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It was only in December 2003 that the same minister, on the same grounds and fully in accordance with the approved FTP that Order No 450 was finally signed introducing ex tra pay for special conditions of combat training to contracted servicemen in military units and formations to be transferred to the new system of recruitment for the army. The Order instructs to introduce significant extra pay to those serving in the 42nd Guards Divi sion, stationed in Chechnya, and extra pay in the amount from 2700 roubles to 3300 rou bles in other military units and formations to be transferred to the new system of recruit ment for the army, the guiding principle being: the higher the rank, the higher the extra pay. Yet, the respective payments started not right away but only beginning from the day of assumption of an office but not earlier than the date when the commander of the re spective military unit by his order officially declared transition of such unit to the new sys tem of recruitment for the army. In the result, the money allowance level of contracted pri vates and junior rank officers in the permanent alert military units and formations turned out to be lower than the average wages/salaries in the country. Moreover, totally forgotten were contracted servicemen in other military units and formations not being transferred to the new system of recruitment for the army. Such turned out to be market motivation for joining the army on the contract basis! A year later, when it became clear that with this level of payment RF citizenry are not very willing to become contracted servicemen on a voluntary basis and that such level in deed needs to be raised, functionaries of the Defense Ministry just repeated the approach efficiently tested in the previous year: they just prepared a new Order No 346, dated 30.10.04, which increased the said extra payment up to 120% of the basic money allow ance but only to military servicemen in the central administration.

It is also noteworthy that the said extra payments in the military units and formations are eventually determined by the commanding officers thus opening the way for possible arbitrariness with regard to military servicemen.

RUSSIAN ECONOMY in trends and outlooks 3.8.2. Military expenditures of the federal budget Since the federal budget for the year of 2004, military expenditures of the state in cluded, was approved in due time it enabled all the executive bodies to practically immedi ately start its implementation. And although growth of prices on fuels and lubricants, elec trical energy and housing and communal services during the year required that the corresponding expenditure articles be increased, proficit of the federal budget permitted such increases which was practically done in November 2004.

Due to changes in the law on the Federal Budget, its expenditures were increased up to 2 768.1 bln roubles (or by 4.1%) which allowed to increase military expenditures as well.

Finally, the defense expenditures grew by 3.9% on the whole; at that, the military program of Minatom (Ministry of Atomic Energy) went up by 8.9% and expenditures on the military reform grew by 16.5%. Expenditures on pensions to military servicemen remained at the same level and on pensions in the law enforcement bodies even went down by 7.7%. Thus, growth of the military budget turned out to be less than such of the federal budget on the whole. No indexation of the money allowance for the military servicemen or of salaries for the civilian personnel were provided. In view of the regular indexation of salaries for the federal state employees, it was understood in the military servicemen community as inten tion of the states military and political elite to solve macroeconomic stabilization problems at the expense of worsening the social status of families of military servicemen, military pensioners and civilian personnel of the power bodies.

Absolute and relative indicators of the basic military expenses in accordance with the final version of the federal budget are represented in Tables 53 and 54.

Table Direct military expenditures of the federal budget for National defense Share of expenditures/its Changes in changes as compared against 2004, mln 2004 as com 2003, % Name of the section and subsec roub./the same pared against # tions in prices of 2003, mln in Fed. Budget 2003 roub/ growth GNP rates % 427 376 27 704 15.44 2.1 National defense 382 610 7.24 0.74 0.Building and maintaining of RF 403 376 25 026 14.59 2.1.Armed Forces 361 504 6.92 0.65 0.18 326 3 395 0.66 0.1.2 Military program of Minatom 16 407 20.69 0.12 0.Mobilization and military training for 4 696 34 0.17 0.1.civilians 4 204 0.82 0.00 0.Collective security and peace keep 211 706 0.01 0.1.4 ing (preparation189 and participa 189 373.43 0.03 0.tion) Branches for the national de 343 46 0.01 0.1.fense 307 14.93 0.00 0.Section 3.

