Robert E. Berls Jr., PhD
Senior Advisor for Russia and Eurasia
The State of the Russian Economy: Balancing Political and Economic Priorities
A strong and vibrant economy that addresses the interests and concerns of the entire population is a fundamental national interest of all countries. Russia is no exception. Meeting these goals, however, is not easy. The role of both government and the private sector is to work together to optimize each other’s potential and to strive to achieve the best possible results for the national economy.
In this essay, I will examine the state of the Russian economy and the challenges the Russian government and private sector face in building an economy that meets the needs of the state and the citizens of the Russian Federation.
“We have no money, but you hang in there. Best wishes! Cheers! Take care!” These now-infamous words were uttered by former Prime Minister Dmitry Medvedev during a visit to Crimea on May 23, 2016, in response to questions from a crowd of pensioners complaining that their meager pensions did not match the rising cost of living. Since then, Medvedev’s cheery yet dismissive words—“you hang in there”—have gone viral as a meme frequently used to characterize the Russian government’s indifference to the needs of ordinary citizens, particularly those on the lower rungs of the economic ladder.
The second popular meme is an image of a huge, yellow “rubber ducky” floating on a duck pond at a sprawling, opulent estate allegedly belonging to Medvedev. “Rubber ducky” balloons and pictures appear at Russian protest rallies as a symbol of the widespread corruption of Russia’s elite. They reinforce the “you hang in there” meme about the huge gap in Russian society between the “haves” and the “have-nots,” and the blatant indifference of the elite toward what has become the greatest divide and potential cause of future unrest in Russian society today.
Russia is not the only country with sharp societal divisions based on differences in economic and social status. This problem plagues most countries, both rich and poor. For Russia, it is exacerbated by a period of impending political uncertainty as Vladimir Putin’s final term as president comes to an end in 2024. What will follow is unknown. Will Putin find a way to hold on to power? Will someone emerge as his legitimate successor who will ensure a smooth transition of power? Or will forces be unleashed in Russian society, intensified by its huge income inequality, that could disrupt the political, economic, and social structure of the country? This political uncertainty is coupled with ongoing economic stagnation and a society that is becoming more and more dissatisfied with their lives, particularly members of the younger generation who are increasingly demanding a voice in the future of their country.
An economy that meets the needs of the people will be a key determinant of Russia’s future. Russians traditionally have been more tolerant than most of hardships and have managed to divorce themselves from the political machinations of the elite to focus on their daily lives. But how long will this last?
In his early years, President Putin instituted an informal social contract with society: The state will provide a rising standard of living for the people, but the people must stay out of the political life of the country. That social contract worked for about eight years until the economic collapse of 2008. For a while, it was replaced with the Kremlin promoting conservative social values, rising nationalism, and increased use of the state’s instruments of intimidation and force. It appears now that society is less willing to accept the Kremlin’s propaganda. People are growing tired of an economy that on the macroeconomic level appears to be doing alright but on the microeconomic level is stagnating. Reminders abound of the stagnation of the Brezhnev years, and people—especially young people—are growing increasingly concerned about the future of the Russian economy. Many are expressing a desire to leave Russia to live and work abroad.
Finding a way out of this economic quagmire will be key to maintaining control and stability in a society that could become increasingly restive. This is a formidable task in a society where an overwhelming majority—86 percent, according to a recent survey—of people believe social tensions are growing. Russian society is fragmented, primarily due to economic inequality, making antagonism between the rich and poor a significant problem. This antagonism counterposes the “haves” (Putin’s political elite and closely associated oligarchs) against the “have-nots” (the overwhelming majority of the population) in a battle of interests in which the former have the overwhelming advantage. Establishing a more equitable balance will be critical for the future of the Russian economy.
The German philosopher and political theorist Karl Marx was one of the most influential thinkers of the past two centuries. His theories and call to action, based on his analysis of the worst abuses of the capitalist system in a rapidly industrializing 19th century Europe, had a cataclysmic impact not only on Europe but throughout the world. Marx’s vision of capitalist society was one of exploitation, abuse, and great inequities at the hands of the power elite and the owners of the means of production. The masses—principally the downtrodden, impoverished industrial workers—were seen as victims of an abusive system that would only change if the workers rose up against the tyranny of exploitation and created a new socialist society that would enable the workers to control the means of production. But this process would not be complete until society reached its final stage of development—the attainment of communism under which, according to the Marxist dictum, each member of society would be given free access to and distribution of goods, capital, and services based on the principle “from each according to his ability, to each according to his needs.”
Although Marx’s description of capitalist society and his call to arms were aimed at industrialized Europe, it was in peasant-dominated Russia where Marxism achieved its greatest success. This was due primarily to the efforts of the skillful and shrewd revolutionary, Vladimir Ulyanov, better known as Vladimir Lenin. Lenin transformed and applied Marx’s doctrine to the backward, weakly-industrialized, largely-peasant society of Russia and created a new doctrinaire set of teachings called Marxism-Leninism. The October Revolution of 1917 under Lenin’s leadership overthrew the vestiges of Imperial Russia and set the country on a course of development the world had not yet experienced. A new country emerged: the Union of Soviet Socialist Republics. Under Lenin and his successor Joseph Stalin, the Communists, as Lenin’s revolution party was called, launched an experiment in building a new society and economic system that would send shockwaves around the world.
The regime established by Lenin and Stalin was transformational. Over a relatively short time, it created a major industrial power with a centrally planned economy out of a backward, peasant society. But change came at an enormous price. The upper levels of Imperial Russian society—the nobility, the political and social elite, the intellectuals, the industrialists, the clergy, even the more successful peasants—were largely wiped out, either through forced emigration or physical extermination. Meanwhile, as war, famine, and forced collectivization of agriculture devastated the country, huge demographic shifts occurred as millions of peasants were forced to flee the countryside to the cities in search of work.
A state-led campaign of terror took a tremendous toll on the elite, as it did on average citizens as well. The country lived in mortal fear under the brutal regime of Stalin as terror, pressure, and propaganda created short-term results for Soviet society and the Soviet economy. As a result of the enormous pressure imposed on the population, economic statistics were impressive. The Soviet Union grew rapidly and became a development model for third-world countries, rivaling the models of the industrialized West. The Soviet leaders devoted immense resources to the military-industrial sector of the country and developed a military potential that challenged that of the United States and its NATO allies.
