Russian Economic Reform » Archive » Russia’s Economic Future: Part 1

Russia’s Economic Future: Part 1

Published on August 21 2023

Posted by: jeff

Introduction

Part A. Political and Administrative System

Population and Labor Force Issues
Constitution and “Federation” Issues
Budgetary and Financial Systems

Budgetary System and Policy

Financial System and Policy

Infrastructure
Power Realities
Corruption

Part B. Early Putin Period

First Steps
“Strategy2020” Research and Report

Part C. Later Putin Period

Post-2014 Crimea
National Projects
Information Control, Education and Research
State Control of the Economy
Management Capability
Economic / Technology Sovereignty

Part D. Russian International Economic Relations

Countries and Regions

Eurasian Economic Union and Central Asia
China
Other countries and regions

Products

Energy Exports
Minerals and Raw Materials
Agricultural
Manufacturers and Technology

International Issues

Climate Change
Arctic

Conclusion

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ABSTRACT

Since February 2022 Russia has increasingly turned inward in political, social and economic terms. At the same time, Russia’s top leaders – and some important supporters – seem to think that Russians have some unique characteristics and talents that will allow an extreme focus on self to thrive in a complex economic and technological world; and also both influence and attract others. While this may appear to be so in the short-term because of Russia’s generally successful efforts at macroeconomic control, rich natural resources, internal propaganda and implicit threats to use nuclear weapons, this thinking is delusional. The ideological corruption of the education system will reinforce the misguided notion of technological sovereignty; and social and economic life will in the medium-long term move toward stagnation. Moreover, Russia is a country with a declining population which is increasingly ignorant of the wider world, a deteriorating culture, and no solid friends. Little will change while Putin and his thinking hold sway in Russia and present an antagonistic face to the world, and most Ukraine related foreign sanctions remain in place. Russia’s economic and political future is not particularly rosy, but neither is it anything like the 1990’s because of a generally competent bureaucracy and little prospect of regional separation.

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“Russia’s Economic Future”

© Jeff Schubert August 2023

Introduction

While the main focus of this book is on the future medium to long-term performance of the Russian economy, the future is significantly dependent on unfolding political-security events in Ukraine. These are so important that I will firstly set out my views about how this situation is likely to proceed in the next few years so that I can then concentrate this text on economic issues. Having said that, in the text I do not shy away from offering a political and social perspectives. As well as basic facts, I often offer judgements on what is and what should be.

It is almost impossible to imagine Russia agreeing to return Crimea to Ukraine – irrespective of how the war proceeds and irrespective of who is in power in Moscow – because of his historical and strategic significance (particularly naval base in Sebastopol) and the wishes of the local population. It maybe in Ukraine’s interests to let Russia keep parts of Donetsk and Luhansk in order to avoid having a hostile Russian-orientated population within its borders. Anna Aruntunyan writes that “according to a poll conducted in April 2014 by the Kiev International Institute of Sociology, over 70% of respondents in the Donetsk and Luhansk oblasts of Ukraine – where support for Russia was far less consolidated than it was in Crimea – considered the government in Kiev illegitimate.”[1] There is little reason to believe that these numbers have since become more favorable for Ukraine.

As for the other annexed regions of Zaporozhye and Kherson, they are not vital to Russia’s interests, but they may be vital determinants of whether or not Putin stays in power. If Russia can retain these, Putin will be able to spin this as a victory for the security of Russia. If these regions are returned – in whatever way – to Ukraine, Putin is unlikely remain in power because these are the only tangible things that his very costly “special military operation” has achieved.

It is very unlikely that relations between Russia and “Western” countries can return to anything like pre-February 2022 conditions while Putin is in power (either as president or behind the scenes). The majority of foreign sanctions will not be lifted, and certainly not anything related to advanced technology.

Given – at the time of writing – the unlikelihood that the Ukraine offensive will take back the regions of Zaporozhye and Kherson, I have proceeded in this text to imagine that Putin remains in power and that the majority of foreign sanctions remain in place for a number of years.

But, there are also other factors that will have a very significant influence on Russia’s economic medium-longer term economic future – and these are the focus of this text!

Part A of this book offers an explanation of the official political and administrative / institutional system of the Russian “federation”. The basics of the system – as laid out in the Russian constitution – will not easily be changed and thus provide some guidance on the likely future course of Russia, although I are very conscious that the system has increasingly been distorted and abused ever since it was first introduced following the collapse of the USSR. A basic tenet of the discussion is that bureaucratic systems are difficult to fundamentally change and that both the size and structure of Russia makes it doubly so. Even harder to change is the almost inevitable decline in Russia’s population. I also consider the Russian budgetary and financial systems and basic physical infrastructure.

