be funnelled into useless subsidies. The IMF has long criticized subsidies as improper manipulation of agricultural markets. A former deputy agriculture minister agrees they should be eliminated, if only because they're simply too insignificant to matter.

Forty million rubles in subsidies to wool producers, 230 million in feed subsidies to livestock plants and chicken farms and 70 million to linen and hemp f hemp? f farmers will make little difference in the health of these sectors, said Leonid Kholod, former deputy agriculture minister.

"The budget is so small that to break it up into many small subsidies is senseless," Kholod said. "They are too small to have any real effect ? to get rid of them would have no negative impact."

Particularly useless is the 2.2 billion rubles in subsidies planned for fertilizer purchases. Fertilizer factories take the funds and lower prices on some of their products but compensate by raising prices on other products, Kholod said.

Subsidies are "on paper for propaganda's sake but have no effect," he said.

Subsidies are not the only expendable items in the agriculture budget. An additional 500 million rubles planned in soft loans to agriculture could certainly be eliminated, as the credit program in the past has been riddled with corruption.

And surely the seven classifications of agricultural education to be supported by the budget f these include the seemingly wildly redundant general education, mid-professional education, education at mid-level special boarding schools for retraining and improvement of qualifications, education at (presumably plain old) boarding schools for retraining and, finally, higher professional education f could be consolidated, or possibly eliminated altogether?

The absolute gem of the agriculture budget is something not even Kholod could explain: a 417,000 ruble budget for "culture, art and cinematography."




Some of the most creative spending can be found in the 6.7 billion ruble Federal Targeted Investment Program outlined in Attachment 6 of the budget, also known as regional pork-barreling.

Duma deputies lobbied hard to get their pet projects included in this slush fund, which promises millions of dollars for the development of healthcare facilities, construction, culture and education.

The investment fund includes such curious projects as the Reconstruction of the Municipal Puppet Theater in the city of Kaluga, the building of a Monument to History and Landscape Architecture in the Stavropol region and the installation of a "water pumping station and pipeline connecting the village of Dugino to the pumping station of the second hill of the village of Nedvigovka in the city of Taganrog, Rostov region."

Also noteworthy: Refurbishing the Center for Stone and Woodworking in the Alatir Chubashsky Republic and Reconstruction of the Starch and Molasses Factory in Klimova Bryansky region.

To be fair, some of the funds are allocated to more urgent projects, like the construction or rehabilitation of tuberculosis clinics and orphanages. But the programs in general appear to be the responsibility of regional governments, not the federal government. Some of the most expensive projects in the 6.7 billion ruble fund involve the construction of natural gas pipelines and power station components that should, in theory, be handled by the state monopolies Gazprom and Unified Energy Systems.

"The very fact that such items appear in the federal budget does not speak for its good quality," the economist and budget expert said. "They are called investment grants but it is the regional governments that should tend to the items listed here."




As severe as it may seem, eliminating Russia's foreign affairs and agriculture budgets, as well as some regional investment, gets rid of less than half the budget deficit. Doing away with the other half calls for some desperate slashing:

The Federal Road Fund: Sure, paving over Russia's plentiful potholes is a worthy task, but does it really require 29 billion rubles? For whatever reason, the Road Fund enjoys special privileges under the federal budget: It is an earmarked budget fund, meaning it is automatically funded by the proceeds of the infamous Road Tax, and Article 9 of the budget law declares it the only one of seven earmarked funds not to be executed by the federal treasury. This freedom and largess breeds corruption, budget analysts say. In dire times like these, fat-cat construction bosses and potholes will have to wait.



Law Enforcement: The ranks of the Interior Ministry have increased dramatically since 1991 as crime levels have grown, making the law enforcement budget, at 51.3 billion rubles, second only to defense spending. Perhaps a more efficient strategy to reducing the number of police officers and government auto inspectors, or GAI, would be to pay them more to cut down on bribe taking and improve crime solving. Let's cut the budget by, say, 20 percent.



Nannies for Rich Kids: Yes, the ballet schools that feed the Bolshoi and Mariinsky troupes are a national treasure, but does the Culture Ministry really need to fund the education of governesses for wealthy families? According to a ministry spokesman, a small portion of the ministry's 2.6 billion ruble budget this year will fund professional schools teaching the craft of becoming a "nanny for rich kids." Cutting 10 million rubles should eliminate such nonsense.



River Transport Subsidies: A small but niggling item in the Transport Ministry's budget is 600 million rubles worth of Government Support for River Transport. According to a river transport expert in the ministry, the business of hauling cargo and passengers by river is mostly privatized and set to "grow despite the tough times now." Really? Then why subsidize it?



Spaceships: The Russian space program of late has been embarrassing its own proud history with the constant malfunctioning of the Mir space station. Russia is also woefully behind in financing its share of new projects with NASA. Better to postpone the construction of new rockets and space toys than tarnish the image of Yury Gagarin.



Foreign Debt: Okay, we didn't want to do this, but there are 12.7 billion rubles left to cut and it's definitely not coming out of the pension fund. Elderly Russians have suffered enough. Instead, why not stick it to those who expect it: foreign investors. Debt servicing, at 166.8 billion rubles, is the budget's heaviest burden. Foreign debt payments, at 100 billion rubles, eclipse the national defense budget. Sure, analysts have warned that Russia will relegate itself to financial obscurity if it defaults on foreign debt, but really, what's a measly 12.7 billion rubles? Perhaps a few missed payments to the London Club of commercial creditors? Fuhgeddaboudit.



Phew. The IMF would be pleased. We have balanced the budget, and all it took was marginalizing a few fringe groups: foreign investors, ambassadors, Cuba, UN Secretary General Kofi Annan, shepherds (and possibly sheep), hemp farmers, regional puppeteers and woodworkers, GAI officers, Volga boatmen and astronauts. Success!