Although the Soviet Union presented an image of a powerful, industrialized country with an economy that appeared to have the potential for long-term internal growth and expanded influence around the world, the domestic picture presented a different reality. The burden of building the Soviet economy was borne by the Soviet people at great cost and pain. Investment in the wellbeing of the population was minimal. Housing shortages were rampant, and what existed was often substandard. Many urban dwellers were forced to live in communal apartments with other families. Healthcare was universal but far from adequate. Food shortages were frequent, and long lines for even the basic items were part of daily life. Soviet propaganda worked overtime to convince the Soviet people, who were largely isolated from the outside world as a result of restrictions on foreign travel and the jamming of foreign broadcasts, that they lived in the most developed, the most progressive country in the world. Many believed the state’s lies, but as time passed and conditions worsened, Soviet propaganda began to spring leaks and the people grew increasingly more cynical and frustrated. However, there were few outlets for the citizens to express their discontent. The overwhelming majority were apolitical. Demonstrations were rare, and on the few occasions when they took place, there were quickly suppressed.
A small dissident community expressed their views through self-published samizdat that were circulated surreptitiously among those brave enough to share “anti-Soviet” writings. If one was caught writing, circulating, or even reading samizdat, the price was usually prison or exile to the gulag—the Soviet network of labor camps located in the most inhospitable parts of the Soviet Union.
For the average citizen, the most daring means of expression of discontent was through humor and popular Soviet jokes that captured the essence of the abuses and absurdities of the Soviet system. One such joke that became popular in the closing days of the Soviet Union explained the difference between capitalism and socialism this way: “Capitalism is the exploitation of man by man. Under socialism, it is just the opposite.”
Despite the many negative aspects of the Soviet Union and the inefficiencies and inequities of the Soviet economy, there is a growing nostalgia today for the Soviet past, including among the younger generation that never experienced life in the USSR. According to a recent survey by the Levada Center, 66 percent of Russians are nostalgic for the Soviet Union. Part of this is due to an effective Kremlin propaganda machine that uses the past to build nationalism through pride in Russia’s heritage. This works well on members of the older generation who have suffered economic hardship since the Soviet regime collapsed.
Although Soviet citizens had few material possessions or financial resources, they took solace in the fact that almost everyone else was in the same predicament. There was a sense of equity and security that although Soviet citizens were given access only to the bare minimum to meet their needs at least these meager assets and services were guaranteed to them by the state.
At the same time, many people understood that they were accepting a myth. They knew that members of the elite lived different lives, that they were given special treatment, that they had access to special shops where they could buy foreign products. People simply accepted this as the reality of power. As long as their neighbors and co-workers were treated no better than they were, most people were satisfied with the “equality of privation” that pervaded much of Soviet life. It was ironic, but also typical of Soviet attitudes, that when General Secretary Mikhail Gorbachev tried to save the Soviet system in its dying days of the late 1980s and allowed for small private cooperative businesses—mainly cafes, restaurants, beauty salons—to be formed and run by private citizens, neighbors and agitated citizens at times became enraged and struck out against their entrepreneurial compatriots by sabotaging their businesses and even burning them down. They resented the fact that those who had taken advantage of the new law had dared to “leave the collective” to seek a better life. They preferred that everyone remain equally miserable.
This phenomenon, which was strongly reinforced by the Soviet system, has deep roots in a centuries-old peasant society tradition that if someone left a small peasant community that was struggling to maintain its existence against the forces of nature, wild animals, marauders, and evil landowners, it would weaken the ability of the community to defend itself. Although some of that tradition may still linger, hindering the encouragement of individual initiative and independence, particularly in the more rural, backward parts of modern-day Russia, it—along with the fundamentals of Soviet society, its ideology, and its political and economic foundation—was torn asunder by the relatively peaceful collapse in December 1991 of the failed, bankrupt Soviet system. What had started more than 70 years earlier as an experiment to create a new international order imploded under the weight of its failures and external pressures. A new era was to begin—one that rejected the Soviet past but could not avoid the burden of its legacy.
The 1990s could not have been more unlike the early decades of that century, but ironically they bore certain, albeit restrained, similarities. The revolutions of 1917—first, the February revolution that overthrew Russia’s imperial rule and made an abortive attempt to move toward a more democratic system; then the October revolution that brought Lenin and his ragtag band of radical socialists to power and ended the feeble attempt of “democrats” to find a more equitable replacement for centuries of imperial rule—brought civil war, devastation, and turmoil to Russia. The death toll from war, as well as government-forced exile and extermination, was high. Emigration—voluntary and forced—of Russia’s former elite classes, intellectuals, business leaders, and entrepreneurs drained the country of valuable resources and decimated society and the economy. For the new regime led by Lenin and Stalin, this was not only desirable but necessary if they were to build a new international socialist order—first at home, and then around the globe—and to create a new Soviet man—the model for Soviet citizens of the future.
The demise of the Soviet Union and the emergence of a new Russia under the leadership of President Boris Yeltsin in 1991 also sought radical change, but it occurred under very different circumstances. With the stroke of a pen, not the shot of a rifle, the Soviet Union came to a peaceful, ignoble end. The Soviet system had exhausted itself and had exhausted the Soviet people. Many wanted change. Gorbachev had attempted to preserve and reform the Soviet political and economic structure of the country but failed. The system was unsalvageable. A coup against Gorbachev in August 1991 by a small group of hardliners failed. Demonstrations on the streets of Moscow and other cities grew in size and demand for change. Those demonstrations were largely peaceful, and the government avoided force with a few exceptions. Change was in the air, but not revolution. A different path from the one taken in 1917 was the goal.
Yeltsin, a pragmatic and popular Communist Party leader, was elected as the first president of Russia in June 1991—six months before the Soviet Union was officially dissolved. One month later, he quit the Communist Party and embarked on a radical reform program that would transform Russia from the Soviet model of a centrally planned economy to a market economy. Like Lenin’s revolution of 1917, the transformation of the Russian economy Yeltsin and his government sought to bring about was unprecedented in scope and dimension. Yeltsin’s administration sought to build a new system in a country that attempted to emulate western practices and experiences but that did not have the foundation necessary to support the transition. Unlike the Soviet experiment, Yeltsin and his small army of reformers sought to do this peacefully and eschewed force and compulsion. What Russia lacked in knowledge and skills, it hoped to gain support from the West, and, indeed, Western help was forthcoming. But whether it was the right support and advice, and whether it was adequate is still hotly debated. The biggest challenge was to attempt to build a capitalist system in a country that had never had one and was burdened by relics of the Soviet economic behemoth and the attitudes and convictions of government officials and ordinary citizens that were still anchored in the Soviet past.
