Russia's economy has experienced steady growth over the past few decades, mostly because of high energy prices. Oil and natural gas profits account for 35 to 50 percent of the government's revenues over the years. High energy prices have allowed the Russian government to pay off all its international debts, reduce its budget deficit to 0.1 percent of gross domestic product and stash away approximately $500 billion in currency reserves and $130 billion in a sovereign wealth fund.

Greater energy profits have also allowed the Kremlin to raise federal spending by 15 to 30 percent each year (except during the 2009 financial crisis). Most of this increased spending has been on social concerns (such as housing, education and health care) and defense (national security, military and law enforcement).

However, there have been concerns that the federal budget — which is planned for three years at a time — was vulnerable, because for three years it hung on extraordinarily high oil prices. The 2012 federal budget was set with the assumption that the price for a barrel of Brent crude would be $117. Moreover, the government — mostly President Vladimir Putin during his election campaign — has announced a slew of spending increases starting in 2013 for social projects (an increase of $85 billion), pensions (an additional $45 billion) and defense (an increase of $72.2 billion). Siluanov opposed these plans, wanting to assume much lower oil price projections for the budget and not implement any of Putin's campaign promises. The finance minister even wanted to slash all areas of the budget further.

A confrontation between Siluanov and Putin erupted Sept. 18, on the second day the government was locked down on drafting the budget. Putin blasted Siluanov and Medvedev for not implementing his campaign programs. So the draft of the 2013-2015 budget Medvedev and the Cabinet agreed upon Sept. 20 appears to be fairly conservative, with a few compromises to ensure Putin keeps some of his campaign promises.

Details of the New Budget

With the new budget, Russia will maintain a deficit equal to 0.8 percent of gross domestic product in 2013, with the aim of erasing the deficit by 2015. The budget projects oil prices at $91 per barrel in 2013 — a 23 percent decrease from the previous budget. This is also fairly cautious, as it is also below recent Russian Economic Ministry forecasts for the price of oil in coming years, with their projections at $97 per barrel in 2013.

The overall federal budget will see an increase in 2013, rising from $407 to $428 billion. This is only a 5 percent increase, although the Russian government has increased its budget between 12 and 30 percent year-on-year for the past decade. Even during the Russian financial crisis in 2009, the Russian federal budget increased by 12 percent. The two areas that were the most controversial within the budget talks were defense and social issues.

Defense Spending

The debate about defense was centered on a major rearmament program meant to modernize the military for long-term state preservation. The program would require $770 billion over the next 10 years, meaning a 25 percent increase in defense spending starting in 2013. But there is no increase in defense spending in the 2013-2015 budget. There is a 30 percent increase in spending on national security and law enforcement for 2013 only, which means that the Russian government is more concerned with growing security issues at home — be that the opposition movements or issues among Russia's Muslims — than with issues abroad. Such an increase on internal security also makes sense for 2013, as Russia prepares to host the Winter Olympics in Sochi at the start of 2014.   

The cap on defense spending is still good for the Russian military; Siluanov originally wanted to cut spending by 20 percent. Such a move would have made efforts to maintain current military standards impossible. The rearmament program could still progress, just not with funding from the Russian budget. For example, the Kremlin could decide to use part of its rainy day fund instead.

Social Spending Cuts

The largest blow to spending is in the social sectors. By 2015, spending on housing will have dropped by 25 percent, education by 6 percent and health care by 27 percent.

For a Kremlin facing regional elections in October and an ongoing opposition movement, this news could spark new backlash. It looks as if the Russian government is trying to temper any reaction to these cuts with a fulfillment of the president's campaign promises of child benefits, salaries, scholarships and more, which will cost the federal budget $37 billion through 2015.

The Kremlin's plan for spending in the Russian pension system, traditionally the largest expense for the government, for 2013-2015 is not yet known. There is a debate taking place over major reforms to the entire pension system in Russia, one of the most controversial issues in the country. It seems that any decision on the matter is being delayed for another day — likely a day after the upcoming elections.

Overall, it seems the Kremlin has realized that it cannot spend as it did in the mid-2000s. Moscow is attempting to maintain some stability in its defense spending, but social spending is taking the brunt of this new strategy — something that could further the unrest over the next few years. The budget will soon go to the Duma and then Putin's desk for approval. It will be important to see if either pushes back on the draft, though it seems that overall this budget is trying to compromise a need to spend on certain projects with a more pragmatic approach to the entire budget.