The real sector Table Direct and indirect military expenditures for other federal budget sections Share of expenditures/its 2004, mln Changes in changes as compared against Name of the section and subsec roub/the as compared No 2003,% tions same in against 2003 mln prices of roub in Fed. Budget GNP Expenditures on military organization in Law enforcement and state security 23 347 1 680 0.84 0.2.1 Internal troops of RF MIA 20 902 8.04 0.05 0.53 571 216 1.94 0.2.2 State security bodies 47 960 0.45 0.06 0.31 272 1 797 1.13 0.2.3 Bodies of border services 27 996 6.42 0.04 0.3 Military and related expenditures provided for in other sections of the federal budget Men, combat training, material and 6 630 422 0.24 0.3.1 technical supply of MES forces 5 935 7.11 0.01 0.(without fire service) Maintenance of special construction 1 093 49 0.04 0.3.bodies 979 4.99 0.00 0.1 100 500 0.04 0.3.3 Mobilization preparation of economy 985 49.23 0.02 0.67 7 0.00 0.3.4 Civil defense 60 11.70 0.00 0.8 438 10 100 0.30 0.3.5 Military reform 7 554 133.70 0.43 0.Russian defensive sports technical 18 43 0.00 0.3.organization 16 266.55 0.00 0.It is noteworthy that growth of military expenditures of the Russian Federation after the 1998 crisis is of a stable character. However, as shown in Table 55 and Fig. 76, in con stant prices of 1999 this growth is of a fading character.

Table Dynamics of expenditures on defense and security in 1999Years Sections of the federal budget 1999 2000 2001 2002 2003 Expenditures on National defense 93 702 140 852 214 688 281 970 354 907 427 in prices of the budget year (1999, 93 702 117 181 150 598 173 504 190 987 204 mln roubles) Increment as compared against the 25.1 28.5 15.2 10.1 7.previous year, % Increment as compared against 25.1 60.7 85.2 103.8 118.1999, % Expenditures on Law enforcement 51 324 79 802 131 621 165 999 249 799 318 and state security In prices of the 51 324 66 391 92 329 102 144 135 618 152 budget year (1999, mln roubles Increment as compared against the 29.4 39.1 10.6 32.8 12.previous year, % Increment as compared against 29.4 79.9 99.0 164.2 197.1999, % RUSSIAN ECONOMY in trends and outlooks Expenditures on 450.0 defense (nominal) 400.Expenditures on 350.defense (real) 300.250.0 Expenditures on security (nominal) 200.150.Expenditures on security (real) 100.50.1999 2000 2001 2002 2003 Source: Calculations of IET Fig. 76. Dynamics of expenditures on defense and state security, bln roubles As to indirect military expenditures (Table 56), noteworthy is their stabilization which is determined by completion of the main processes of transition of Russias military or ganization to a new system. There also took place further decrease of the real (5%) ex penditures on pensions to military servicemen which is stimulating loss of the military ser vice prestige.

Table Indirect military expenditures connected with previous military service Share of expenditures/its changes Changes in as compared against 2003, % 2004, mln as compared Name of the section roub./the same against and subsections in Fed. Budget in prices of 2003 mln roub/growth GNP rates % Pensions to military ser 66 606 2 969 2.41 0.4.vicemen 59 629 4.98 0.19 0.Utilization and liquidation of armaments, including 10 944 962 0.40 0.4.performance of interna 9 797 9.82 0.05 0.tional agreements Conversion of defense 190 80 0.01 0.4.industry 170 46.97 0.00 0.Section 3.

The real sector Table Summary indicators of military and related expenditures Share of expenditures/its changes as compared Expenditures No Name of expenditures against 2003, % (mln roubles) In federal budget 2004 GNP Summary direct military expen 19.67 3.1 544 ditures 0.80 0.Summary direct and indirect military expenditures con 22.78 3.2 630 nected with the present and 0.13 0.past military service Total expenditures on national 26.95 4.defense, law enforcement and 3 745 1.90 0.national security Summary direct and indirect federal expenditures con 31.85 5.4 nected with the present and 881 1.20 past military and law enforce ment and state security Data on performance of the military and related expenditures, based on Ministry of Finance monthly reports concerning performance of the consolidated budget, are repre sented in Table 58 and Fig. 77. When analyzing them, account should be taken of the fact that in 2004, the Ministry of Finance turned to quarterly allocation of expenditure quotas whereas in 2003, such quotas were determined on a monthly basis. Effect of such innova tion seems to be rather doubtful because, for example, with the general excess of the planned level of expenditures on Building and maintenance of the Armed Forces in the amount of 3.2 bln roubles, indebtedness to the Defense Ministrys suppliers comprised in the end of the year more than 5 bln roubles. Accordingly, it seems somewhat paradoxical that significant financial effect was achieved with regard to articles State security bodies, Pensions to servicemen of the RF Defense Ministry and Military reform where savings comprised 1.7, 1.7 and 2.2 bln roubles, respectively.