Yeltsin instituted some economic reforms similar to the “shock therapy” that had been introduced with some success in the smaller, more manageable economies of Eastern Europe several years earlier. In retrospect, the goals were unrealistically high, and the implementation was very painful for ordinary Russians. In the end, the Russian government did not fully implement “shock therapy” as practiced in Eastern Europe because it feared that massive unemployment and bankruptcies would result. Among the measures it did undertake were the lifting of Soviet-era price controls, large-scale privatization, and efforts to stabilize the ruble. However, even these measures were devastating for most people. When price controls were lifted, the prices for basic foodstuffs like bread and butter skyrocketed by as much as 500 percent in a matter of days. Large sections of the population sank into deep poverty almost overnight.
By 1994, about 70 percent of the Russian economy was privatized, which was a significant accomplishment because one of the keystones of the Soviet system was state ownership of all branches of the economy, including industrial enterprises, land, small shops, and even living space.
Many of the worst abuses of the privatization of the major industrial enterprises were tied to President Yeltsin's re-election campaign in 1996. Facing strong opposition from the Communist Party candidate and fearing a return of the Soviet system, Yeltsin was determined to use all possible resources to bolster his campaign, including a major infusion of financial resources. To do so, he instituted a program called “loans for shares” that transferred ownership of some of Russia’s largest and most valuable natural resources enterprises to powerful businessmen called “oligarchs.” For their part, these oligarchs were obliged to help finance Yeltsin’s re-election campaign using their newly obtained wealth. Yeltsin was re-elected, and the oligarchs became wealthier and more influential in the economy and political life, which increasingly operated on a system of bribery and coercion.
At the same time, crime was rampant. Gangsters owned the streets, demanding bribes and protection money from even the smallest private business owners. Lawlessness and corruption on the part of government officials made life for Russian citizens a battle for survival. Many Russians had fallen into abject poverty and were reduced to selling their family heirlooms on the streets. The life of the average citizen was in stark contrast to a vulgar, ostentatious display of wealth by the new ultra-rich. Inequality had become—and still is—the major grievance in Russian society. This was particularly painful for older Russians who had suffered the most after the demise of the Soviet Union and who recalled with nostalgia the “myth of equality” perpetuated under the Soviet regime. In capitalist Russia, the concept of “equality” was turned on its head. As the economy went into free-fall, and oligarchs, gangsters, and corrupt officials set the rules, the impoverished majority found itself increasingly helpless and depressed.
Despite citizens’ suffering and the overall poor performance of the Russian economy, Yeltsin’s reforms did produce some positive results. Most importantly, sufficient progress had been made by the mid-1990s in transitioning to a market economy that made a return to Soviet-style central planning unlikely.
For the Russian people, however, this was of little concern, and they struggled to survive in a chaotic environment. During the first seven years of the Yeltsin regime, the Gross Domestic Product (GDP) of the country fell by almost 40 percent, and numerous bouts of hyperinflation wiped out the savings of many Russian citizens.
By the end of the 1990s, the Yeltsin government was unable to manage an economy that was rapidly spiraling out of control. The government’s problems were exacerbated by a mounting international economic crisis. As the Asian economic crisis of 1997 spread around the globe, and oil prices on which Russia heavily depended as its main hard currency earner fell, the Russian economy was no longer able to sustain itself. In 1998, the Russian government defaulted on $40 billion of short-term government bonds, devalued the ruble, and declared a moratorium on payments to foreign creditors. This catastrophic default crippled the Yeltsin government and led to Yeltsin stepping down as president just over a year later.
On New Year’s Eve 1999, Yeltsin—in ill-health and exhausted—addressed the nation and announced that he was stepping down immediately as president of the Russian Federation. Putin, a former KGB officer who has only recently become prime minister, became Russia’s next president. The nation was shocked but welcomed the change. The people were desperate for order to be reestablished and for stability to return to their lives. This became Putin’s mission, and he delivered on it. He restored discipline and order to the government; made the State Duma—Russia’s parliament—subordinate to his will; ended elections of regional governors and turned them into appointed officials; seized control of the media; and cracked down on the oligarchs, exiling or imprisoning many of them. Putin was helped by a surge in oil prices from a low of $10 a barrel to a peak of $150 a barrel, and he used this huge influx of money into state coffers wisely to build up the Russian economy and bring stability back to the country and the lives of the Russian people. As a consequence, large segments of the Russian population that had been at the lower end of the economic spectrum moved into the middle class. An informal social contract was established between Putin’s administration and the people: If the people stayed out of politics, Putin would ensure stability and prosperity. For the next eight years, this social contract produced positive results. But economies are fickle; they depend on many factors over which government officials do not have full control. 2008 proved to be a year that would drive this point home, not only for Russia but for much of the world.
Until 2008, Russia prospered, due largely to the economic reforms Putin instituted with the help of his Minister of Finance, the well-known liberal economist Aleksey Kudrin. They increased income from taxes by simplifying the tax code and introducing a flat 13 percent rate on personal income that brought more people on the tax rolls. They also tightened enforcement against those who did not pay. They modernized and instilled greater discipline in the budget process at the federal and regional levels. And perhaps most importantly, they established a stabilization fund to protect the state and the economy from fluctuations in the prices of oil and gas, Russia’s biggest source of revenue. During Putin’s first two terms as president (2000–2004, and 2004–2008), the Russian economy prospered, and the people shared in this economic boom. According to the noted Russian economist Sergey Guriyev, “in the ten years from 1999 to 2008, Russian GDP grew by 94% and per capita GDP doubled. This is the most outstanding decade in modern Russian economic history.”
But another group benefited even more. A new elite emerged that replaced many of the oligarchs of the Yeltsin years. These were individuals close to Putin dating back to his days in the KGB or when he served as deputy mayor of St. Petersburg in the 1990s. Because of their close ties to Putin, they were able to gain control over important sectors of the Russian economy and became heads of state companies that grew following the nationalization of assets of many of the former Yeltsin-era oligarchs. Step-by-step Putin created a state of crony capitalism that was bolstered by the so-called siloviki—powerful figures from the security and military services—who were active participants in Putin’s increasingly corrupt system.