In Part B of this book, I look at Putin’s economic policies when he first came to power – and when he was more open to ideas other than his own. These included commissioning research of an extensive “Strategy2020” report on Russia’s future in the economic and social spheres. Contrary to some commentary there is much more to Russia than oil and gas fields and corrupt oligarchs, and Putin was keen to develop a large service sector with a significant SME participation.

In Part C, I look at the latter Putin approach to the economy and related issues. For convenience, I call this the post-2014 invasion of Crimea period, although the transformation in Putin’s thinking and approach to issues began a number of years before this. There is now a very significant push to increase Russia’s “economic and technological sovereignty”. I judge that this push will remain in place for a number of years irrespective of the exact events in Ukraine and irrespective of who holds power at the upper levels of the Russian government; particularly as the technology competition between the USA and China – focused on computer chips – will provide some justification to Russian policy makers for their “sovereignty” aspirations. But, at some stage a large degree of failure will need to be admitted with a subsequent change in course. The nationalist ideological corruption of the education system will make such a change in course more difficult than it should be.

In Part D, I look at Russia’s international economic situation over which its economic policy makers have less control. I start with a geographic – ie country / region – focus because it is most conducive to identifying international political factors that may affect Russia’s economic future. I start by looking at the Eurasian Economic Union (EAEU) and Central Asia before moving on to consider the remainder of Eurasia — particularly China — and then some aspects of the wider world. At the end of this part of the book I attempt to look at Russia’s international economic situation from a product perspective with a particular focus on raw material, energy, agricultural exports and major existing technologies (nuclear power and weapons). Here I also consider issues associated with “climate change” and the Arctic.

Finally, I write a Conclusion.

Part A. Political and Administrative System

Population and Labor Force Issues

Russia does not have favorable demographic trends.[1] Its population has been falling since 2018 and there is little chance of a significant change. According to research by Moscow’s Higher School of Economics (HSE), Russia’s population was 146 million people at the start of 2023 [2][3][4], although this number did not take account of the effects of the war in Ukraine which has led to many deaths and an exodus of many younger people who wanted to avoid military service. HSE modelled several different population scenarios based on likely life expectancy, fertility, and migration rates.

The medium, and most realistic, scenario shows Russia’s population falling to 131 million by the mid-2070s with a slight increase to 137 million people by the end century.

According to the HSE low pessimistic scenario, the population will constantly decline and in 2100 will not exceed 84 million people — and depending on the level of migration could even fall to 67 million. The high optimistic scenario was that Russia’s population could be maintained at 146 million by 2100, but this scenario used the highest likely life expectancy, fertility, and migration rates.

Of the three scenarios, migration is the factor that could vary the most. From 1992-2019 inward migration was 9.6 million.

According to the UN’s latest projection, Russia’s population will be 112 million by 2100 under average circumstances.[5]

The generations born in the 1990s and 2000s, when Russia’s birth rate was at its lowest, are now entering the labor market. This will exacerbate the existing crisis due to a lack of young workers. Meanwhile, the post-war generations of the 1950s and 60s are aging and approaching retirement.

Other research by Finexpertiza[6] consulting firm indicates that “the number of young workers in Russia has dropped to one of its lowest levels in the country’s post-Soviet history”. “Working citizens under the age of 35 in the Russian labor market totalled 21.5 million in December 2022, accounting for 29.8% of the country’s workforce of 72 million. That marks the lowest share of young workers since the start of data collection in 2006.”

Constitution and “Federation” Issues

The Russian Federation is not a “federation” on the sense of countries such as the United States of America (USA) and the Australia Federation which were formed when individual regions agreed to come together and cede specified powers to a central authority. The powers ceded by the USA and Australian regions are specified in written constitutions, with the residual powers remaining with the regions. Instead, the Russian Constitution[7], and division of powers, was imposed on the regions in 1993 several years after the break-up of the USSR. It was, however, approved by a national referendum.

