RUSSIA is planning to wrest more money from some commodity producers and state companies and trim non-defence spending, according to a government order, as the costs of the invasion of Ukraine mount.

Proposals include higher dividends from state companies and a “one-time payment” by fertiliser and coal producers, under instructions issued to officials by Prime Minister Mikhail Mishustin in mid-December.

The document, a copy of which was seen by Bloomberg, calls the effort part of “revenue mobilisation.” It also orders 175 billion roubles (S$3.3 billion) in extra spending to resettle 100,000 people from Kherson to Russia, an apparent admission that the Kremlin has little hope of retaking the Ukrainian region that its forces abandoned in the fall just weeks after illegally annexing it.

Russia’s budget is increasingly squeezed as President Vladimir Putin’s invasion heads for its second year and the economy contracts under sweeping US and European sanctions. Dividends and a windfall tax paid by Gazprom PJSC already helped swell a fiscal surplus late last year, before heavy spending commitments in December likely sent the budget into the red.

Some of the additional money is necessary to cover costs related to the war, according to people with knowledge of the matter. No decision has yet been taken on the size of dividends or the one-time levy, they said, as the amount will depend on how the budget fared in the full 2022 year.

Authorities will try to set dividends above 50 per cent of net income for state companies whenever possible, they said.

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Spokespeople for the Russian government and the Finance Ministry didn’t immediately respond to a request for comment during a holiday period in the country.

The Russian leader has meanwhile vowed “no limitations” on military spending for the war, with social programmes remaining the biggest single budget item. By contrast, outlays on education and medicine are feeling the pinch.

It’s a balancing act laid bare in Mishustin’s order, which calls for an “optimisation” of budget spending outside defence and security that should generate at least 150 billion roubles in savings.

Funding Needs

With budget deficits entrenched for years to come and international debt markets all but shut for Russia, the urgency is growing to ensure the government has access to financing as its energy proceeds come under pressure.

The Finance Ministry, which last year was forecasting a budget gap of 0.9 per cent of gross domestic product, now expects the shortfall at 2 per cent both in 2022 and 2023. In total, spending last year probably reached around 30 trillion roubles, Finance Minister Anton Siluanov said in late December, or about 27 per cent more than initially planned.

Siluanov has said the government plans no changes in taxes this year even if budget expenditures rise, and Mishustin’s order appears to propose no permanent levies.

In the months just before the invasion at the end of 2021, Russian mining companies, including coal and fertiliser producers, were hit by an increase in the mineral extraction tax rate. The government has since declined to ease the burden even as sanctions disrupted sales and forced output cuts. BLOOMBERG