Factions and rivals emerged and fought over assets. Under this system, Putin rewarded some over others, but those who reaped rewards were obliged to deliver on projects with major political and/or economic benefits for the country. Today, it is clear who Putin’s favorites are, but it is an oversimplification to call Putin the puppeteer. Much of what transpires at the upper echelons among Putin’s cronies now occurs without Putin’s direct intervention as the system, though cumbersome, continues to function as the fundamental pillar of the Putin regime. Although it delivers certain results, it is not healthy for the growth of the Russian economy in the long run. It retards the development of grassroots initiative and entrepreneurship and threatens prospects for the type of reform that is so necessary for the future of the Russian economy. The current system functions on favoritism, corruption, and bribery—three aspects of Russian life that are not just confined to the elite but permeate society. The system places a heavy burden on ordinary Russians and is particularly painful whenever the economy enters a downturn.
In May 2008, Vladimir Putin stepped down as president after two terms, as limited by the Russian Constitution. He handed the presidency to his prime minister, Dmitry Medvedev, who occupied the post for the next four years. Putin, in turn, assumed the position of prime minister, but in reality, remained the power “behind the throne,” as regents had done for young, inexperienced tsars during Russia’s imperial years.
Medvedev had a reputation at the time of being a liberal reformer. As president, he launched a bold plan to modernize the Russian economy and to shift its reliance away from oil and gas toward technology. The cornerstone of this program was the development of a sophisticated, grandiose technology center called the Skolkovo Innovation Center, located on the outskirts of Moscow and headed by Viktor Vekselberg, one of Putin's cronies and a “new” oligarch. Although Skolkovo has contributed to Russia’s technology development, it failed to meet expectations of becoming Russia’s Silicon Valley. This is due in part to the overall lack of critical entrepreneurial spirit and initiative that is stifled by corruption, lack of sufficient protection of property rights, weak enforcement of the rule of law, and an overall unattractive business environment. Russia has immensely talented scientists and engineers, but many of them move to more attractive positions abroad rather than stay in Russia.
President Medvedev also promised to strengthen the rule of law, protect civil liberties, and introduce reforms to promote economic freedom and development. But these aspirations were short-lived. The economic crisis that struck Russia in 2008 wiped out all reform plans, and Russia was forced into damage-control mode. Many of the economic gains of the previous years suffered setbacks from which they would not fully recover. The Kremlin’s focus was on helping state companies weather the economic storm. Small companies that could not rely on the state for assistance went bankrupt or suffered severe damage. The state was not living up to its end of the informal social contract with the Russian people. The Kremlin’s promise of continued prosperity and economic growth was no longer realistic.
In May 2012, Putin returned to the presidency, and Medvedev once again assumed the post of prime minister. This swap, which the Russians referred to as “castling,” to use a chess term, was made possible by a change to the Russian Constitution introduced during Medvedev’s presidency that allowed Putin to serve another two terms and extended the term of the president from four to six years.
The return of Putin to the presidency angered significant segments of the Russian population who turned out onto the streets of Moscow, St. Petersburg, and other cities to protest. The most violent demonstration at which many were beaten and arrested took place at Bolotnaya Square across the Moskva River from the Kremlin on May 6, 2012, the day before President Putin was inaugurated for his third term. The images on television and in the world media were graphic. They contrasted dramatically with the empty streets of downtown Moscow the following day as Vladimir Putin rode in his limousine to the Kremlin for his inauguration. The message could not have been more clear: The Russian people—at least a vocal segment of them—did not want another six, and maybe 12, years of Putin’s rule.
President Putin, according to numerous reports, was shocked by the demonstrations against him and vowed to crack down on opposition to him and his regime. Physical force could deliver a powerful message, but Putin needed more than just an intensification of his authoritarian rule and a demonstration of the state’s might. He also needed a message that would be attractive to the majority of Russians who had not actively protested but who were dissatisfied with their lives.
When Putin returned as president in 2012, the economic development model, which had suffered a mortal blow in 2008, was exhausted. The prosperity of the first eight years of Putin's rule and the informal social contract had ended. In its place, the regime fashioned an ideology based on conservative social and religious values and resurrected the traditional threat to Russia from a hostile West. Putin’s rule became more authoritarian, and political opposition led by a small but vocal minority was increasingly suppressed.
What was needed was an acceleration of political and economic reform. What transpired was a deceleration. Although the regime continued to speak about the need for reform, little was done. The growth rate began to decline rapidly. According to the Russian economist Sergey Guriyev, the average annual growth rate from 2010 to 2019 was less than 2 percent. Russia had entered a period of stagnation and showed no signs of economic recovery. Foreign investment declined precipitously, and capital flight accelerated. By the period 2014 to 2018, Sergey Guriyev projects that losses from Russian money leaving the country totaled $320 billion, or approximately 4 percent of GDP per year.
2014 marked another critical year for Russia and sparked political and economic crises from which Russia has yet to recover fully. During much of his third term, Putin continued to divert attention from the weak economy by attacking his foreign and domestic enemies and by promoting massive projects, such as the 2014 Winter Olympics, which cost more than $50 billion—the most expensive Olympic Games ever. Much of the funding came from Putin’s billionaire buddies, including Viktor Vekselberg who also funded Skolkovo. But pride in such projects was not enough to keep the Russian people distracted from their increasing economic woes. Furthermore, the emphasis on conservative values and the nebulous threat from the West no longer evoked the same interest and enthusiasm as they did during the previous few years. This was reflected in Putin’s approval rating, which had fallen to the low 60s. Something more spectacular was needed.
This need was satisfied by Russia’s annexation of Crimea and active support for, and involvement in, a war in Ukraine’s Donbas region. Putin rallied the nation behind him. Through his actions in Ukraine, he instilled national pride in the overwhelming majority of the Russian people. In return, he gained their loyalty and support. Concerns over economic growth were put aside for the time being. Putin won over the Russian people, and his approval rating skyrocketed.
But this euphoria did not last long. Economic sanctions imposed by the West and Russia’s countersanctions against European food products began to bite. Russia soon entered another economic crisis from which its recovery has been slow and uneven.
In 2014 oil prices fell again. Westers sanctions increased and reached deeper into the Russian economy. Investors, both Russian and foreign, looked for more attractive markets. On November 5, 2014, the Russian Central Bank announced that it would no longer underwrite the value of the ruble.