This top-down approach to “federation” in some ways makes it easier for the central government in Moscow to exert influence over the country. However, historical factors have left Russia as a country with 83 regions (excluding Crimea), which is a very large number for central government to have necessary relationships with[8]. These regions have various designations – republics, krays, oblasts, cities of federal significance, an autonomous oblast and autonomous okrugs – and according to the constitution all have equal rights as part of the federation. These regions vary tremendously in geographical size and natural wealth. The smallest region has around 200,000 people while the largest has around 13 million. Moscow’s control efforts must also cope with the fact that the Russian landmass is very large and covers eleven time zones.

Some commentary has suggested that Russian “defeat” in Ukraine may lead it to fall apart in a similar way to the USSR, possibly partially on ethnic lines. Sociologist Alexey Gusev[9] doubts this and has pointed out that while “the borders of Russia’s regions and republics are essentially abstract, having been repeatedly redrawn between the 1920s and the 1940s”, they “can give the false impression of large national autonomies”. He has written that: “Sociologically, most of Russia’s regions share the same basic values and attitudes. In 2018 and 2020, Moscow State University researchers discovered that predominantly Russophone provinces did not have statistically significant differences when it came to how they felt about power distance (the extent to which people are accepting of formal hierarchy and inequality), uncertainty avoidance, individualism versus collectivism, and long-term versus short-term normative orientation. Neither geography nor socioeconomic development made a difference.”

Budgetary and Financial Systems

As a former professional macroeconomist – Australian central bank (RBA) and chief economist of the Australian subsidiary of a large international bank (HSBC) – I am relatively relaxed about the way budgetary and monetary policy issues are handled in Russia. However, I well recognise how shorter-term macroeconomic events can have a major effect on longer-term developments.[1]

Budgetary

The Russian Tax Code has two parts (introduced in 1999 and 2001).

Corporate profits tax rate of 20% with 85% of this going to the regions and the reminder to the federal budget (several tax payments may need to be made when a company has separate subdivisions in more than one Russian region.); VAT rate of 20% (food and medical products at 10%) goes entirely to federal budget; personal income tax rates of 13% and 15%, of which 85% goes to regions and remainder to local government. Revenue from other federal taxes (such as excise) goes to federal budget. There is also a quite complex tax on mineral resources extraction, and various special tax regimes various business sizes and areas of activity[2] – as is often the case in other countries!

Unlike in a true “federal” system where certain defined powers have been voluntarily ceded to a central government with the regions retaining the balance, the Russian regions can only change taxes within limits set by the overall Russian Tax Code. The same situation applies to local (municipal) taxes. The main regional taxes are corporate property tax; transport tax and gambling tax. The main local taxes are land tax, individual property tax and sales duty.

A 2021 IMF report said that “compared to other large countries with federal systems of government, Russia stands out with its high reliance on direct taxes as a revenue source for its regions.”[3] There may thus be scope for some change in the distribution of corporate and/or personal income tax receipts. In addition, there would appear to be scope for raising the low personal income tax rates.

Having said that, the huge variety of Russian regions generates significant problems, according to a number of reports on the situation before the February 2022 invasion of Ukraine. A GIS report said that only 13 of Russia’s 85 regions “fully meet their budget needs from their own resources”. “These include the highly developed and wealthy Moscow and St. Petersburg cities, the industrial regions of Kaluga, Leningrad, Samara and Sverdlovsk, the Tatarstan Republic, and rich oil- and gas-producing regions such as the Sakhalin and Tyumen, along with the Nenets, Khanty-Mansi and Yamalo-Nenets autonomous districts. All other regional governments can only make ends meet with help from the federal budget.”[4] There are 22 regions in Russia, whose financial self-sufficiency is below 50%.[5]

The 2021 IMF report said that “World Bank (2018) estimates Russia’s richest region to be 17 times richer than its poorest one, and explains this finding with the Soviet legacy and the unique geography of a continent-sized, sparsely populated country with pockets of abundant natural resources.”[6]

There is also a mandatory payroll based “insurance contribution” which is paid to pension funds at a rate of 22% and further payments to social and medical insurance funds which take the total additional cost of employing people to 30%, which may be considered high in international comparative terms.[7]

The GIS report says that in various years the Finance Ministry has estimated that oil and gas related taxes in the total federal budget have ranged from 36% to 51%. The changing nature of the Russian economy because of both Ukraine-related sanctions and energy markets may prompt changes in the distribution of taxing powers.

A number of factors since the February 2022 invasion of Ukraine have made understanding the Russian budgetary situation more difficult. These include taxation policy changes and “secret” data. According to the Stockholm Peace Research Institute, Russian defence spending increased to 9% of GDP in 2022 from 4% the previous year. Along with construction spending in the occupied regions of Ukraine this has increased the budget expenditure and may result in increases in taxation.

