Russia’s invasion of Ukraine has been fuelling frequent analyses about the Russian defence budget.
According to the most recent estimates using market exchange rates, the British defence budget surpassed Russia’s in 2020 and continued to grow faster than the Russian in 2021. However, a different scenario is found when considering the Purchasing Power Parity (PPP). Although with its own limitations, this conversion method might be helpful for the governments within NATO to understand the size of the Russian defence budget.
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According to the International Institute for Strategic Studies (IISS), in 2020, the Russian Federation (5th) fell behind the United Kingdom (4th) in the rankings of the largest defence spenders in the world. This trend gained pace in 2021 when the UK, with its $71.6bn defence budget, widened the gap with Russia ($62.2bn) while surpassing India ($65.1bn). So, how could a country with about half the Gross Domestic Product (GDP) of the UK and a smaller Defence Budget become a source of so many strategic concerns within NATO?
At first, it seems that beyond its nuclear arsenal, Russia could be “punching above its weight” in the internal arena. A major nuclear power, a GDP roughly the size of Brazil or Australia’s, large reserves of natural resources, territorial disputes, and a foreign policy not aligned with the West are Russian characteristics that together – or even alone – can be a source of relevant considerations in the United States, Britain, Japan, and elsewhere. Nevertheless, this scenario would still fall short of the amount of strategic concern and attention that Russia has been drawing from NATO and other countries since the military reforms of Vladimir Putin. Within this context, the Russian invasion of Ukraine is also a test of Moscow’s stance when claiming the country is an ascending military Great Power, even though signs of decline have remained since the end of the Cold War.
Thus, comparing the defence budget of the Great Powers is a complicated task. Another argument is that the defence spending that supports Russia’s military is larger than the publicly acknowledged by Western governments. Since the decades of the Soviet Union, the United States, Britain, and other NATO members have had a close watch over the Russian defence budget. Still, it is not easy to have precise information about Moscow’s military spending. During the Cold War, Western analysts and officials could observe that the military-industrial complex of the Soviet Union had a significant role in its economy while sustaining vast military capabilities without support or cooperation from other nations outside of the Warsaw Pact. Even then, the data that could be raised mainly relied on estimates and statements from Moscow that hardly provided an accurate picture.
Research institutes and governments currently rely on numbers about defence spending based mainly on the average market exchange rates. Although this analysis method provides an accurate value for countries within the same level of standards and living costs, it has limitations when analysing the ones that display internal markets with different costs. For these countries, including Russia and China, using Purchasing Power Parity (PPP) exchange rates rather than market exchange rates could provide an adequate understanding of the military expenditure. The African Development Bank Group states that it employs the PPP instead of market exchange rates for the first accounts “for price differences between countries” and allows “comparisons of market size, the structure of economies and what money can buy”. In sum, it provides a more accurate picture of domestic markets, in particular from countries considered as “emergent” or “developing economies”. In addition, market exchange rates are fit for measuring the value of internationally traded goods, while Purchasing Power Parity is the best choice when measuring “non-traded goods and services”.
It is worth noting that this PPP method on defence applies mainly to China and Russia because these two nations established their defence procurement primarily within their domestic market, fuelling state-owned or domestic defence industry to attend to their demands. Thus, non-traded goods and services dominate the defence spending of these two countries. India will become another full “member” of this specific case in the next decades. Other countries that rely heavily on defence imports would have different outcomes. For example, the Brazilian purchase of HMS Ocean for £84 million in 2018 represented more than four times its Pound Sterling value in the Brazilian Real, showcasing how a defence procurement based on imports from a stronger currency might have negative impacts on the buyer’s budget. In this case, the PPP weights unfavourably to the purchasing nation. Another case is the one that happens between the “developed countries” of Western Europe, the United States, Canada, and others. In this situation, buyer and seller have similar purchase power, and their markets are closely integrated, leaving a different scene where both sides have similar exchange rates for their purchase parity.
Therefore, when using the artificial Purchasing Power Parity measure and despite its issues, it is possible to have a new view on the size of the funds sustaining the Russian military apparatus. Employing PPP, Russia’s defence budget goes from $62.2bn (in market exchange rates) to a value within the range of $150-180 billion, more than double of Britain’s spending of $71.6bn. Some analysts might point out that the numbers could reach $200 billion after considering the expenditure on border forces and National Guard, but this would also require revising the defence budget of other countries. Lacking a precise number, one could consider the average of $165 billion as the best outcome of these estimates.