Within two years, the Russian state budget showed signs of suffering from the economic downturn. Defense spending, which had an ambitious growth projection, was cut back as was spending on social welfare programs. Manufacturing levels declined, as did the overall quality of life in Russia. By 2019, five years after the latest economic crisis began, Russia’s growth remained weak and below the growth rate in most developed countries. When adjusted for inflation, the average Russian was making less money in 2019 than in 2014.
During this tumultuous time, however, the Russian government and the Russian economy adjusted to the sanctions and reaped some benefits from them. According to the International Monetary Fund, sanctions have only cut into Russia’s economic output by between 1.0 and 1.5 percent. Certain sections of the economy have grown. One important sector is agriculture, which is now booming as a result of the sanctions and countersanctions on foodstuffs. In his annual press conference on December 19, 2019, President Putin pointed to these gains. He also touted the growth in defense manufacturing. “Russia never had helicopter engine-manufacturing. Now we do….We did not have engines for sea-going ships. Now we do.… Our economy … has adapted to external shocks, while the national currency has, by the way, become much more stable in relation to possible fluctuations in energy prices.”
Russia also has adjusted its financial sector to sanctions. It has unloaded most of its U.S. Treasury Bonds and is stockpiling gold. It has also developed its own independent bank transfer system in case it is blocked from using SWIFT—the worldwide interbank financial telecommunication system.
Oil prices, until just recently, have risen, and the Russian budget is in much better shape. The economy is growing again, but slowly. The Kremlin is focusing now on what it calls “national projects” to improve Russia’s infrastructure, thereby stimulating economic growth. From a macroeconomic perspective, the Russian economy is improving, albeit very slowly. Russia is now running a budget surplus and has set conservative budget targets.
From the microeconomic view, however, the Russian economy is not in good shape despite a slight increase (0.8 percent in 2019) in the growth of real disposable income. The Russian government has not restored spending on social welfare programs to the pre-crisis level. Moreover, additional burdens have been imposed on the Russian people in the form of an increase in the age for eligibility for state pensions and a rise in the Value Added Tax (VAT) from 18 to 20 percent—a burden that hurts the Russian consumer. Russian citizens feel that their lives are not getting any better and hold Putin responsible. According to the independent polling agency Levada Center, about 65 percent of Russian households have no savings, and bankruptcies are on the rise.
One of the key factors that affects the growth of the Russian economy is private investment. The government argues that conditions for investment are good right now. It points to record low inflation, budget surpluses, and a stable ruble. But investors remain leery. They worry about the unpredictability of the rules of doing business in Russia, the politicization of the judiciary and the difficulty of obtaining fair judgments from the courts, the ongoing interference and pressure on businesses by the security forces, the lack of incentives and reform of the economy needed to stimulate investment and growth, and the all-pervasive, entrenched corruption which, according to some polls, is getting worse.
As a result of sanctions, the state budget and state-owned banks are the primary sources of investment. Consequently, the economy has put significant emphasis on large-scale state-funded projects that are run by state-run corporations headed by some of Putin’s richest cronies who, ironically, are under international sanctions. As a result, these state-run companies are getting bigger and richer, owing indirectly to the sanctions—the purpose of which was to punish these businessmen for their involvement in Russia’s illegal activities in Crimea and eastern Ukraine.
An important aspect of any healthy economy is the contribution made by small- and medium-sized enterprises (SMEs). In Russia, an SME is defined as a business employing fewer than 150 people, having annual revenue of fewer than two billion rubles (about $31 million), and meeting certain rules of ownership and governance. For years SMEs have been struggling with a sluggish economy, widespread corruption, the lack of an effective rule of law, and arbitrary and rapidly changing regulations. According to Rosstat, the state statistical agency, SMEs make up just 20.2 percent of the Russian economy. This is a decline from 22 percent in 2017. To sustain growth in the Russian economy much more needs to be done to promote the expansion of the role of SMEs. By contrast, the three Baltic States—Estonia, Latvia, and Lithuania—that were also part of the former Soviet Union, have successfully advanced the role of SMEs in their economies. They now account for more than two-thirds of their respective GDPs.
Although the Russian economy is growing, it is not growing fast enough to keep pace with the rest of the world. What this means over time is that the Russian economy, as it is currently constituted and lacking major reform and restructuring, will inevitably experience declining standards of living and economic stagnation. Growth in 2019 remained at about 1.0 percent—a figure that has been fairly constant since the economic crisis of 2014 began. Economists are hopeful that growth will improve in 2020, but opinions differ on how fast it will accelerate. The Russian government is pinning its hopes on the “national projects” to revitalize the economy, and officials continue to talk about economic reform. Progress in these two important measures to stimulate the Russian economy is critical for its growth and the prosperity of the country.
At the beginning of this essay, I cited two popular memes that Russian people often repeat as they confront the major problem they face in their daily lives—huge wealth inequality and poverty. According to joint research by the Higher School of Economics and the state-run VEB Bank, “the wealthiest 3 percent of Russians owned 89 percent of all financial assets in 2018.” The Moscow Times reports “the number of billionaires in Russia grew from 74 to 110 between mid-2018 and mid-2019, while the number of millionaires rose from 172,000 to 246,000.” Although Russia’s rich did suffer losses during the worst years of the latest financial crisis (2014–2015), they recovered quickly. According to Forbes’s rating, the total wealth possessed by Russia’s top 200 in 2019 was $15 billion higher than it had been in 2014.
At the other end of the economic spectrum, Rosstat reported last year that 14.3 percent of the population (21 million people) are poor. This is an increase since 2018 when the figure was 12.9 percent. These people did not recover from the latest financial crisis. According to Yale economist Christopher Miller, Russians keep getting poorer and poorer. The year “2018 marked the fifth straight year in which Russians’ inflation-adjusted disposable incomes fell.” Rosstat further reports that “almost two-thirds (63.5%) of Russian households only have enough money to buy food, clothes and other essential items.” The Russian Central Bank reports that 75 percent of the population is not able to save anything each month, and almost one-third of those who manage to put some money into savings do so by skimping on food.
