A look at the Russian defence budget

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.