The Coming Deluge: Russia’s Looming Lost Decade of Unpaid Bills and Economic Stagnation

 The Coming Deluge: Russia’s Looming Lost Decade of Unpaid Bills and Economic Stagnation

ANDREI KOLESNIKOV,  DENIS VOLKOV

NOVEMBER 24, 2021

ARTICLE

Summary:  Russia faces a litany of long-term economic challenges that will hobble its growth potential but likely won’t be severe enough to force far-reaching political change.

SUMMARY

With all the problems facing the Russian economy, many are wondering how the government will respond. As Moscow finally wakes up to the reality of climate change, the prevailing attitude among members of the ruling class appears to be that there is enough oil and gas to keep the state coffers full, buy voters’ loyalty, and control civil society and the media for as long as the country’s current leaders are in power (until 2036, when President Vladimir Putin may at last have to step down). What comes after that does not concern them: “After us, the deluge.”1

To project Russia’s likely development trajectory over the next ten to fifteen years, the authors asked twenty-three economists and business leaders to identify the biggest challenges for Russia, when they will materialize, what the consequences may be, and whether they can be overcome under the current political system.

Many of the challenges and potential crises these experts discussed are intertwined, including Russia’s human capital crisis, the numerous structural economic challenges it faces on energy and technology policy, and the apparent absence of a sense of urgency among the ruling elites.

Most of the key challenges facing the Russian political system are related to the lack of economic growth. One of the factors inhibiting that growth is the state’s excessive interference in the economy and indeed all other aspects of life, creating an overcentralized and ineffective administrative state. This overcentralization, coupled with constraints on the media and other outlets for freedom of speech, means that the Russian authorities get little feedback and consequently have at best a blurry picture of what life is really like for average Russians. The country’s economic risks are also exacerbated by unaddressed environmental challenges and the lack of steps being taken to address them, such as decarbonization.

Most of the economists and business leaders interviewed for this study agree that Russian elites are aware of the problems facing their country but are mired in inaction by feelings of complacency and a widespread reluctance to engage in any long-term strategic planning or change: the only acceptable changes right now are short-term plans with instantaneous effects.

The respondents agreed unanimously that the authorities will not try to change Russia’s development vector within the country’s existing political and economic models. Unless something drastically changes, stagnation in the broadest sense of the word—from economic depression to social apathy—is the only possible medium- and long-term scenario for Russia.

INTRODUCTION

Russian President Vladimir Putin is a lucky man. When the coronavirus pandemic hit, a group of prominent Russian economists suggested that the Kremlin embrace the kinds of economic stimulus and social welfare measures that Western governments rushed to implement.2 Even as the price of oil—the lifeblood of the Russian economy—crashed to multiyear lows, Putin conspicuously waved off such ideas.3

Instead, he placed his faith in an eventual economic rebound that could rekindle overseas demand for the natural resources that have made Russian elites fabulously rich. The name of the game was pursuing (relative) fiscal austerity, strictly hoarding the country’s vast hard currency reserves and rainy-day funds, and offering targeted assistance to the well-connected insiders who needed a little extra something to tide them over. Once again, the people who had to tighten their belts were not those who run state-linked corporations but average Russians, whose real incomes have repeatedly fallen over the past seven years.4

The ongoing surge in global energy and commodities markets that is roiling everyday life and disrupting businesses across Europe and in other parts of the world provides another illustration of how difficult it would be to persuade Russia’s leaders that they should execute big policy moves now to guard against future economic stagnation. They have become quite confident that there is little about the country’s economic model that cannot be sustained over the long haul. Nor is there anything on the immediate horizon, in their minds, that poses a systemic threat to the economic system that Putin’s approach to governing has created.

Why, they ask, should they pursue major reforms if such measures might jeopardize political stability? Why reduce corruption, the predatory role of the state, creeping monopolization, or the flimsiness of property rights if these characteristics are key elements helping keep the Russian political system glued together? Why would the Russian authorities want to sever the paternalistic bonds that link poorly paid average citizens to the state, lest the Russian people become overly demanding that their material needs be met or that they be given real rights and protections from the arbitrary, petty state harassment they face each day?

