In the immediate aftermath of the Duma election, I predicted Putin would do the following:
- Even more populism, with lavish promises regarding pensions, state investments, limitations on increases in utility tariffs.
- Nationalist appeals, complete with dark tales about foreign conspiracies to destroy Russia.
- Relatedly, even more truculence in foreign policy, e.g., Syria, BMD, the Near Abroad.
All is going according to form. Insofar as the truculence and nationalism is concerned, Putin’s promises of a lavish binge on weapons procurement fits right in. The latest of his mind-numbingly long articles on his future plans focuses on defense. He promises $770 billion in expenditures on weapons over the next 10 years-an increase of $120 billion over and above what had been mooted last year.
Putin gives two rationales for this binge. The first is that the defense industry can be the catalyst for a revitalization of technologically advanced industries in Russia. This is a common assertion, and one that has little basis in reality.
The second is that Russia is under siege:
“New regional and local wars are being sparked before our eyes,” Mr. Putin wrote. “There are attempts to provoke such conflicts in the immediate vicinity of Russia’s borders.”
Note the phrasing: “attempts to provoke conflicts.” Only the truly dim will not understand the code and fail to identify whom Putin believes it he provocateur.
Several quick comments.
First, when Kudrin was sacked for criticizing Medvedev’s lavish defense spending plans-a mere $600 billion or so-I said that Kudrin was really attacking Putin, because Putin was the driver behind increased defense spending. It is now clear that this was definitely the case: Kudrin’s (admittedly guarded) move to opposition provides further evidence.
Second, this plan is technologically fantastical given the actual performance in Russian weapons programs in recent years.
Third, Putin completely misdiagnoses the real source of Russia’s military weakness. It is a software problem, not a hardware problem. Just where are all the soldiers, sailors and airmen needed to operate these new weapons going to come from?
Fourth, Putin warned defense contractors against price gouging on new contracts. Hahahahahahahaha! What a card! Good luck with that! Especially given Putin’s own policy of consolidating Russian defense contractors into a few huge politically connected behemoths.
Fifth, this is fiscal insanity. This is especially true as there is little prospect for raising additional revenues from the energy industry. Indeed, the opposite is likely true (h/t R):
Russia’s 12-year oil boom is nearing its peak, forcing the next president to decide whether to cut taxes and revive production or use the windfall from $100 oil to boost public spending and quell mounting unrest.
As Vladimir Putin campaigns for a second stint in the Kremlin, the nation’s existing fields are losing pressure and oil companies OAO Rosneft, OAO Lukoil and TNK-BP (BP/) say production taxes give little incentive to invest. Since Putin first became president in 2000, crude output has grown 57 percent to 10 million barrels a day, surpassing Saudi Arabia and flooding the state treasury.
“The cream has been skimmed off the top,” said Leonid Fedun, the billionaire deputy chief executive officer of Lukoil, Russia’s second-largest oil company. “Further steps require taxes based on different principles,” or production will start falling within three years, he said.
Any cuts in the oil and gas industry’s 5.64 trillion rubles ($190 billion) in taxes mean less cash to combat the biggest anti-government protests since the 1990s. Deputy Energy Minister Sergey Kudryashov said Feb. 2 the need to strike a balance between revenue and oil output levels is one of the most difficult questions facing the state.
To which I would add that future competitive threats to Gazprom will put additional pressures on revenue in the medium-to-long term. (Note that Gazprom has already given price cuts of around 10 percent to big European and Turkish customers. The pressure on pricing will only increase in the next several years, certainly within the 10 year defense budget horizon Putin discussed.)
Sixth, the need for revenues to pay for such outlandish promises makes the Retroactive Oligarch Tax all the more attractive. And we can see that Putin gave a very clear hint at how Putin might propose that this tax be paid: he lavished praise on TNK and Surgutneftgas for paying for the continued operation of a submarine base in 2002. We can expect Putin to extract similar “contributions” from other big companies to pay for his defense splurge. (As a too funny sidebar, Prokhorov said that the oligarchs should decide themselves how much they will pay. Good luck with that! And I’m pretty sure that was the real Prokhorov who said that, not @fake_prokhorov.)
Seventh, the centerpiece of Putin’s plans are the building of 400 MIRVed ICBMs. This is occurring when the Obama administration is mulling a unilateral cut in US nuclear warheads-perhaps to as low as 300. It will be quite interesting to see whether Putin’s announcement makes the slightest dent in these dreamy plans. Sadly, I believe that is unlikely to be the case, given (a) Obama’s bizarre strategic views, and (b) his obsession with the Reset.