Janus Klluge gives a good summary of the budgetary situation as of April 2023[8] and of the various factors that can affect it.

Financial System

The Russian approach to Central Banking and managing its financial system is generally quite conventional; and I will not elaborate much here because the focus of this report is on Russia’s medium to longer term economic performance.

However, on 14 August an article by Maxim Oreshkin, economic aide to Putin, was published in Tass.[9] He argued that “the economy is successfully changing its structure, faster than anyone predicted.” He spoke of visits “to dozens of enterprises in more than 20 regions”. He wrote: “There are positive trends everywhere. The main change of the last year is the increase in enterprises’ investments in the creation of new technological solutions, scientific groundwork and personnel training. These trends are actively supported by the government and regional authorities.”[10]

Oreshkin complained that Central Bank monetary policy was too loose and pushing up inflation and leading to a weakening ruble exchange rate. He said that “weak ruble complicates the restructuring of the economy”.[11]

If the Russian economy was showing weak GDP growth, a conventional approach might be to accept a weaker ruble to boost exports and slow imports – while accepting some increase in inflation. But the economy is presently showing good GDP growth and has excessive inflation. Oreshkin seems to think that a weak ruble reduces pressure on Russian enterprises to restructure as Russia pursues a policy of “economic and technological sovereignty”.[12]

I accept that in some cases a stronger domestic currency policy can be used push business to become more efficient and productive, and it will happen in quite a few Russian organizations. However, later in the text I will argue that Russia’s very extensive “technological sovereignty” policy aims are unrealistic. Oreshkin is deluding himself when he claims that “in the coming years, this will have a significant positive systemic effect on the economy”.[13]

Like a number of other countries, Russia is considering introducing a central bank digital currency (CBDC) – possibly by 2025[14] — although the exact approach varies between countries. The Russian central bank says that the digital ruble will operate primarily as a means of payments and transfers. “CBDCs are not cryptocurrencies, but they use crypto’s underlying distributed ledger technology.”[15] There is nothing unusual in the Central Bank proposals.

Infrastructure

I have travelled widely in Russia and lived and worked for extended periods in Moscow, Irkutsk and Vladivostok (respectively in the European part of Russia, Siberia, and the Far East). While the privately built shopping malls are much the same in most large cities, the quality of publicly financed infrastructure can vary considerably. The Moscow metro system is extremely high quality (both the stations and the operation of the system) and an excessive amount of money has been spent on many streets near the center (and clearly some corruptly so), while regional city infrastructure can be quite dangerous for pedestrians and vehicles.

A May 2023 article by Ekaterina Zolotova looked at some of Russia’s infrastructure problems.[1] She says that “aside from pipelines, road and rail are the only way to move goods across Russia. Of the two, rail is self-evidently more important; a massive territory, a lack of access to maritime trade routes and a harsh climate necessitated as much.”[2]

Zolotova says “regional infrastructural disparities are explained by geography. The south and east developed much slower than the rest of Russia because the terrain and climate are difficult and harsh and because the low-density populations lived so far away from the main consumption centers.”[3] “Transport routes were thus concentrated in the European part of Russia, where a significant part of the population with higher incomes lives. Here, there is a much larger market for goods, a closer proximity to European markets and fewer geographic barriers.”[4] “Almost all the most important roads fan out radially from Moscow and St. Petersburg. Europe has therefore always been Russia’s biggest and most important trading partner, even if the specific beneficiary of trade changed throughout the years.”[5]

She says that even as Russia’s international trade with non-European countries increased in recent years, “it never really translated into infrastructural improvement. Moscow continued to rely on the existing road and rail networks and on the Suez Canal and the Black Sea port of Novorossiysk. The current state of eastern and southern transport systems is therefore comparatively poor.”[6]

The war in Ukraine and its fall-out have changed the “structure and direction of cargo flows. Instead of going through Black Sea ports or railways to the West, Russian goods flow south and east, through mainland Russia. The volume of direct rail transportation through land border crossings with China, Kazakhstan and Mongolia has also significantly increased. Border facilities and domestic Russian infrastructure were ill-equipped to metabolize increased trade with the rest of Asia. Far East ports, which account for the bulk of current imports and exports, are already operating at 100 percent capacity. Trucks are not enough to circumvent the bottlenecks; traffic jams increased, as did the time it takes for goods to reach China. Similar problems cropped up in the Caucasus.”[7]

