April 26, 2021 MEMRI Daily Brief No. 273

The Russian Economy: No Crash, No Progress

April 26, 2021 | By Dr. Vladislav L. Inozemtsev
Russia | MEMRI Daily Brief No. 273

The Russian economy might be considered inconceivable since it is backward and effective, fragile and sustainable, relatively small and quite huge at the same time. Today, Russia is not the world's second superpower as it once was. Its GDP is 10 percent less than Google's market cap,[1] and the nominal average personal income[2] stays at around 12 percent that of America's citizens.[3] But it is also the world's second-largest oil and gas producer and a huge market with 144 million customers and 117 billionaires.[4] Its economy suffered a drastic decline in the 1990s, it became one of the world's best performers in 2000s, and it has ceased to grow since 2014 as Russian President Vladimir Putin decided to bet on foreign policy adventures rather than on economic advances. Today, I would argue, the Russian economy has come to a perfect equilibrium: It is too infrangible to be destroyed by the outside crises and too simplistic to find new means for securing sustainable growth. This, to my mind, perfectly reflects the notion of "stability" that Putin values over any kind of change.


The Russian Economy Did Not Collapse As Many Predicted

Contemporary Russian economy took shape in the early 2000s after a disastrous decade of post-Soviet collapse. Two main factors contributed to its current fashion: There was, on the one hand, a huge inflow of petrodollars caused by a surge in oil prices after 2000; and, on the other, a massive underinvestment that happened after the Soviet Union's collapse. If one compares the average oil revenue of 2000-2004, 2005-2008, and 2011-2013 to the same figures for 1999, she or he finds it was $34, $223, and $394 billion per year higher[5] than at the time that Putin assumed Russia's presidency. In 2008, the "additional" petrodollars inflow accounted for around 17 percent of Russia's GDP.[6] At the same time, the investment into fixed capital declined from 38-42 percent of GDP in the late Soviet period to 16-18 percent in 2003-2006,[7] allowing the personal consumption to rise – at least as a share of national product. These two factors – rising financial inflows into the country and a larger share of the national wealth used for personal consumption – produced the Russian economic miracle of the 2000s when the economy grew by 85 percent from 1999 to 2008,[8] the nominal wages in dollar terms increased by 7.5 times,[9] and the foreign exchange reserves shot up from $12 to $478 billion.[10]

These years featured a very special kind of economic growth based on the advance of industries either underdeveloped or nonexistent in both Soviet times and in the 1990s. Between 2000 and 2007, around 70 percent of the GDP growth originated from just five industries all being tied to the consumer market:[11] wholesale and retail trade, restaurants and lodging, banking and financial services, residential construction and real estate operations, and telecoms and internet services providers. Actually the heavy industries – from metal processing to oil and gas, not to mention machinery or chemical production – never exceeded the Soviet levels of output (even in the 2010s the oil and gas production stood slightly above 1990 levels while in Kazakhstan or Azerbaijan it is at least three times higher).[12] This might be explained by the privatization in the 1990s: Most assets were acquired for pennies, and therefore the new owners got the chance to squeeze out any new competitor who might wish to start production from a greenfield[13] – this made the development of new industries essential for Russian business, which did quite well in the 2000s.

But by the time of the Great Recession, the Russian market was almost saturated – I would only mention that there were 156 mobile phones with sim-cards in use for every 100 people; the retail or banking industries also became well-developed while the use of internet technologies reached levels unseen in Europe or in the U.S. So as the crisis struck, the economy fell by the largest margin among all G20 nations, or by 7.9 percent,[14] even while the government allocated up to 13 percent of its GDP for different stimulus measures.[15] After a short recovery in 2010-2012, the growth rate fell to a mere 1.8 percent in 2013 despite high oil prices and a stable macroeconomic environment.[16] It is from here that our story truly begins.

As in 2014 President Putin invaded Ukraine and Russia faced Western sanctions, many U.S. observers believed the Russian economy would falter (President Obama famously stated in his 2015 State of the Union Address: "Today, it is America that stands strong and united with our allies, while Russia is isolated, with its economy in tatters").[17] But up to today, nothing like this has happened: The growth rates fell almost to zero (the Russian GDP advanced by only 0.3 percent annually on average between 2014 and 2020)[18] and the real disposable incomes declined by 10.6 percent during the same period[19] with no significant economic disruptions seen or popular protests recorded.