Despite the perceptions of Russia’s ruling class, many economists and experts (including the authors of this article) posit that the Russian political system faces many risks and challenges—political, social, economic, and even psychological—that could bring major hazards earlier than expected, before the country’s current decisionmakers leave the scene. Compiling a catalogue of these risks is important. With that in mind, in the summer of 2021, the authors conducted an in-depth survey of twenty-three leading economists and business leaders from various sectors and countries, including ones who have held government positions (see appendix 1). (Some of them, understandably, asked to remain anonymous.) Two of them are foreigners who have worked in the Russian business community for many years; several of them live and work abroad.5

The survey respondents’ main conclusion is that, despite the gravity of the challenges Russia faces, hardly any of them expect “either the collapse of the regime or its democratization,” for the foreseeable future, as Russian economist Dmitry Travin put it.6 All twenty-three interviewees were unanimous in their conviction that the Russian establishment will make no effort to substantively change the country’s existing development vector, political structures, or economic model.

THIS, TOO, SHALL PASS

“There is no need to grieve; you’ll make yourself ill. After us, the deluge.” This phrase, attributed to Madame de Pompadour, mistress of King Louis XV of France, portrays the prevailing mood of the Russian establishment today.7 What brings the quotation to mind is how, until recently, Russian political and economic elites concerned themselves with everything except the country’s real medium- and long-term challenges.

For example, Russian elites began grudgingly discussing climate change just recently, finally recognizing the gravity of the situation. The country’s most forward-thinking economic policymakers, who before had skeptically dismissed the problem of the global energy transition, are starting to occasionally refer to it: this includes Finance Minister Anton Siluanov, First Deputy Prime Minister Andrei Belousov, and Putin’s newly named special envoy for sustainable development, Anatoly Chubais.8 Numerous discussions conducted for this study with knowledgeable individuals (including the survey respondents and others), who have some understanding of how those at the top think, confirmed the following hypothesis: the Russian ruling class’s motto seems to be, “There’s enough to last for our lifetimes.”

In short, Russian political elites are confident that so long as they are in power, there will be enough oil and gas to raise the necessary revenues for the federal budget or to buy voters’ loyalty. Likewise, they believe that the Russian state will remain well-provisioned enough to completely suppress civil society and the media and to keep state propaganda channels active for maintaining control over the segments of the Russian population that depend on the state. And afterward—perhaps after 2036, when Putin will be required, in theory, by the Russian constitution to step down—well, afterward: the deluge.

There are several reasons for this assessment. First, Russian elites are content with the country’s existing model of governance and accustomed to operating within it. Second, decisionmakers in Russia are only prepared to selectively cherry-pick short-term policy measures that may offer comforting, swift improvements to state-tabulated economic data, measures such as payments to families with children.9 As a result, it is more important to Russian leaders to offer reassuring data and forecasts than it is to give accurate, sober assessments of the problems the country faces and how they can be addressed. This is one manifestation of what multiple interviewees referred to as a “crisis of management.”10

This state of affairs is reminiscent of the last years of the Soviet regime before perestroika. During that period, there was also “a consensus of inaction,” as economist Andrey Movchan dubbed it during the discussions for this study.11 In one of the author’s previous work, this phenomenon also has been referred to as a “bad equilibrium”: members of elite clans are afraid of taking action or even speaking openly about problems because doing so might cost them their positions in the establishment.12

The days of Russian authoritarian modernization—large-scale programs prepared by experts for the powers that be, such as Strategy 2020 and the 2017 proposal by the Center for Strategic Development—are over.13 The country’s current system has two founding principles that are inviolable: political authoritarianism and state capitalism. The only changes allowed under such circumstances are technocratic improvements from within with short time horizons and rapid political effects; no other policy or strategy recommendations are acceptable. The underlying logic is that such an authoritarian system can lose its legitimacy, but it must not lose the loyalty of the masses or its veneer of legality (its formal conformity with legislation, even if that legislation is repressive).

THE NATURE OF THE CHALLENGES

Russia faces a series of grave, intertwined challenges including severe underinvestment in human capital, other major structural causes of macroeconomic stagnation (including an outdated energy grid), and a lack of political will among its leaders to tackle these problems.

For example, Russia’s human capital crisis, which the surveyed economists and business leaders mentioned frequently as one of the main challenges for the country’s development, is both a cause and a consequence of the inefficiencies of the Russian economy. Brain drain is just one part of the problem: Weak economic growth, stagnant incomes, and limited opportunities to build job skills are eroding the quality of Russia’s workforce, and the country’s poor human capital in turn further restricts opportunities for economic growth and improved labor productivity. Alarming trends in Russia’s educational system are already evident, particularly the increased popularity among younger Russians of ending their education at the high school level or pursuing vocational degrees instead of a college education because of low family income and a desire to join the job market faster.14 In the medium and long term, these trends could further degrade the quality of human capital.