Table Performance of military and related expenditures in the federal budget by months, mln roubles No Expenditures 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 National defense 18 432 30 310 40 597 96 218 22 084 29 158 37 042 28 888 32 511 36 217 36 868 65 806 (2 586) Building and maintaining of RF 16 467 27 670 37 610 46 581 24 457 28 727 34 479 27 424 31 026 34 795 34 984 62 801 (3 222) 1.Armed Forces Military program of 16 1.2 1 842 2 346 2 539 1 092 1 122 2 189 1 148 1 157 1 097 1 519 2 Minatom 18 Mobilization and 4 1.3 military training of 119 254 397 398 330 413 356 308 317 301 298 591 4 civilians July May April June March August January October February November December September corrections expenditure) Saving (over Plan/Plan with RUSSIAN ECONOMY in trends and outlooks No Expenditures Collective security and peace keeping 1.4 2 16 15 17 25 18 18 8 10 25 22 16 (preparation and participation) Branches for the 2 24 36 43 68 45 341 1.nationa defense Law enforcement and 11 189 22 435 26 656 27 650 20 970 27 870 25 085 22 409 27 344 25 688 28 246 49 809 3 21 nternal troops 720 1 397 1 868 1 927 1 725 2 206 1 888 1 836 1 990 1 981 2 467 3 575 (233) 2.23 49 State security bodies 2 536 3 634 3 915 4 258 3 498 4 045 4 558 3 391 4 170 4 001 3 710 10 146 1 2.53 Bodies of border 29 803 1 355 2 035 2 683 1 896 2 538 2 028 2 768 2 586 2 626 3 016 6 377 2.services 31 Conversion of de 3.1 15 19 56 16 81 fense Maintenance of spe 1 cia construction bod 19 89 84 101 82 95 93 69 74 62 64 142 3.1 ies Prevention and liqui 15 dation of conse 713 1 054 1 250 1 708 1 005 1 429 1 343 1 302 1 285 1 304 1 393 2 083 4.15 quences of Civil defense 13 3 8 3 5 14 10 2 4.Pensions to military 66 5 5 225 5 253 5 381 8 127 2 676 5 382 5 396 5 515 5 475 5 500 5 448 5 480 1 servicemen 66 Utilization and liquida tion of armaments, 10 6 including perform 457 844 1 453 310 1 653 79 588 1 201 528 1 075 1 106 1 632 10 ance of international agreements Mobilization of econ 1 100 258 7 17 36 124 7 37 13 45 103 252 252 omy 1 100 067 7 8 Military reform 328 594 713 561 379 586 546 325 743 393 364 739 2 8 As can be seen from the comparative analysis of the defense expenditures structure of a number of foreign countries (Fig. 78), a rather popular opinion about an insufficient level of the investment component in Russias military expenditures is most likely just a ha bitually wrong understanding. Should the decision of the RF Security Council on the opti mum share of expenditures on the respective development equaling 40%, be imple mented, then Russia will be among the top in this indicator category leaving behind the USA, the Great Britain and Germany. Whether this is really needed and what the effect of such optimality will be, to a considerable extent still remains a question with no answer.

Neither the criterion of optimization nor its methodology are yet known to the Russian sci entific community. So far, the funding of the investment component, for instance, in the Defense Ministry are to a considerable extent formed at the expense of expenditures on the money allowances and salaries what its governing bodies are absolutely not shy to offi cially and regularly declare in different mass media means.

July May April June March August January October February November December September corrections expenditure) Saving (over Plan/Plan with Section 3.

The real sector bln roub.

Average monthly level of expenditures by the Average monthly level of 65 changed variant of the expenditures by the initial variant budget of the budget Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Calculations of IET based on the RF Ministry of Finance data.

Fig. 77 Expenditures on building and maintenance of RF Armed Forces in 2004.

100% 16,6% 90% 21,2% 25,6% 34,2% 38,0% 80% 46,0% 70% 60% 50% 83,4% 40% 78,8% 75,0% 65,8% 62,0% 30% 54,0% 20% 10% 0% USA Great Britain France Germany Poland Russia Content Equipment Fig. 78 Structure of expenditures on equipment and maintenance of armed forces of a number of countries in 2004.

Sources: 1. Der Verteidigungsetat 2004. Einzelplan 14/2004 im Vergleich zum Haushalt 2003 (in der vom Parlament verabschiedeten Fassung, Stand 28.11.2003);

2. UK Defence Statistics Factsheet 2003 Edition. London: The Stationery Office, 2003;

3. Budget of the United States Government Fiscal Year 2006;

4. Budget de la defense pour 2004. Novembre 2003;

5. Podstawowe informacje o budecie MON na 2004 rok. Warszawa: Ministerstrwo obrony narodowej, 2004.

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