BOFIT Viikkokatsaus / BOFIT Weekly 2018/18

Russia's finance ministry reports that government defence spending fell by 25 % in nominal ruble terms last year. The defence spending assessment of the Stockholm International Peace Research Institute (SIPRI) and calculations in the Gaidar Institute for Economic Policy (IEP) both suggest that Russian defence spending declined slightly less. The discrepancy reflects the fact that SIPRI and IEP figures include military spending outside the defence expenditure budget category, especially social security, homeland security and spending on the economy. Defence spending contained in these expenditure categories grew rather briskly last year, increasing their share in the accounting for total military spending. The share was 26 % in SIPRI figures and 33 % in data counted by IEP.

Overall, money flows from government budgets and domestic banks for defence fell notably last year. IEP bank figures mean the net flow of money also in 2017 was from the defence industry to banks due to the industry paying down principal and interest on bank loans. In 2016, the defence industry received a large sum from the federal budget to pay off bank loans. In contrast, in 2011–14 money flows to the defence industry were boosted with bank loans, raising the total flow to defence even faster than budget figures indicated.

The three sources mentioned all note the defence spending-to-GDP ratio in 2017 was similar to 2014 when spending had already surged. The finance ministry puts the ratio at slightly over 3 %, SIPRI 4.3 % and IEP 4.6 %.

SIPRI reports that US defence spending continued to fall in real terms in 2017, but otherwise spending in Russia's vast neighbourhoods continued to rise. During 2015–17, China and India increased their defence spending by 5.5–6 % a year. Annual spending growth in eastern central Europe and the Balkans was nearly 8 %, while spending of the Baltic countries rose at 20 % a year. Defence spending in western Europe rose 2 % a year. Turkey increased its spending by nearly 10 % a year, while Ukraine's spending, despite slight dips, was up 5.5 % from the 2014 level.

Ratio of Russian defence spending to GDP, %

Sources: Russian finance ministry, SIPRI, IEP, Rosstat and BOFIT.