More than $300 Million a Day: How much does the war in Ukraine cost and what does it mean for the Russian economy?

On one hand, the answer to this question eludes everyone; on the other, the potential scale of this figure is evident. In 2024, Russia's defence budget will soar to 11 trillion rubles, or approximately $120 billion at the current exchange rate. This accounts for 30% of all budgetary expenditures and 6% of GDP. In reality, Russia will spend even more than this on the war in Ukraine, as some expenditures are concealed within other budget categories. An alternative method to assess Russia's military expenditures has been employed by Ukrainian Forbes, based on data from the Ukrainian General Staff of the Armed Forces. The publication draws its estimate from four key areas: support for military operations, military personnel salaries, compensation for the families of the deceased and wounded, and the cost of destroyed equipment. The result is the same — over $100 billion annually, or $315 million per day. Is this a substantial sum or a modest one? To put it in perspective, $100 billion is roughly a quarter of the average annual value of Russian exports over the past decade. Further, in 2022 and 2023, revenues were significantly higher, exceeding the average annual level by a total of approximately 200 billion. Thus, barring the effects of sanctions, at current commodity prices, this war, in its present scale, will not bankrupt the government or pose serious budgetary problems.

How much does Russia's war with Ukraine cost, and what does it mean for its economy? It may seem that the fog of war and the secrecy that surrounds it obscure the answers to these critical questions. Nevertheless, various data, estimates of prices, payment sizes, as well as the scale of expenditures and losses of equipment and personnel exist. It is unlikely that precise figures can be obtained at this moment, but it is possible to estimate the scale of these expenditures.

Russia's budget expenditures for 'National Defence' will exceed 10.7 trillion rubles in 2024, according to the 'Basic Guidelines for Budget, Tax, Customs and Tariff Policy for 2024 and the Planning Period 2025 and 2026' recently published by the Ministry of Finance. On September 29, the draft budget was submitted to the State Duma. 10.7 trillion represents 30% of all budget expenditures and approximately 6% of GDP. According to the Stockholm International Peace Research Institute (SIPRI), none of the major military powers allocates such a share of its GDP to defence, with the world average standing at 2.2% of GDP.

In reality, Russia will spend even more on the war. Some expenditures directly related to the war are hidden within the category of 'National Security and Law Enforcement Activities'. Others are covered by civilian expenditure categories: for instance, payments to residents of occupied territories fall under 'Social Policy,' construction work is under 'National Economy' or 'Housing and Utilities,' and the treatment of the wounded is covered by 'Healthcare.'

To obtain a more accurate estimate of military expenditures, economic analyst Boris Grozovsky suggests adding classified expenditures from all other categories to known defence expenditures since, in the context of war, 'the main motive for classification is its connection to defence and security.' Applying this method to the 2023 budget, Grozovsky arrived at the figure of 8.7 trillion rubles: the unclassified portion of 'National Defence' accounted for 2.2 trillion, and all classified categories amounted to 6.5 trillion. This equates to 30% of planned budget expenditures or nearly 6% of GDP. In 2024, according to the Bloomberg agency, which was the first to disclose the parameters of the new budget, the volume of classified expenditure items will nearly double and exceed 11 trillion rubles. Grozovsky made his calculation for 2023 in the summer, assuming that the final amount would be higher as 40% of the annual spending plan for 'National Defence' had already been reached in the first two months, with 2 out of 5 trillion rubles already spent. And that is exactly what happened.

In early September, citing a confidential government document, Reuters reported that spending on national defence alone exceeded 5.6 trillion rubles in the first six months of the year. The original plan was for expenditures of slightly less than 5 trillion rubles. As of September 1, the Ministry of Finance estimates annual expenditures to be 6.4 trillion rubles. However, if the expenditure distribution in 2023 is similar to that of 2022 (when slightly less than 60% was allocated for January to June), real spending on national defence could reach 9.6 trillion rubles, according to Grozovsky's calculations. A government document from Reuters contained a similar estimate: 9.7 trillion rubles. This is only 10% less than the planned budget for 2024.

An alternative method of assessing the dynamics of Russia's military expenditures has been proposed by Ukrainian Forbes. Based on data provided by the General Staff of the Ukrainian Armed Forces, the publication calculates the direct costs of conducting combat operations, breaking them down into four major categories: support for military operations, salaries of military personnel, compensation for families of the deceased and wounded, and the cost of destroyed equipment. In total, over the course of 18 months of war, from February 24, 2022, to August 24, 2023, expenditures in these categories could have amounted to approximately $170 billion.

Forbes estimates the cost of one soldier in 2023 to be around 360,000 rubles per month. This figure includes salary and additional payments. Compensation to the families of the deceased costs 7.4 million rubles, while compensation for injuries is 3 million rubles. According to the data from the Ukrainian Armed Forces, upon which the journalists have relied, the level of losses in 2023 (especially in the first few months of the year) is higher than it was in 2022, leading Russia to spend more on compensation. At the end of last year, following the first nine months of the invasion, journalists estimated salary expenses at $15.6 billion and, over 18 months, at $35 billion. The total amount of compensation paid to the families of the deceased increased from $9.4 billion to $25.6 billion, and for the wounded, from $7.7 billion to $21 billion. The cost of supplying the army with ammunition, missiles, fuel, medicine, and more, for the first nine months, was estimated by Forbes to be $28.7 billion and, over 18 months, this figure had grown to $51.3 billion. The largest share of this spending went to missiles: $21 billion, with artillery shells coming in second at a cost of $9.1 billion. The cost of destroyed equipment, based on the first nine months of the war, was estimated by Forbes at $20.8 billion and, over 18 months, at $34 billion.

If Forbes' calculations are anywhere close to the reality, despite changes in the structure of expenditures, they remain relatively stable in dollars: Russia is spending a little over $300 million per day on the war, both last year and this year, which amounts to $100 billion annually. However, in 2022, the average exchange rate was 60 rubles per dollar, while in September 2023, it was 96 rubles per dollar. This means that, in rubles, direct military expenditures in 2023 may have increased by a third when compared with the first year of the war. This does not contradict other estimates. National defence spending is set at nearly 11 trillion rubles for 2024, equivalent to $120 billion at an exchange rate of 90 rubles per dollar.

$100-120 billion represents approximately a quarter of the average annual value of Russian exports over the past 10 years ($425 billion). At the same time, last year's export revenues reached a record $590 billion, although they are expected to decline to $460 billion this year. Thus, the additional price rent (exceeding the average income) will amount to $200 billion over the two years, comfortably covering the direct costs of the war during this period.

These calculations, of course, do not account for indirect costs and losses to the Russian economy as a result of Western sanctions, which, contrary to popular belief, are quite significant. These include capital outflows, the increased costs of imports and logistics, unproductive expenditures on duplicate infrastructure, and reduced productivity due to technological degradation. However, at current commodity prices, such levels of expenditure will not become a source of significant budgetary problems.