For all these years the Kremlin reiterated its will to accelerate growth and give the economy a push (Putin in 2012 promised that 25 million new jobs would be created,[20] a huge rise in personal incomes would be achieved, and inequality would finally become less visible), but nothing of it was actually delivered. Quite to the contrary: The government was forced to abandon the IRAs in 2014, to close the domestic agricultural market to foreign competition, to increase the retirement age starting in 2018, to devalue the ruble from around 30 to almost 80 to the dollar, and to raise different taxes and duties more than 20 times since the occupation of Crimea. The misuse of public funds (I will explain in a future commentary why I refrain from calling it corruption) remains enormous and the rise in public expenditures in most cases fails to produce increasing results (now Russia builds six times fewer new highways per year than it did in the early 2000s while allocating five times more funds for this purpose annually).[21]

Nevertheless, the economy did not collapse as many predicted it would. Life in the country became less affluent with the number of those officially recorded as poor (for this one should earn less than 11,300 rubles,[22] or $155, per month) rising from 15.5 to 18.9 million individuals,[23] but industries that provide foodstuffs and everyday staples are doing well as the average Russian these days spends 30 percent of her or his income on food alone.[24] Due to weak consumer demand, the inflation rates fell dramatically even despite the decline of the ruble exchange rate – CPI has been driven down from 11.4 percent in 2014 to 3.05 percent in 2019[25] with the Central Bank key rate as low as 4.25 percent, the lowest ever (it was raised to 4.5 percent on March 19, 2021).[26]

This System Looks Almost Immune To External Shocks But Unable To Develop Itself

For the first time Russia experienced what may be called a "de-dollarization" as most prices decoupled from the dollar rates and the profit margins were greatly reduced as businesses struggled to survive difficult times. The most important point I would like to make here is that the Russian economy does quite well just because of its primitive character: It does not produce a lot of goods whose consumption may be reduced substantially. People are buying cheaper foods but in the same quantities, they cannot live without ordinary clothing and home appliances, the restaurants are among the best in the world in terms of quality-to-price ratio, and the heavy industries survive on contracts to state companies and to the oil and gas industry. The economy in general benefits greatly from the inflow of incredibly cheap labor from the post-Soviet states (before the COVID arrived, there were up to 12 million migrants working in Russia, or 18 percent of active labor force).[27] I would say that the Russian economy is reminiscent of an abacus (счёты) as the American economy is of a MacBook laptop – but it is more stable just in the sense that the abacus has a lower chance than a MacBook does of breaking if dropped on a stone floor.

There is another problem coming from the very same cause: Such an economy cannot grow since it might be effectively driven only by an increase in consumer demand, which is not in sight. The government's reserves are not too big (the value of National Wealth Funds stays at 13.5 trillion rubles, or 11.7 percent of GDP[28] making the funds equal to $1,230 per every citizen, which, for comparison, in Norway is $245,870 per citizen[29]), and the Kremlin does not want to spend it since it believes the "hard times" are still ahead. During the pandemic, the government disbursed only 760 billion rubles, or less than 1 percent of GDP, for direct financial assistance to its subjects – but the economy contracted less than in the U.S., once again due to the fact people were forced to work and to do their business for a living. The human cost was large – in 2020, 324,000 more deaths were recorded in Russia than in 2019[30] (a 17.9 percent annual increase), but there were fewer lockdowns and less economic impact (these days in Moscow, with restaurants full and traffic jams persisting as at any time before, almost no restrictions remain in place). But, once again, the economy may recover to the pre-crisis level, but not exceed it. Funny enough, it is what I can call Russia's curse: In 2008 the Russian economy grew to the 1989 Soviet Russia level, and then fell back; in 2013 it once again recovered to 2008 levels and crashed again, in 2019 it stood around 2013 amounts, and retreated another time – so I would say that Putin's model is truly exhausted.