However, sustaining a $165 billion budget – or $62.2bln in market exchange rates – requires a significant effort from Russia. While the defence budget of the UK takes roughly 6% of HM Government Expenditure throughout the 2010s and around 2% of the British nominal GDP, Russia spent on average almost 25% of its Federal Budget on defence and roughly 4.5% of its nominal GDP. Analysing only the two governments’ budgets, the Russian efforts to sustain its military are more than four times the cost Britain pays for its current capabilities. So, while one “dollar” spent in Russia has more purchase power than one dollar in Britain, it remains one dollar spent. This rather obvious statement means that while the Purchasing Power shows that the Russian defence budget could rank as one largest in the world, both PPP and market exchange rates indicate that Moscow has a considerably larger amount of its resources put into the military expenditure than London. It is worth mentioning that according to the International Monetary Fund, Britain’s GDP PPP ($3.174 trillion) of 2021 is quite similar to its GDP Nominal ($3.108 trillion) of the same year. On the other hand, Russia has an almost threefold increase in its GDP PPP ($4.32 trillion) compared to its GDP Nominal ($1.64 trillion).
Amongst other issues related to the formulation of the PPP index, estimates using it have difficulties dealing with countries with “hybrid” (national and international) or heavily dependent on international deals for their military procurement. The results generally have similar problems present in the Nominal estimates when covering Russian and Chinese budgets. Therefore, according to Professor Peter Robertson, neither market exchange rates nor Purchasing Power Parity can accurately depict military expenditures across countries. Professor Robertson’s “military-PPP” is an attempt to surpass most of the deficiencies found in the PPP method, successfully taking into account some issues, including “relative equipment prices; relative wages for personnel, adjusted for skill levels; and the GDP-PPP exchange rate to measure operations costs – where the budget share of each component is the appropriate weight”.
Nevertheless, briefly exploring the case of Brazil can enlighten the understanding of why Russia, China, and – to an extent – India are prime examples of how PPP measures can work. Still, when analysing other countries, challenges might arise. Using the basic PPP method with the 2020 Brazilian defence budget, Brazil PPP’s spending value is more than 70% of its market exchange rates (nominal). Effectively, the defence budget of this country jumps from $27bn to $46bn. A brief comparison can quickly see that Brazil would be spending almost as much as Japan ($49bn) in PPP. If these numbers are correct, several issues enable Japan to take more return from its defence investments than Brazil.
Similarly, the PPP military expenditure of Turkey is roughly three times larger than its nominal expenditure, almost surpassing Britain’s. In this case, it can be argued that Turkey depends less than Brazil on international purchases for its military power, but critical components remain sourced from foreign markets in Western Europe, the United States and Russia. For example, the US government terminated Turkey’s participation in the F-35 programme in 2019 after Ankara bought the Russian-made S-400 air-defence system.
The risk of these Purchasing Power Parity analyses is turning “underestimation” of low and medium-income countries – with reservations on China and Russia – into “overestimation” because issues concerning technological and procurement dependency are rarely considered. Professor Robertson notes: “Comparing real military spending across countries amounts to comparing military inputs, not military output. Military output, or ‘power’, also depends on a country’s defence strategy, alliances, force multipliers and other non-budget factors”.
Additionally, one crucial budget-related factor remains largely ignored when dealing with countries with medium to low income other than Russia, China and India: that the “developing” and “emergent” nations remain dependent on international defence purchases and deals that involve the “trade of goods” instead of relying mostly on their domestic markets (“non-traded goods”, which is the aspect that the PPP is best suited for analysis). In addition, procurement efficiency is a “non-budget” factor that analysts should also consider.
Despite the issues concerning the Purchasing Power Parity, when dealing mainly with the case of Russia and China – or any other low to mid-income country with a robust domestic defence industry – this analysis provides the researcher with less distorted results than the market exchange rates. Once again, it is worth emphasising that this can only give a relatively accurate picture as long as the country buys its defence procurement internally; considering Moscow’s case, it means that PPP is valid as long as Russia acquires its products from its domestic defence enterprises for roubles. Distortions will occur when inquiring about other countries – Turkey and Brazil, for example – that cannot rely entirely on their domestic defence sector.
The United States, Britain, Japan, and others have more and better information on the Russian budget and economy than during the years of the Soviet Union, even though some argue that the Russian military expenditure has become increasingly “opaque” in the last decade. Nonetheless, the available data should be considered on both market exchange rates and Purchasing Power Parity. Policymakers in Britain and elsewhere would benefit from more methodologies that could enlighten their understanding of some aspects that have been fuelling the military capabilities of state-based competitors.
Within the standards of the Powers with the strong currencies – the US with its dollar, Britain and its Pound Sterling, Japan and its Yen, Germany and the Euro, which are the four main “reserve currencies of the world” –, Russia’s economy could be seen as a relatively small economy that sustains a respectable defence budget but nothing more than what Britain, France, and Germany could afford with a smaller effort than Russia. However, despite the many frailties of the Russian economy, Moscow has one advantage when it comes to the defence budget: its domestic military industry can provide the Federal Government with its procurement in roubles, giving more returns to Moscow for every “dollar” it spends. The Purchasing Power Parity helps to understand this phenomenon. It should also be taken into account by Britain, the United States, and others when evaluating their defence spending compared to Russia’s.