Zolotova says that, “although rail and road are more expensive, inland water transport is untenable because of short navigational periods and a general absence of west-east rivers.”[8] Paul Goble writes that use of rivers and canals for transport has been adversely affected by lowering of water levels and an aging fleet of river ships and barges.[9] “Given the shortage of railways and highways throughout much of the country, rivers and canals carry as much as 80 percent of the nation’s cargo that the other branches do combined during the navigation season, a time that is limited by falling water levels and the absence of a sufficient number of river-based icebreakers to allow ships to pass for longer periods.”[10]

Goble notes that during the “special military operation” in Ukraine, Russia has only been able to use the Volga-Don Canal river system to shift smallest type naval vessels from the Caspian Sea to the Sea of Azov (next to Ukraine). Dredging the entire length of Russia’s numerous rivers, something that has not been done for many years, would be extremely costly. And Moscow’s problems with shipbuilding and Putin’s desire to build up the blue-water navy make it unlikely that Russian shipyards will produce the new riverine ships he is talking about.”[11] I briefly address Russian ship-building issues later in this text.

Power Realities

The breakup of the USSR allowed a considerable number of people to obtain control and/or ownership of many assets that previously were “state” property. Some of these people – commonly known as “Oligarchs” – played a very significant role in Russian politics prior to Putin becoming president in 2000 following the resignation of Boris Yeltsin. Putin worked to decrease the political power of these Oligarchs while building a system in which he had ultimate say on significant economic and political issues with the assistance of a generally competent team of economic technocrats and security orientated people (the later often dubbed “siloviki”).

I wrote an article in 1992, after my second visit to Russia, foreshadowing some to the economic problems that Russia was to subsequently suffer.[12] Mark Galeotti has produced an excellent (former Twitter, now X) podcast on the 1990’s in Russia, Yeltsin and the Oligarchs etc. and the influence on present-day Russia.[13]

As in 2008 the Russian constitution limited any individual to two successive presidential four-year terms, Putin arranged for Prime Minister Dmitry Medvedev to become president for a term before he returned to the presidency in 2012.[14] Not unexpectedly, Medvedev liked his new situation and there were clear signs that he wished to have a second term; but Putin had chosen his man well and Medvedev did not have the psychological strength to state publicly that he wished a second term and yielded to the wishes of Putin.

By early 2022 – at the time of the so-called “special military operation” in Ukraine – Putin had been the ultimate Russian leader for over 20 years. It would have been quite unusual if during this period his had not become to regard himself as indispensable to the future of his country.

His thinking also seems to have been significantly affected by his selected reading of Russian history and what he regards as some historical rights for Russia to dominate its near neighbors and play a crucial role in world affairs. In 2011 Dmitry Peskov, Putin’s press secretary, said that Putin “reads all the time, mostly about the history of Russia. He reads memoirs, the memoirs of Russian historical state figures.” In response, I wrote at that time: “Reading history is an excellent way of understanding the nature of people and their actions and reactions, but that understanding then has to be applied in a contemporary context with an eye to the future – and not used to justify existing notions. Putin would be well advised to read more widely; he has already read enough Russian history!”[15]

Various actions by other countries, including – importantly in my view – the actual and expected expansion of NATO, contributed to Putin’s views; and, indeed, those of many Russians. The Ukraine was particularly significant because its inclusion within NATO would have meant that Russia’s Black Sea Fleet would have been based in a NATO member country – ie in the Crimean city of Sebastopol.

Under the presidency of Putin the autonomy of Russian regions has been reduced by a series of steps which have replaced most elected regional leaders (and city mayors at sub-regional level) with Moscow appointed officials. Some regions have been more troublesome than others, most notably Chechnya in the Caucasus geographical area of southern Russia. The war in Ukraine has resulted in more responsibilities for regional authorities as Putin has focused on his military adventure and efforts to woo the so-called Global South to his side.