Russians are very worried about the state of the economy. The independent Russian polling agency, Levada Center, reports that “72 percent of Russians say they worry about rising prices, 52 percent cited growing impoverishment, and 48 percent say one of the nation’s biggest problems is unemployment.” These concerns go beyond those at the bottom rungs of the economic ladder and have spread well into the middle class. As the economy stagnates and the purchasing power of the Russian consumers decreases, growing socio-economic discontent threatens to increase instability and raises the risk of popular demonstrations against the Putin regime, something that has been occurring with increased frequency over the past year. The popular Russian newspaper Moskovsky Komsomolets has been reporting on growing social tension in Russian society. According to a recent Russian Public Opinion Research Center survey, “86 percent of the population say that antagonism between the rich and poor has become the main problem today. Society is fragmented, primarily due to economic inequality.”
The response of the Russian government to the growing dissatisfaction with the economic plight of a large segment of the Russian population is to continue to promise reform, exert pressure when needed, and suppress—often with increased violence—popular demonstrations against deteriorating economic conditions. Most glaring, however, is the government’s overall disregard for the plight of its low-income citizens. Recently, a news anchor in Russia’s eastern region of Kamchatka burst out laughing as she was reading a report on an increase in certain social security payments. According to the report, recipients will get a little more than 1,500 rubles ($23.50) a month to help with payments for medicines, health resort packages, and “international travel” to the resorts. It is no wonder that there is so much cynicism among the population about the government’s interest in their needs.
Yale’s Miller cites a Russian narrative that illustrates the quandary both the Russian consumer and the authorities face. Miller says that,
the population is in a tug of war between their refrigerators and their televisions. The fridge is empty, but the television says everything is great. And for those who don’t believe the television, there is the police baton…[S]o long as Russians sit at home, the Kremlin has no reason to keep their fridges full.
Despite Russia’s more successful macroeconomic indicators, the ramifications at the microeconomic level of a stagnant economy for the consumer and the population, in general, pose a serious challenge to the future of the Russian economy and its political system. The promise of reform, which has been repeated ad nauseum over the years, as the panacea for Russia’s ills, contains within it an inherent threat to the political system itself—a system that is largely responsible for Russia’s ills. Will the Russian economy be able to continue to stumble along without significant changes? Will the implementation of reform be inevitable? Decisions made in the next few years may well determine the fate of the Russian economy.
There is little doubt that Russia cannot continue along its current path and wallow in economic stagnation if it is to regain its status as a great power, become a stronger player on the world economic stage, and provide a better life for its people. Russia must modernize and institute meaningful reforms to move forward. Without change, the Kremlin risks growing social unrest and further degradation of living standards.
President Putin acknowledged this challenge in his State of the Nation Address to the Federal Assembly on January 15, 2020, in which he said that raising the income level of Russian citizens is “… the most important task of the government and the Central Bank.” He stressed that “we need structural changes in the national economy and an increase in efficiency.” He also promised a higher GDP growth rate and increased investment in the economy. Such promises are well and good, but without sustained, aggressive government programs and private entrepreneurial initiatives, these are just empty words.
Russia’s most prominent liberal economist and former Minister of Finance Kudrin has expressed concern over the direction of the Russian economy. In June 2019, he issued the following assessment: “For the past six years, the country has not taken advantage of the opportunities, and our share in the global economy has fallen. We have not become more competitive and efficient. We are in a state of economic stagnation that doesn’t lend itself to optimism.” He added that there is a “decline in real income. And when so many young people live below the poverty line in 2019, this worries me, and many citizens could begin expressing their concerns.” By this, he means there is a greater chance now that young people will come out on the streets and protest despite the threat of government suppression and violence. Frustration is mounting, but a satisfactory course correction is not imminent.
Impediments to reform are formidable. The largest impediment is the state itself. The state and its top leadership, its bureaucracy, and its subservient oligarchs have benefited immensely from the current system and have gotten rich because of the strict controls they exercise over the economy. They have no intention of abandoning these controls and the symbiotic relationship among these power centers from which they derive their sustenance and strength. Therefore, they will continue to rely on state-sponsored projects, natural resource exploitation, and restrictive regulations to maintain their dominance and to impede competition and initiative from below. Consequently, such important elements of a free and fair economy as the sanctity of private property, personal freedom, fair and equitable implementation of the rule of law, an independent judiciary, and an effective and persistent war against corruption are eschewed as anathema to sustaining the current political and economic regime.
Because of oppressive governance and growing economic stagnation, which are increasingly resembling some of the worst features of the Brezhnev regime of the 1970s–1980s, there is a decreasing capacity for the economy to diversify and grow. Putin periodically talks boldly about change, raising living standards, and erasing the worst abuses of his corrupt regime, as well as undertaking meaningful reform and investing in human capital and the next generation of leaders. Such steps, however, if pursued, could threaten to dismantle the very structure of control on which his authority is built. The result could be chaos.
Frustration is not just an emotion shared by a large segment of the general population; it is also the sentiment of many talented economists, business executives, and government officials who would like to see Russia pursue a different course. They are frustrated that their voices are not heard, that they are not able to effectuate positive changes and make a real difference in the lives of their compatriots. Many keep trying, but others can longer tolerate the inequities of the system and the lack of opportunity for professional development. They opt instead to hone their knowledge and skills and develop their careers outside of Russia. Although the outside world benefits from these talented young men and women, Russia loses, the future of Russia loses.
In the meantime, the Putin regime continues to look for ways out of its economic maze without surrendering the levers of control that it so religiously guards. The latest hope for building a “bright future” is the so-called “national projects.”
The 12 “national projects” program, which the Kremlin initiated in 2018, is an attempt to create a new economic model based on supply-side investment. The program focuses on massive infrastructure development, major boosts to health and education, and large-scale economic modernization over six years at a cost of $400 billion, one-third of which is to come from the private sector. This program includes major road-, bridge-, rail- and airport-building projects, substantial revitalization of urban housing, expansion and modernization of oil and gas pipelines, and large-scale investment in developing the “Northern Passage” Arctic sea route between the Far East and Europe.
Criticism of the national projects is widespread, not only among the general population but also among many economists. They argue that the program is overly ambitious and will fail to turn the economy around, that it will benefit big business, not the Russian consumer. The Economic Development Ministry claims that investments in the national projects will result in an 85 percent increase in the rate of growth over six years. But economist Yevgenia Sleptsova of Oxford Economics argues that: “The National Projects are no breakthrough for Russia’s growth model, as long as institutions continue to constrain productivity and the working-age population declines. Russia is still looking for growth in the wrong places.” Russian economist Guriyev is also highly critical of the national projects. He claims that they will cost the Russian taxpayers trillions of rubles, but they will increase Russian GDP, according to the International Monetary Fund, by an average of only 1.4 percent through 2023, which, Guriyev points out, will bring Russia back to the level it stood at in 2008.