In conclusion, considering the particularities of the Russian case, it is possible to understand the reason – and resources – that sustain the country’s military capabilities. Through the Purchasing Power Parity lens, in the 2010s, Russia has had a defence budget slightly more than double of the British defence spending. However, it also costs Moscow roughly 25% of its Federal Budget, while defence costs around 6% of the British Government’s budget.
Beyond the fact that these numbers show that Britain has a larger governmental income – without Purchasing Parity calculations – they also display that the debate about whether Britain is underspending or overspending on the Defence of Realm can benefit from direct budget comparisons instead of mainly focusing on the percentage of the GDP. An increase in the British defence spending from the current trend of 2.2% of the GDP (nominal and PPP) to 3% would still mean that less than 10% of the British Government’s budget would go to defence. However, this decision would demand the Government’s willingness while turning the 3% pledge into a Policy of State, not only a Party Policy.
Even though spending is just one of the parts that contribute to military power, misconceptions about the expenditure of other countries can lead to the mistakes of overconfidence or condescension that have dire consequences.
References
Hartley, Kieth. The Economics of Arms. Agenda Publishing, Newcastle upon Tyne, U.K., 2012.
International Institute for Strategic Studies (IISS). The Military Balance 2021. IISS, London, 2021.
International Institute for Strategic Studies (IISS). The Military Balance 2020. IISS, London, 2020.
Robertson, P. E. The real military balance: International comparisons of defense spending. Review of Income and Wealth, 2021.
Robertson, P. E. Debating defence budgets: Why military purchasing power parity matters. Vox Centre for Economic Policy Research, October 2021.
It gets very muddy, very quickly. Regards, Russia. A Russian soldier gets paid an eighth? of a UK soldier, so you can have more soldiers for the same money. However Russia has a corruption problem. So how much of the money for maintaining equipment leaks to corrupt officials instead? Trying to get an exact parity formula remains tricky.
PPP is very relevant for manpower costs and indigenous kit purchases, but it is necessary to account for the realities of what the difference in development that PPP highlights means in practice. It cost us more to buy ‘stuff’ but the ‘stuff’ is not necessarily qualitatively comparable- any more than a T45 is comparable to a galleon. In Russia’s case there are some dependencies on technology imports that they would struggle to produce indigenously, as well as a reliance on legacy platforms (such as the Slava cruisers) that they probably no longer have the industrial capacity to build. There is also evidence of corner-cutting on training, maintenance and various modern technologies that go some way to explaining how the Russians have been able to afford such a (theoretically) large combat mass, even allowing for a budget that is too small in real terms to sustain such mass ‘properly’.
Finally someone talks about what matters instead of crude nominal GDP.
I can now identify Mr. Vitor Tossini’s article in the first few lines without even checking the author’s name – it is packed with facts, yet written in an easy manner for a layperson to understand.
Thank you for yet another of your great articles!
Agree, was going to say the same. Full of detail and well researched.
Sorry, but this article spends a lot of time saying not very much. A logical analysis of comparative defence spending, would start with the question “what is it for”, that is what are you trying to achieve, as a quant once said to me “you haven’t spent much time designing this spreadsheet have you”. So to avoid confusion are we talking about equipment costs? If we are then it’s silly to compare total defence spending as this also includes pensions and salaries and in some cases policing. Again, what are we looking to gauge? If we are looking to measure combat equipment or combat investment then we have to pare these figures of non-essential inputs like personnel and pensions, but also include qualitative measures (or their proxies) in order to get any meaningful measure.
From a practical perspective, whether you call it kicking the tyres or walking the shop floor or do the figures relate to actual performance, one would have to say far from PPP doubling Russian defence expenditure a realistic metric would halve it or thereabouts.
Nicely put OR. I imagine your metric to halve it makes provision for the stolen funding?
Not immediately obvious but there is one interesting thing towards the end, and that is that Russia’s defence spending is almost entirely kept within its borders, unlike most others who procure significant things from other countries. This internal spending especially on hardware is circular and meaning less dependancy outside and the corresponding increased control over manufacturing. In Britain we are very good at exporting our expenditure, sadly that is not as beneficial as exporting goods!
Yeah but look what they get when all their defence spending is internal. No cross-pollination of military ideas and technology with experts in other countries which results in blinkered thinking and outdated and flawed equipment and policies.
Production is different to design and development. We need indiginous production especially of things like electronic chips which are central to modern weapons. This is partly the same argument used for building of warships, but rarely applied to any other major items.
Russia’s main tank factory has now shut down production, due to the lack of spare parts, due to Western sanctions.
Not that their factory seems to be producing much before! Just proves the point of ensuring indiginous supply lines and manufacturing.