Less energy being exported to Europe and more to other markets means that some energy producing regions closer to Europe are likely to decline relative to other newly exporting regions. Having said this, the production of military equipment for the fighting in Ukraine has been boosted in some regions. Sociologist Alexey Gusev says that the invasion of Ukraine has not led to any form of regional separatism in Russia. He argues that it has more “closed the values gap between Russia’s provinces than widened it, boding ill for those with separatist aspirations”.”[16]

According to Gusev, since Sergei Kiriyenko’s appointment as the Kremlin’s deputy chief of staff in 2016, regional governor’s “have looked more and more alike, from their surnames to their faces to their biographies. The selection of governors has become personnel policy rather than public politics, with local clans gradually deprived of input, even in the most autonomous of republics, such as Tatarstan, Bashkortostan, and Yakutia. By 2022, every region’s executive branch was reliably dedicated to meeting targets set by the Kremlin’s domestic politics directorate. The same happened at the municipal level, as mayoral elections were effectively canceled in favor of the appointment of figures approved not by local bosses but by the Kremlin.”[17]

Guzel Garifullina[18] says that there are now more likely to be “politically inexperienced and risk-averse individuals” in the positions of governors and mayors. “Despite increased centralization under Putin and due to the country’s vastness and heterogeneity, subnational officials—governors and mayors—play a major role in policy implementation and everyday governance in Russia.”

Despite this, Garifullina says “the September 2022 mobilization illustrates some of the effects of the existing institutions. We saw regional and municipal officials minimizing engagement with the public, mostly refusing to provide any clarification or to make commitments when challenged by citizens and shifting blame to individual local agents when pressed. Importantly, in the absence of rewards for risky behavior, cautious officials were not overzealous either: in this system, there is little benefit to be had from extreme loyalty. Except for the governors of the (Ukraine) border regions that are in a very different situation, we did not see many examples of public officials’ statements actively promoting the war effort. Many governors up for reelection (in ballots heavily controlled by the Kremlin) tried to avoid the theme altogether. Their lack of experience in public politics and their disconnectedness from the public, characteristic for ‘outsider’ governors, sometimes led to massive public relations meltdowns. Overall, as a result of local implementation, all the drawbacks of the ill-prepared national draft campaign were reinforced and led to public grievances from initially relatively loyal popular groups.” “There is little reason to expect that a whole new population of local politicians with different personalities and backgrounds will appear overnight in contemporary Russia, a system that has been consistently sanitizing the field of public politics.”

Ilya Tsypkin of ratings agency ACRA has calculated that the annexed Donetsk and Luhansk People’s Republics, Zaporozhye and Kherson regions received a third of all gratuitous transfers from the central government to highly subsidized regions. “New regions received mainly non-targeted subsidies, which allows their authorities to decide for themselves what to spend money on.”[19]

The budgets of the annexed regions are approved for one year, and not for three, as in other subjects of the federation: it makes no sense to plan them for three years, says Vladimir Klimanov, director of the RANEPA Center for Regional Policy. Compared to other regions of Russia, the annexed regions spend more on national security and security forces (7.5% of spending versus 1.3% in Russia), social policy (57.6% versus 23%), and less on the national economy (4 .5% vs. 19.2%), utilities (2.2% vs. 8.8%) and education (12.8% versus 23.8%), the Gaidar Institute notes.[20]

Subsidies are only part of the spending on new annexed regions in Ukraine. Numerous infrastructure facilities are being built directly by federal contractors, patronage is provided by other subjects of the federation at the expense of their regional budgets, Klimanov noted. The presidential administration has attracted other regions to “sponsorship” assistance, similar to the model that was applied after the annexation of Crimea in 2014. The subjects generally do not give money directly, but deliver humanitarian aid, transfer vehicles and construction equipment, repair and build roads, schools, kindergartens. In particular, the tram traffic in Mariupol was restored at the expense of St. Petersburg.[21]

Corruption

Corruption has been a perennial problem in Russia. As a foreigner I have generally only experienced it on a small scale except in the 1990s when I was offered at various times part ownership of a newly “privatized” building or participation in a scheme to move stolen goods on Russian railways.[22]

In May 2023, Svetlana Orlova, Member of the Board of the Accounts Chamber of the Russian Federation, said: “In 2022, 1,100 people were convicted of corruption crimes, which is 11% more than in 2021. For the first time, the value of regained property and seized assets exceeded the amount of caused damage.”[23]

The most corruptive sectors are still public procurement, construction and reconstruction, she says. In addition, year after year, the Accounts Chamber of the Russian Federation identifies systemic violations related to zero result of spent budget funds, primarily in R&D, design, engineering, and estimate documentation. “Everyone applies for R&D money, but there is no effect,” Svetlana Orlova emphasized. “And they are constantly re-writing design and estimate documentation. The cost of work increases as a result. Then there are affiliated companies that cannot perform these works. And, of course, another problem is buying unused real estate and other property. We checked a lot in this respect and see the risks.”