On April 21, 2021, Putin addressed the Federal Assembly (both houses of Russian "parliament," or rather a group of hand-picked officials voted in without real alternatives) with a speech in which he reiterated his commitment for economic growth promising some new stimuluses (first of all the writing-off of the regional budgets' debts to the central government, new investments into a highway from Moscow to Kazan' and Yekaterinburg,[31] which just a year ago was suspended due to incredible costs,[32] and new subsidies to families with children[33]), but I doubt they will be helpful. In the 2000s the real disposable incomes grew by 20-25 percent annually one year after another. To achieve the same result today the people have to earn up to 30 trillion rubles more every year, which looks impossible. Russian Finance Minister Anton Siluanov responded immediately after Putin's address, saying that the direct subsidies to the people will cost the budget 130 billion rubles this year,[34] or just above 0.2 percent of annual nominal incomes. Putin's economy remains based on oil exports, an effective tax system, huge state employment, and large allowances (in 2020, the share of pensions, welfare payments and other government subsidies in people's incomes rose to 21.8 percent and exceeded the Soviet levels while the share of entrepreneurial incomes dropped to record lows at only 3.5 percent of the total).[35] The president has no trust in business and his siloviki (a term that designates all the policemen, secret service employees, tax inspectors, and prosecutors) are pressing the entrepreneurs hard squeezing out their revenues for both public and personal needs. Many adventurous people emigrate (the "Putin exodus" has brought more than two million self-made individuals out of Russia in recent decades),[36] and there is no hope for a private business renaissance. I see no new industries that can lead the hi-tech sphere as the state tries to regulate the Internet and suppress any pro-democratic activities. The only means of securing growth, I will reiterate, is the injection of private money – and just last year we saw a perfect example of this kind when the government authorized its new mortgage-financing program, offering subsidized loans priced at 6.5 percent per year in rubles.[37] The move resulted in a 35 percent increase in approved mortgages[38] but produced no growth in residential construction compared to 2019[39] (Putin boldly announced the new goal of constructing 120 million square meters of new residential buildings per year in the coming years,[40] looking forward to increasing the 2020 figure by around 50 percent[41]), but as the program expires on July 1, 2021, I expect the trend to be not too impressive.

So, I would conclude by saying that it seems Russia found a way to secure the economic model Putin has crafted during his long reign. The inflow of petrodollars looks quite secure for at least 5-10 years, and the current prices serve well for balancing Russia's federal budget; the people are accustomed to current hardships and wish for things not get worse while having little hope for improvement; the state and the state-owned companies provide businesses by contracts crucial for their survival and by minimal investments needed; or­dinary people continue to spend their money for everyday needs supporting basic industries. This system looks almost immune to external shocks while being unable to develop itself. It does not represent any significant threat to the West since it is nothing like the rising China, but it provides a solid ground for Putin's lifelong rule. Of course, the country may awaken and its economy may once again become quite dynamic – but not under the current leadership. I am not sure whether this is good news or bad news, but this is a reality of which every Western politician should be aware.

*Dr. Vladislav L. Inozemtsev is MEMRI Russian Media Studies Project Special Advisor


[1], January 2, 2021;

[2], February 5, 2021.


[4], April 7, 2021.

[5], December 16, 2014.






[11], 2017.


[13], December 14, 2018.

[14], July 29, 2010.

[15] Горегляд, Валерий. Мировой кризис и парадигмы государственного финансового регулирования. Москва: без указания издате-льства, 2013, c. 216, прим, (Goreglyad, Valery. The World Crisis and the Paradigms of Governmental Financial Regulation, Moscow, publishing house not indicated, 2013, p. 216, note – in Russian).


[17], January 20, 2015.


[19], January 28, 2021.

[20], December 12, 2012.

[21], November 26, 2019.

[22], April 14, 2021.


[24], December 14, 2020.

[25] Xn----ctbjnaatncev9av3a8f8b.xn--p1ai/%D1%82%D0%B0%D0%B1%D0%BB%D0%B8%D1%86%D1%8B-%D0%B8%D0%BD%D1%84%D0%BB%D1%8F%D1%86%D0%B8%D0%B8

[26], March 19, 2021.

[27], September 18, 2019.

[28], April 22, 2021.



[31], April 21, 2021.

[32], March 8, 2020.

[33], April 21, 2021.

[34], April 21, 2021.

[35], August 3, 2020.

[36], February 2019.

[37], April 23, 2020.

[38], March 16, 2021.

[39], January 28, 2021.

[40], April 21, 2021.

[41], January 28, 2021.

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