Any article which purports to analyse the defence spending of Russia, China and India without factoring in endemic corruption is obviously an academic tome which has no relevance to reality.
Are implying that corruption is always bad? corruption might also means making things moving.
Another usually denigrated example, the black market is one of most powerful systems against poverty.
Yeah, good luck with that!
Couldn’t agree more. Decades of syphoned off stolen funding since the fall of the Soviet Empire. The article is meaningless without the full picture of corruption.
Well, it does provide a better index of the overall budget. The issue of whether the money is siphoned off to corruption is significant, but so is the question of whether it is included in, say, an overpaid group of general officers, or excessive benefits for retired service persons (If that’s included in the defense budget) or failed projects that go nowhere. But this is true of every military, so it’s still useful to have the basic budget adjusted by purchasing power as that’s at least a useful starting line.
For the budget itself, I imagine you could develop a mathematical formula that is something like:
Effective Military Budget = (Budget x Purchase Power modifier) x a spending efficiency factor, with the latter number including, among other things, a corruption factor. This need not be entirely subjective: there are various organizations around the world that annually rate global corruption and estimate how badly it impacts particular economies.
If you really want to rate military combat power then budget isn’t the way to go, or you get things like Canada rating above Israel. There are folks who try to index combat power in various scenarios (power projection, local defense, immediate vs. long term, with or without WMD, as a solo power etc.) This is probably most useful when comparing apples to apples. e.g. “in a limited Aegean conflict without outside support, who would win, Greece or Turkey?”) and can certainly be done on that level, indeed it is routinely done in things like strategic wargame simulations.
Insightful commentary Izzy, thanks for posting. Given the breath taking audacity of the theft , I imagine it sits in the budget under under something like: “unrealized/deferred capital expenditure.” In other words, it’s actually factored into the budget.
I saw a fascinating doco on SKY detailing the rise of Putin. Seems he cut his teeth under Boris Yeltzen (a corrupt SOB of the first order). It’s fascinating viewing, well worth a watch . https://www.channel4.com/programmes/putin-a-russian-spy-story
Heh. Wouldn’t surprise me. Thanks for the documentary link!
That could be a project for you. Use this article as a base and integrate how corruption effects the budget. If it’s good it will get published. You can submit to the website.
Moring MS
Hope you’re well today. Now you’ve got my brain racing. Have yo seen this doco on the rise of Putin- great viewing: https://www.channel4.com/programmes/putin-a-russian-spy-story
I will give it a look. I may have already of seen it. Putin is seen as a good man in Russia and I get why. After the 1990s he put himself as someone to sort out the mess. He did it but as with anyone at the top for to long he starts to dream bigger and bigger. Taking control of the media bit by bit, wiping out opposition etc etc. He’s rise to greatness may well be on the downturn we will have To see. With control of the media putin can put out any old nonsense and it will be believed to an extent. Also Russians are frightened to be the first ones to stand up as they will disappear. Thank goodness we live in a nice cohntry
Cheers for that MS. I see shades of Stalin all over Putin. I live in NZ and like you am very grateful to live in the society we do.
This is really interesting.
Given the level of corruption in Russia, and the sheer size of the motherland I wouldn’t be surprised to hear much of this funding is funnelled into various offshore accounts.
Well, regardless of how much they actually spend, they seem to be spending it on equipping their forces with complete junk, given its performance over the last 3 mths.
Most of Ukranian equipment is also of Soviet origin.
He said nothing about Soviet equipment. Simply that the Russian one is junk and that it isn’t working.
In my opinion, the direction in which the budget is used is more important than the size of the budget.
Everyone knows that Russia’s outdated tactics don’t function as well as budget in modern warfare – let’s put Russia’s corruption aside for now.
If Russia had prepared stealth fighters to seize air and had properly conducted organic land and air cooperative attacks in the war, the Ukrainian War would have been significantly different from the present outcome.
But Russia was obsessed with the old idea of being huge and strong, focusing on expensive and massive self-propelled artillery and their tanks.
In the failure of Russia’s aerial warfare superiority, Ukraine’s small drones were free to operate, which resulted in the destruction of the Russian army.
Had Russia focused its efforts on surveillance and reconnaissance small drones rather than stupid self-propelled artillery, tanks and attack helicopters, the results of the Russian army would have been different.
We can learn from Russia’s failures about what will be most effective in future warfare and where budgets should be allocated efficiently.
We don’t know a lot about the conflict. We build most of our perception on videos that appear in twitter.
So how much of Ukranian artillery destroyed Russian forces compared to ukr tanks or ukr drones? A: we don’t know.
It won’t be until long after the war is over that we’ll know the facts. By way of example, the common perception is that it was the Viet Cong that was the USA’s main opponent in the Vietnam War. Whereas more American servicemen were actually killed by regulars in the North Vietnamese Army.