Guriyev summarizes the criticism of the national projects this way:
It is not surprising that experts and investors have little faith in the effectiveness of large-scale public investment in a country notorious for corruption. The solution to Russia’s problems lies in precisely the opposite direction—in implementing the long-promised reforms: protecting property rights, respecting the rule of law and competition, reducing the state’s role in the economy, fighting corruption, reintegrating Russia into the world economy, and investing in human capital.
Other critics recognize the problems of the national projects and admit that they will most likely fail to deliver results as promised, but they argue that these projects should be viewed not just in economic terms but also through a political lens. Even if only limited progress is made, the Kremlin will spin this as a sign of its commitment to improving life in Russia for everyone. With elections coming up—2021 for the State Duma and 2024 for president—this can be a powerful tool for the politicians.
One of the major challenges Russia faces is insufficient diversification of its economy. Its principal source of revenue over the years has come from the exploitation and export of its natural resources, primarily oil and natural gas. The Kremlin recognizes this challenge, acknowledges the need to increase investment in technology and digitalization of the economy, but struggles with implementing the necessary measures to meet this challenge. Former Prime Minister Medvedev was known for his fascination with technology. He was one of the first Russian senior government officials to own an Apple iPhone. He was a great admirer of Silicon Valley and sought to replicate its development of innovative technology by building the Skolkovo Innovation Center. The new prime minister, Mikhail Mishustin, is an economist and is known for promoting digital technologies in the workplace. There is hope that Mishustin will be a more successful promoter than Medvedev in expanding Russia’s development of innovative technologies.
Unfortunately, advanced technology and digitalization, and its commercialization, face the same problems and roadblocks as most other aspects of the economy. The predatory practices of the government, the lack of rule of law, the stifling of initiative, arbitrary government regulations, and a poor investment climate have a chilling effect, particularly on private Russian companies that have the talent but not the resources to overcome the multiple hurdles the government places on their path to success. Until and unless the state changes its traditional concept that the people serve the state to one that empowers the people and provides the economic and political resources to pursue initiatives that benefit society and the state, Russia will remain far below the world’s leading countries in the areas of technology development and innovation. According to Russian scholar Andrew Kuchins, Putin has said that “whichever country dominates artificial intelligence will rule the world.” Kuchins argues that “maybe he is right, maybe not. What is clear, however, is that his policies for nearly 20 years now have for the most part hurt rather than helped Russia’s technological competitiveness and prospects for long-term sustainable economic growth.”
Putin has made several attempts at reform during his 20 years in power. Most of those attempts have failed. Is there any expectation that implementation of the national projects, a change in government leadership under a new prime minister, or the anticipation of upcoming elections will bring about sufficient policy changes that could lead to a revitalized economy that serves the interests not just of the elite but of the ordinary citizens as well?
Most experts take a pessimistic view. At a minimum, they argue that because of the upcoming elections the authorities will not attempt to make any drastic changes that could hurt either their constituents or jeopardize the power elite. Key to Putin’s 20-year-long reign has been maintaining a fragile political balance among the various factions of power and wealth in the country. As Leonid Bershidsky, a columnist for Bloomberg View, explains: “The Russian president would rather sit on his hands than risk disturbing the fragile political balance that ensures his power.”
Bershidsky further explains why reforms pose a threat to the Kremlin. Reforms, Bershidsky argues, that reduce
the state footprint would undermine the most important pillar of the Putin regime. The employees of various branches of government and state companies are Putin’s more reliable support base. Putin’s billionaire friends have gotten rich from state procurement…and it remains the only source of their continued prosperity. And Putin needs to keep his cronies happy if he wants to avoid a stab in the back. Given the regime’s political constraints, it’s hard to see how Russia can defuse economic time bombs like falling investment, chronic capital outflow, and a frightening structure of household debt.
In his book The Putin System, Grigory Yavlinsky, a veteran liberal political leader and economist, argues that “the prospects [for economic reform] are grim. Inability to reform the economy condemns Russia to tightening authoritarianism and slow collapse.” “The only solution,” Yavlinsky says, “is to educate enough citizens so that when the next ‘fork in the road’ comes, they can change the system.”
That next “fork in the road” may come in 2024 with the presidential election, or it might come earlier if Putin decides his future is already safely assured. A change in the system could mean, inter alia, a new economic model and policies for Russia. This could come about by creating a more positive climate for foreign and domestic investors, pass and implement appropriate regulations and enforcement mechanisms to attract more investors, and encourage rather than discourage initiative from below.
As we have seen in the past, the Kremlin and its allies see such changes as a threat to their control and power, despite the benefits to the country. The Russian Government sent a chill through the international investment community when, in February 2019, it arrested on dubious charges a major American investor in Russia, Michael Calvey. After months in prison, Calvey was remanded to house arrest where he still awaits trial and a decision on his fate. That decision will not only determine the fate of Calvey; it may also impact the fate of future foreign investment and the course of the Russian economy.
It will take a long time for the negative clouds that hang over the Russian economy to dissipate, even if Russia seeks a different direction at a future “fork in the road.” Until then, it appears that the Kremlin will continue to hunker down and avoid any steps that could threaten the status quo of the power elite, their powerful business partners, and the system that sustains them.
The future direction of the Russian economy is unclear, and predictions among experts differ greatly. They range from the mildly optimistic (the view of some Russian government officials) to dire. Most analysts see continued stagnation at the microeconomic level, with some small improvement in the standard of living, depending on how serious the authorities are about committing resources to this effort. Few experts doubt that the power elite will surrender their tight hold on the economy and their sources of income.
Some take a more radical view and predict a potential socio-economic apocalypse if radical political reform is not set in motion in 2024 when Putin’s term as president ends and a new president is elected. Most experts argue against such views, insisting that Russians are historically much more tolerant of authoritarian rule and are willing to accept certain hardships as long as they are left alone to manage their daily lives in a reasonably acceptable manner.
Instead of a predictive conclusion due to the uncertain path of the Russian economy, I offer a sampling of views of prominent experts on what to expect from the Russian economy over the coming years.