The push for Russian “technological sovereignty” – to be described and analysed later in this text – is going to boost such corruption in coming years. Indeed, the stories being told to Maxim Oreshkin (discussed earlier) may be part of this!

Part B. Early Putin Period

First Steps

The collapse of the USSR in the early 1990’s meant that much of its bureaucracy was split into geographical areas, sometimes as new independent countries and sometimes less radically into Russian regions seeking more independence from Moscow. Not only did this mean that officials found it sometimes impossible to carry out normal governmental tasks, but looting of public assets and their use for non-governmental purposes became widespread. All this was especially disruptive because the centralized economic planning and financing of the USSR ceased to work for most organizations previously dependent on it; and, as an analyst working for a foreign investment fund in the 1990’s, I had many discussions on this extremely difficult issue with Russian managers.

The arrival of Vladimir Putin to the presidency in 2000 led to a serious effort to reduce that chaos without attempting to completely re-establish what had been broken. By providing stability at the top Putin allowed remaining officials to again effectively provide many of the essential services of a government in an industrialized economy. He also appointed many competent officials in areas that were not directly related to his views on national security. While Putin has never been fully committed to an open liberal economy, he was initially smart enough to see that the Western economic model gives superior results to a tightly regulated economy.

As one commentator has noted, in the early 2000s Putin really achieved the strengthening of the state: increasing the collection of taxes, restoring funding for state bodies, and creating a single legal field throughout the country. However, progress quickly stopped, giving way to rare local successes against the background of general stagnation, and in some places even regression. But eventually “regime-building objectives” took precedence over “state-building objectives”.[1]

“Strategy2020” Research and Report

For me, it was encouraging that Putin was prepared to commission a very detailed economic study and support implementation of many recommendations.

Putin asked Vladimir Mau (Rector of the Russian Academy of National Economy and Public Administration) and Yaroslav Kuzminov (Rector of the Higher School of Economics), to oversaw development of “Strategy 2020”, [2] a plan for Russia’s socio-economic development over the following decade. The report was completed in 2013. Around 1000 experts were involved in the Strategy2020 development, and it is worth listing the 21 expert groups to illustrate its analytical ambition and comprehensiveness.

The “expert groups” were: (1) “New Model of Economic Growth. Securing Macro-economic and Social Stability”; (2) “Budgetary and Monetary Policy, Macro-Economic Parameters for Developing the Russian Economy”; (3) “Reform of the Pension System”; (4) “Strengthening market institutions. Securing stable conditions for ownership and development of competition, stimulation small business”; (5) “Moving from stimulation of innovation to growth on its basis”; (6) “Taxation Policy”; (7) “Labor market, professional education, migration policy”; (8) “New schools”; (9) “Reducing inequality and overcoming poverty”; (10) “Development of financial and banking sector”; (11) “Health and a healthy environment living environment”; (12) “Real federation, local self-government, budgetary relations between the center and lower levels of government”; (13) “Increasing the efficiency of government investment and government purchasing, creation of a federal contract system”; (14) “Optimizing the role of government: reducing regulatory functions, securing transparency and good communication with business and society”; (15) “Managing government property and privatization”; (16) “Development of social institutions”; (17) “Reform of budgetary sector of the economy”; (18) “Reform of natural monopolies”; (19) “Overcoming territorial and information barriers: development of transport system, communications and information”; (20) “International position of Russia: economic benchmarks”; (21) “Development of economic and social integration in post-Soviet area”.

During the period when the this report was being prepared, I sometimes wrote commentary on some of the research and ideas being considered. My first comments were posted on www.russianeconomicreform.ru on 11 June 2011 under the heading “New Russian steel industry on China’s door step”;[3] and others can be accessed on the right-hand side of this site’s main page by clicking on a topic.

The final “Strategy2020” Report was very comprehensive (864 pages) as was released in 2013. I wrote a brief summary/evaluation which can be accessed here.[4]

In 2015, Yaroslav Kuzminov described his joint work with Mau in an interview with Meduza: “Putin instructed RANEPA head Vladimir Mau and I to form the group of experts that prepared his 2020 program, and the President’s laws were largely based on the elements of that 2020 program that he agreed with. He didn’t agree with everything we suggested — for example, we proposed more extensive pension reforms. But he agreed with the core, with the economic program, so we consider the program Putin used to win the election ours.”

