Putin Fears 'Social Discontent' Over Russia's Spending Cuts: ISW

Moscow's orders to eight regions it controls to balance their books could be a Kremlin move to make local administrations bear the brunt of discontent for austerity as Vladimir Putin looks to spend more on the war in Ukraine he started.

That assessment by the Institute for the Study of War (ISW) follows a report in the Russian newspaper Kommersant that the Ministry of Finance in Moscow will make the heads of "non-ethnic Russian republics" of Dagestan, Ingushetia, Chechnya, and Tuva responsible for budget deficits.

These regions are heavily subsidized by Moscow, especially Chechnya, whose strongman leader Ramzan Kadyrov is a Putin loyalist and once said that without the handouts his predominantly Muslim republic would last "not even a month."

Kommersant said on Monday the draft government decree to reduce the gap between income and expenses or face subsidy cuts would also apply to the heads of the four Russian occupation administrations in the Ukrainian regions of Luhansk, Donetsk, Zaporizhzhia and Kherson, which Moscow does not fully control.

Russian republic and occupation heads have until December 18 to sign promises for 2024 on areas including restricting federal money spending on social programs and not expanding state sector worker numbers.

The ISW said that "these obligations appear to amount to an austerity package" and may signal the start "of a wider set of measures to cut budget deficits while maintaining defense spending."

The think tank said that the Kremlin may have instructed the finance ministry to shift responsibility for the measures directly onto the republic and occupation administrations "to prevent the Kremlin from bearing the expected discontent for austerity."

The focus on occupied territories and four non-ethnic Russian republics may have been a move by the Kremlin "to contain social discontent in non-ethnic Russian areas and existing areas of concern ahead of the 2024 Russian presidential elections," in which Putin is expected to run and win.

Chris Weafer, chief executive officer of strategic consultants Macro-Advisory Ltd, told Newsweek the order to Russian-controlled regions comes as the finance ministry had been warning of the dangers of poor spending discipline all year "especially against the backdrop of lower than expected oil tax receipts for the first seven months."

Facing sanctions on its energy exports, which included a $60 per barrel cap on oil, Russia offered discounts to countries it deemed "friendly" and this policy has contributed to lower revenues with the federal budget facing a midyear deficit of 2.5 percent of GDP.

"Since then, the combination of higher export prices for oil, improved tax collection in other areas of the economy, plus the ruble devaluation which boost the value of foreign currency-based exports, means that the budget is comfortably within the target deficit and may end the year well below 1.0 percent of GDP," said Weafer.

However, the finance ministry has made significant changes to its budget to support the military-industrial complex and social programs while previous plans for spending on infrastructure improvements, demographic improvements and on supporting new industries have been shelved, he added.

On Tuesday, Putin approved a record budget increase of around 30 percent for military spending in 2024, reaching 36.6 trillion rubles ($410 billion) with an expected national deficit of 1.595 trillion rubles (€16.4 billion).

Spending on defence and security combined expected to take up 40 percent of the total budget expenditure next year and marks an almost 70 percent increase in defence spending compared to 2023 as Putin remains committed to the war in Ukraine he started.

Newsweek has contacted the Russian finance ministry for comment.