Problems are mounting in the Russian economy as the government tries to finance the war machine.

Problems are mounting in the Russian economy as the government tries to finance the war machine.

The Russian government is facing growing economic and social problems as a result of putting the country on a war footing. Last year, the federal government increased military and defense spending by 40 percent by 2024, an unprecedented amount. The Kremlin made many ‘guns and butter’ promises, saying it would fund military and social projects. In Russia it is failing and inequality is rising.

Russian Prime Minister Mikhail Mishustin arrives for an expanded meeting of Russia’s Strategic Development and National Programs Council and State Council Commissions, Wednesday, May 29, 2024, in the Kremlin in Moscow, Russia. [ [AP Photo/Dmitry Astakhov]

The Kremlin is trying to paint a rosy picture of the Russian economy. On June 28, President Putin announced that the country’s GDP is expected to grow by 5 percent this year. Real wages have increased, as has consumer spending. Official unemployment is just 2.6 percent. So far, as Moscow continues to point out, NATO has failed in its goal of destroying Russia’s economy through massive sanctions, asset freezes and cutting the country out of key world markets.

However, the Kremlin’s ability to maneuver in the context of a rapidly escalating world war is extremely weak. Above all, it is a) forcing the Russian working class into a struggle for survival of the oligarchy and b) suppressing mass opposition to the fratricidal war unleashed by NATO, not only by NATO, but by restoring capitalism in the Soviet Union to the Stalinist bureaucrats, including Putin’s successor.

The current engine of Russian economic growth is massive government investments in war-related industries, which empty Russia’s coffers while funneling profits to big corporations and a tiny fraction of the population. Public spending in 2024 is expected to be significantly higher than previously approved, with energy sector revenues projected to drop by 768 billion rubles this year. Meanwhile, the liquid assets of the country’s National Welfare Fund, the emergency fund reserve, fell by 44 percent between January 2022 and December 2023. Between $300 billion and $350 billion of Russian government assets are frozen in foreign accounts.

In response, the Duma approved a legislative increase in borrowing to 2.12 trillion rubles by 2024 from the estimated 1.595 trillion rubles in the original budget, nearly 33 percent. The Kremlin is simultaneously making changes to the tax structure, moving from a flat tax system to a progressive one, in which as a person’s income increases, so does their tax burden.

This is expected to generate an additional 2.5 to 2.7 trillion rubles ($28 to $35 billion at current exchange rates). Tax increases on high earners and corporations have been presented to the public as a sign of the government’s commitment to pay for war wages for the rich over the past year and a limited, but expensive budget, for pensions and approved social benefits. Foreign press also highlighted Putin’s alleged ‘attack on the rich’.

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The reality is different. First, a large proportion of people who are poor enough to be in the lowest tax bracket will see no relief from the reform. They will continue to be taxed at the highest rate of 13 percent. As wages for some in Russia rise, low earners start to earn a little more, so they are kept at a higher level and paid for their earnings. In addition, income tax applicable to personal income from dividends, savings and investments – assets owned only by the wealthy – will remain unchanged.

Corporate profits will be taxed at 25 per cent, up from 20 per cent previously, with Russian companies said to have lobbied in favor of the reform as a way to avoid ‘surprise’ taxes previously imposed by the Kremlin to fill a gap in federalism. Budget.


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