Trenin, the Director of the Carnegie Moscow Center and an astute observer and analyst of the Russian scene, frames the issue in a broad political-economic context. He wrote on Twitter on January 21, 2020, the following: “In 1999, Putin inherited near-chaos; over the following 20 years, he managed to turn it into a conditionally stable—authoritarian and personalistic political regime. His ambition now is to convert the regime into a state. Hard job.”
Following the appointment of Mishustin as Russia’s new Prime Minister on January 15, 2020, Kirill Dmitriev, CEO of the Russia Direct Investment Fund sovereign wealth fund, offered an unsurprisingly positive assessment. He said that he expects the Mishustin government to focus on “growth, attracting additional investments and increasing the pace of implementation of national projects—the task which was outlined by the president in his Federal Assembly address.” Dmitriev opined that these measures should help increase economic growth to 3 percent in 2021—a figure that Russia has not seen in quite a few years.
In an interview on August 8, 2019, with the popular newspaper Moskovsky Komsomolets, Igor Nikolayev, an economist and professor at Moscow’s prestigious Higher School of Economics, offered a bleaker assessment. He predicted that Russia faces a new economic crisis and explained why:
There are four reasons why a new crisis is inevitable: structural imbalances in the Russian economy, sanctions and counter-sanctions, downward trends in oil prices, and slowing world economic development.… The crisis will definitely occur.… Most likely, it will come in 2020. At best, it may delay until 2021.… Should the sanctions be more severe, then the rouble will immediately react by dropping.… [This will] be followed by a price increase and consequently, inflation will rise.”
To avert such a crisis, he urged three measures that need to be taken: “… decreasing taxes, renouncing countersanctions, and establishing true freedom for entrepreneurs. However, our government, in any case, has so far acted in exactly the opposite way.”
Picking up on the threat a weak economy poses to Russian domestic and foreign policies, Stratfor, a prominent American geopolitical intelligence platform, published their assessment in Worldview, on December 14, 2019. They predicted that “ultimately, Russia’s economic challenges not only will contribute to internal political and social instability, but they also will continue limiting Moscow’s ability to project power internationally.” They note that “economic weakness restricts the resources available for Russia to pursue its interests abroad, and it’s also driving Russia to emphasize exporting and mineral resource extraction that can help drive the economy at home.”
Yale’s Miller offers the most widely accepted view of the future of the Russian economy. “Expect more promises from the state,” Miller tells us,
[B]ut don’t expect much to change. The Kremlin’s style of rule at home and confrontation with the West abroad have boxed it in. Over the next five years, Russia’s economy will barely grow, the country’s government forecasts predict. Given such dismal projections, in the absence of a new foreign crisis to rally around, Russians will probably judge the Kremlin’s policies to be stale. But stale can be stable, even if Putin’s approval rating slips further.… Russians are sadly used to economic stagnation and ineffective government—and they are unlikely to be offered an alternative anytime soon.
I conclude with the assessment of Jake Cordell, a business and economics reporter for the Moscow Times, who focuses primarily on macroeconomic issues, which on the surface present a more positive picture. In a piece in the Moscow Times on December 26, 2019, Cordell wrote:
2019 was an impressive year in the Russian business world. The Russian stock market was one of the best performing anywhere in the world—up more than 40% in dollar terms and setting new record highs in the process. Corporate profits soared—rising 12% and on track to pass the landmark 15 trillion-ruble mark ($340 billion). As a share of GDP Russia’s corporate profits come in around 14%—more than twice the level in China and compared with 8.5% in the United States. Businesses are expecting more of the same in 2020. However, scratch the surface and the optimism and opportunities quickly brush up against a not insignificant set of challenges. There are a lot of risks and concerns, and businesses aren’t sure about their futures. The risk of a decline in domestic demand continues to worry businesses—most of that is undoubtedly connected with the economic slowdown, the VAT increase, increase in the retirement age, the trade embargo [sanctions], and other trends such as the multi-year decrease in consumer income. An unresolved familiar set of problems—including government interference in private companies and an apparent lack of protections for investors—also lingers over the business community. “As the 2020s approach, Russia is caught between needing to find new growth drivers to spur moribund economic growth, and a political economy set to protect the vested interests of established players,” said [the British global risk and strategic consulting firm] Maplecroft’s [Daragh] McDowell. More restrictive conditions for the Russian internet and technology space will be a major trend in 2020. That business associations and investors are still raising the kind of concerns that were prevalent at the start of 2000 or 2010—criminalization of corporate disputes, bloated bureaucracy, government interference, outdated regulations, weak investor protection, a politicized judiciary—shows that change is a slow process in Russia. Surveys also reveal strong dissatisfaction with the modern business climate among Russia’s entrepreneurs. A PwC [PriceWaterhouseCoopers] poll found 52% of business owners think it was easier to do business in the turbulent 1990s than it is today. Stuart Lawson, a veteran British banker who came to Russia in the 1990s, said: “When it comes to Russia, I like to say: it’s never as bad as it feels, but never as good as you hope.”
“It’s never as bad as it feels, but never as good as you hope.” These words ring true for so many things in Russia, not just the economy. They also bring to mind the astute observation of Viktor Chernomyrdin, President Boris Yeltsin’s longest-serving prime minister who lamented: “We wanted the best, but it always turned out the same way.” For the sake of the Russian people and their future, let’s hope that the two memes cited at the beginning of this essay are eventually replaced by a more positive and promising outlook and the “bright future,” which the people have been promised since the Soviet days and has been so elusive, actually becomes a reality.
 Shock therapy is a strategy to switch over to a market economy as quickly as possible. The strategy relies on price liberalization, budget stabilization, ending subsidies, and privatizing industry.
 In an effort to retaliate against sanctions imposed by the West, Russia enacted its own countersanctions, which amounted mainly to a ban on the importation of many Western food products. Although this did have an economic impact on certain European producers, the Russian people felt the countersanctions even more. Not only were they deprived of their favorite food items, but they had to witness absurd scenes of destruction of Western goods that remained in Russia after the imposition of the countersanctions or were smuggled into the country. Piles of quality products were bulldozed, set on fire or destroyed by other means. Although this may have instilled a certain degree of patriotism among a certain class of Russians, it evoked disgust, anger and frustration among many others.
 A “bright future,” or in Russian svetloye budushcheye, was a term used extensively by Soviet officials to rally the nation to the cause of communism and all the wonderful benefits awaiting the Soviet people. Over time, it became a term of derision among Soviet citizens and is still viewed that way today.
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