[1] “Russian Universities to Introduce Mandatory Ideology Lectures”, Moscow Times, 26 October, 2022

https://www.themoscowtimes.com/2022/10/26/russian-universities-to-introduce-mandatory-ideology-lectures-a79194

[2] Andrey Pertsev, “The Faux Ideologies of Late-Stage Putinism”, Carnegie, 2 August 2023

https://carnegieendowment.org/politika/90292

[3] Andrey Pertsev, “The Faux Ideologies of Late-Stage Putinism”, Carnegie, 2 August 2023

https://carnegieendowment.org/politika/90292

[4] Andrey Pertsev, “The Faux Ideologies of Late-Stage Putinism”, Carnegie, 2 August 2023

https://carnegieendowment.org/politika/90292

[1] “Russian Universities to Introduce Mandatory Ideology Lectures”, Moscow Times, 26 October, 2022

https://www.themoscowtimes.com/2022/10/26/russian-universities-to-introduce-mandatory-ideology-lectures-a79194

[2] Andrey Pertsev, “The Faux Ideologies of Late-Stage Putinism”, Carnegie, 2 August 2023

https://carnegieendowment.org/politika/90292

[1] “Such unique times are rare in history”, Meduza, 8 August 2023

https://meduza.io/en/feature/2023/08/07/such-unique-times-are-rare-in-history

[2] “Such unique times are rare in history”, Meduza, 8 August 2023

https://meduza.io/en/feature/2023/08/07/such-unique-times-are-rare-in-history

[3] “Such unique times are rare in history”, Meduza, 8 August 2023

https://meduza.io/en/feature/2023/08/07/such-unique-times-are-rare-in-history

[1] “Russian Schoolchildren Return to Classrooms Changed by War”, Moscow”, Moscow Times, 2 September 2022

https://www.themoscowtimes.com/2022/09/02/russian-schoolchildren-return-to-classrooms-changed-by-war-a78706

[2] “Разговорыо важном”

https://razgovor.edsoo.ru/

[3] “Russian Schoolchildren Return to Classrooms Changed by War”, Moscow”, Moscow Times, 2 September 2022

https://www.themoscowtimes.com/2022/09/02/russian-schoolchildren-return-to-classrooms-changed-by-war-a78706

[4] “Russian Schoolchildren Return to Classrooms Changed by War”, Moscow”, Moscow Times, 2 September 2022

https://www.themoscowtimes.com/2022/09/02/russian-schoolchildren-return-to-classrooms-changed-by-war-a78706

[5] Alla Hurska, “Generation Z: Russia’s Militarization of Children”, Eurasia Daily Monitor Volume: 20 Issue: 134″, 18 August 2023

https://jamestown.org/program/generation-z-russias-militarization-of-children/

[6] “Such unique times are rare in history”, Meduza, 8 August 2023

https://meduza.io/en/feature/2023/08/07/such-unique-times-are-rare-in-history

[7] “Such unique times are rare in history”, Meduza, 8 August 2023

https://meduza.io/en/feature/2023/08/07/such-unique-times-are-rare-in-history

[1] Ben Aris, “LONG READ: How do Russian journalists work in a time of war?”, BNE, 15 August 2023

https://www.intellinews.com/long-read-how-do-russian-journalists-work-in-a-time-of-war-288110/?source=russia

[2] Sergey Medvedev and Ilya Goryachev, “Yarovaya Law and new data storage requirements for online data distributors”, Gorodissky & Partners, 7 August 2018

https://www.lexology.com/commentary/tech-data-telecoms-media/russia/gorodissky-partners/yarovaya-law-and-new-data-storage-requirements-for-online-data-distributors

[3] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[4] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006

“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023

https://www.documentcloud.org/documents/23880135-rad298

[5] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[6] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[7] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[8] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[9] Suzanne Smalley, “Russia’s vast telecom surveillance system crippled by withdrawal of Western tech, report says”, The Record, 19 July 2023

https://therecord.media/russia-telecommunications-sorm-surveillance-western-technology

[10] Jeff Schubert, “Russia Can Use Huawei 5G to its Own International Advantage!”, Russian Economic Reform, 30 June 2022

Russia Can Use Huawei 5G to its Own International Advantage!

[11] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006

“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023

https://www.documentcloud.org/documents/23880135-rad298

[12] “Sanctions-Hit Russia Wary of Over-Reliance on Chinese Tech – Bloomberg”, 19 April 2023

https://www.themoscowtimes.com/2023/04/19/sanctions-hit-russia-weary-of-over-reliance-on-chinese-tech-bloomberg-a80875

[13] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006