Philip Hanson
Associate Fellow, Russia and Eurasia Programme
The centralization of decision-making on Russia’s finances reflects how the strain of economic turmoil has created strong intra-government divisions that only Putin can control.
Russian President Vladimir Putin attends a military parade on 9 May 2014 in Sevastopol, Russia. Photo by Sasha Mordovets/Getty Images.Russian President Vladimir Putin attends a military parade on 9 May 2014 in Sevastopol, Russia. Photo by Sasha Mordovets/Getty Images.

On 23 July Russian Deputy Prime Minister Arkadii Dvorkovich said that federal budget spending decisions for 2016-18 would be made in consultation with President Vladimir Putin. Putin of course was already involved the in budget process but formally, at least, the federal budget is the responsibility of the government, not of the presidential administration. Dvorkovich’s announcement amounts to a semi-formal institutionalization of a practice that was becoming increasingly common. It is a sign both of the increasing difficulty of economic policy decisions and of the acuteness of intra-elite conflicts over the allocation of resources.

Intra-government divisions

Until 2014 the president set out broad priorities in an annual budget address to the Federal Assembly and then, in principle, the government thrashed out the details and presented a draft for legislative approval. That procedure has lapsed for the time being, and the practice of informal consultation with the president during the budget-drafting process has become more frequent.

The latest contentious issue involved the level of agricultural support. The Ministry of Finance wanted to trim this back in 2016 and to do so, moreover, in nominal terms at a time of high inflation and when the extension of the embargo on many food imports had just been announced. After this was referred for consultation to Putin, agricultural support was left untouched.

This is characteristic of how the Ministry of Finance finds itself increasingly at odds with other government departments over spending. Often the Ministry of Economic Development has sided with the spending departments, but there have also been issues where Finance and Economic Development together have been at odds with the ‘social bloc’ over welfare and pension arrangements.

Other issues that have been unusually troublesome in the past year include the rate of growth of defence spending, which has lately been at the expense, most notably, of funding for health and education, spending on the development of the Russian Far East and the level of support from the centre for regional budgets – a problem exacerbated by Putin’s May 2012 pledges on raising public-sector pay and social benefits. This created unfunded spending obligations for regions and municipalities which the Ministry of Finance has declined to offset.

The common feature of these disputed measures is, not surprisingly, that they entail gains and losses for various interests. Perhaps the most vivid example is lending from the National Welfare Fund. The declared purpose of this fund is to provide support in the longer run for the National Pension Fund. To that end it is supposed to be invested in assets that promise a decent rate of return in the medium term. In this it is unlike the Reserve Fund, which exists to help finance federal budget deficits when the oil price is low, and which has to be invested in secure, liquid and low-yield assets. Neither fund is intended to provide soft loans to ailing state companies, but that is exactly what Igor Sechin’s Rosneft and others have been seeking from the National Welfare Fund. How much support they get is highly contentious, pitting heavyweights like Sechin against officials, in particular from the Ministry of Finance.

Political concerns

There are four political concerns that lie behind Putin’s growing involvement in the details of Russia’s budgets.

First, the current recession and the prospect of sluggish growth in the longer term make policy-makers acutely sensitive to the possibility of economic discontent. This fosters policy decisions that favour spending over caution, but resistance from the Ministry of Finance pushes them up to the ‘political’ level – that is, to the president.

Second, hard times exacerbate tensions within the elite as the sharing-out of oil rents becomes more miserly. Recourse to the ultimate ‘faction manager’, in Richard Sakwa’s phrase, becomes a necessity.

Third, the economic bloc of government – mainly Finance and Economic Development – continues to resist the interventionist tide associated with the leadership’s current anti-Western stance. Overcoming that resistance requires the leadership’s intervention.

Finally, in hard times the past practice of the president announcing priorities in advance makes such announcements hostages to fortune. It is possible that the lesson of the rash presidential promises of May 2012 has been learnt: it is safer to intervene ad hoc and in a less public fashion at a later stage in the budgetary process.

The Russian system of economic and political management is under severe strain. In some ways the strain is greater than it was in the 2008-09 crisis. Putin's enhanced role in the budgetary process is one clue to the difficulties the system now faces.

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