Russian president Putin allegedly diverts pension funds towards funding the war.
Title: Moscow's Fiscal Crisis: Putin Drains Russia's Pension Fund for War Expenses
By: Lea Verstl
Social Media Shares: Facebook • Twitter • WhatsApp • Email • Print
Spying on the shadows of Russia's capital, the budget deficit widens. The culprit? Sanctions and falling oil prices. President Putin, ever unrelenting, plunders the Russian state pension fund to fuel military spending, a move that underscores the strain on Russia's economy.
Putin shows no regard for losses, as he keeps his war machine humming. Soldiers on the Ukrainian front bear a high cost, while the war itself generates deep chasms in the Russian state budget. One of the ways the Kremlin is filling these gaps is by tapping into the welfare fund, billions at a time, year after year.
Established in 2008, the welfare fund invested in stocks and assets, financing the Russian pension system. Before the war, it was unthinkable to cover the budget deficit with funds from this pot. Now, Putin is raiding it consistently for his battles. For the current year, the Kremlin plans to siphon around 4.8 billion euros from the reserves to balance the budget deficit, which is projected to triple this year. The welfare fund, once a buffer, is dwindling rapidly.
Experts' Insight:"In the short term, it benefits Putin if he raid's the pension fund," says Alexandra Prokopenko, a researcher for the Carnegie Endowment for International Peace, formerly a central bank advisor living in Berlin. "There are still resources in the form of reserves, such as the welfare fund. There's still room in the budgets. For short-term shocks, the Russian economy is resilient," Prokopenko explains. However, in the long term, it's unsustainable. The widening income gap between various population groups in Russia is evidence of this imbalance. Since the war's onset, the poorer classes have grown poorer, while the rich are becoming richer.
Crumbling Revenues and an Overheated Economy
The income disparity expands as Putin sacrifices the civilian sector for his military ambitions. The Kremlin dedicates a third of all state spending to defense, totaling seven percent of the annual GDP.
The Russian population bears the consequences in other ways. The economy is producing heat, with an interest rate of 21 percent making loans more expensive. Inflation stood at 10.3 percent in March, causing many Russians to view butter prices as astronomical. Even though the economy continues to grow, it's not ascending at the pace of previous years. To sustain the war against Ukraine, Putin likely needs alternative funding sources beyond the pension fund.
Sanctions: A Double-edged Sword
The Russian economy is also under pressure due to Western sanctions. Since the commencement of the war, the USA and EU have enacted new sanctions against the Russian financial, military, and energy sectors.
Political Analysis:U.S. President Donald Trump frequently wavers between viewing Putin as a friend or an enemy. However, Trump's indecision doesn't necessarily matter, as the US has a powerful tool at its disposal: secondary sanctions. These can penalize any companies around the world that continue to do business with Russia, such as those purchasing Russian oil and gas. Yet, it remains uncertain whether the U.S. will employ this weapon.
The EU, on the other hand, recently passed its 17th sanctions package. Targeting the Russian shadow fleet, which transports oil and oil products, EU authorities have banned around 200 ships from docking in their ports.
Expert Opinion:"The sanctions, and particularly the latest sanctions package, are effective—they increase the costs for the Russian economy," says Prokopenko. As companies attempt to circumvent these sanctions, they incur higher costs, which they pass on to their products. "Prices will therefore rise," says the economist.
A Race Against Time
The EU is continuing to tighten the noose around Russia's economy, working on an 18th sanctions package. This package aims to ban the Nord Stream gas pipelines and exclude 20 Russian banks from the international payment system Swift.
Will sanctions bring an end to Putin's war of aggression soon? Prokopenko doubts so. Putin values his war machine above all else, she contends. "All this goes beyond simple economics and rationality for Putin," she notes. Even when the costs of the war began soaring, they did not deter Putin from launching the invasion. Therefore, increasing transaction costs likely won't be the decisive factor in curtailing Putin's violent march: "I don't think he's capable of calculating losses yet."
Although Putin is impervious to the notion of losses, reality has a way of catching up with even the most stubborn of leaders. The reserves from the Russian pension fund won't last indefinitely, according to Prokopenko. In the long run, Putin would need to deplete all resources from the civilian economy, funneling them into his war machine, a strategy that may eventually run out of steam.
In the podcast "Wieder was gelernt," Prokopenko sheds light on Russian politics, the economy, and global affairs. Check it out for enlightening episodes on various topics in politics, sciences, and culture. Find episodes in the ntv app, RTL, Amazon Music, Apple Podcasts, and Spotify. Get the RSS feed for other podcast apps and enjoy learning!
- The East Central (EC) countries, watching the situation unfold, question the sustainability of Russia's energy policy under President Putin, as he continually raids the Russian state pension fund, originally designed to finance the pension system, to cover military expenditures.
- The European Union, in its efforts to curtail Putin's military ambitions, is working on an 18th sanctions package, aiming to ban the Nord Stream gas pipelines and exclude Russian banks from the international payment system Swift, increasing the economic pressure on Putin's energy policy.