Various potential economic risks and crises do not always develop equally quickly, though they often appear in parallel. The respondents estimated that many of the lasting consequences of some challenges Russia is grappling with—such as the decarbonization of key parts of the global economy, a significant decline in state budgetary revenues, deep economic stagnation, Russia’s loss of military and technological parity with leading powers like China and the United States, and depopulation—may appear in ten to fifteen years or even further in the future. Some challenges are already present and growing, such as inequalities in income, wealth, economic opportunities, and political rights. Many of the surveyed experts noted that it is nearly impossible to predict which major problems facing Russia will blow up or when that will happen.

The respondents assessed the adaptability of Russia’s political and economic systems to potential and existing challenges, despite the seriousness of those challenges, to be fairly high thanks to the continuing medium-term balance of the federal budget and the significant indifference and political apathy of ordinary Russians. The expert respondents thought that top Russian officials are unlikely to pursue major changes, enact an ambitious modernization policy, or otherwise respond to pressure for them to act. Overly far-reaching changes could destroy the balance of power and the system’s existing vested interests. For the most part, Russian elites are content with the status quo or are simply afraid to challenge it head on.

In principle, Russian elites do recognize that certain challenges exist, though there are some differences between the views of the siloviki, or the national security, intelligence, and law enforcement services, and those of civilian elites. Limited bureaucratic moves are gearing up around the most obvious risks that were previously ignored or disbelieved as recently as in early 2021. For example, governmental working groups have been created to support the adaptation of the Russian economy during the looming global energy transition. Yet these groups have not been tasked with addressing Russia’s failure to cut carbon emissions; they are instead focused on making sure that budget revenues will remain sufficient to keep the existing system in place and to mitigate the effects of policy moves pursued by China, the European Union (EU), the United States, and other key global players.15

Their approach is to find limited ways to adapt to the challenges facing Russia without changing the foundations of the country’s political and economic systems. Any efforts to wean themselves off of lucrative oil and gas rents, their thinking goes, need to be designed to replace these revenue streams with other opportunities for rent seeking. Economist Oleg Buklemishev pointed out these dynamics, saying,

Past attempts at modernization in Russia frequently relied on rents squeezed out of certain segments of the population or enterprises. The reduction in the volume of accessible hydrocarbon rents at a time when Russia needs to address the challenge of global competition (even in the most conservative sense) will again lead to a search for rents in other sectors ([a reality that the resulting] pressure on the [country’s] metals industry and other exporters has demonstrated). The imperative of redistribution (to some degree, objective) will thus motivate growth in state mechanisms for doing so.16

RUSSIA’S NEGLECTED HUMAN CAPITAL

It is worthwhile to examine each of the main challenges Russia faces in turn, starting with the one closest to the Russian people themselves. The decrease in the quality of Russia’s human capital is a colossal, important issue that almost all of the study’s interviewees mentioned.

The stakes are quite high. This challenge “relates to all aspects of life in Russia and undermines all institutions, including the state,” as Evgeny Gontmakher put it.17 The problem is “civilizational” because it could result in the “dumbing down of the population,” according to Sergei Aleksashenko.18 Sergei Guriev discussed the issue at length, saying,

In the long term, Russia’s main problem is the deterioration of human capital. Russia inherited an important competitive advantage from the Soviet period, but this advantage—its education system and respect for human capital—is constantly being demolished; educated people are leaving; colleges and schools are falling behind their peers. It’s possible that, in ten or fifteen years, Russia will not have obvious sources of economic growth or be catching up to its neighbors.19

One central concern is the steady exodus of skilled Russian workers and the atrophied job skills of those who stay behind. This issue is related to politics, of course: after all, emigration, even if it is not so significant, continues, as do the forced departures of those persecuted for political reasons. As Vladimir Gurevich put it, “The current shortage of skilled labor is seen most clearly in the IT sector; the shortage of workers at any large construction site is high enough to prompt proposals to send over soldiers and prisoners, or increase migrant inflows.”20 The surveyed experts raised the subject of emigration repeatedly: most of them viewed the loss of active and highly skilled working-age Russian nationals as a serious problem that reduces the country’s human capital, particularly among younger generations. “By 2030, [I estimate that] the working population will be down by 7 million,” said Nikita Maslennikov.21

Furthermore, it is important to note not just who is leaving, but also who is staying and by extension who is willing to adapt to the prevailing political and economic conditions in Russia, including the risks of marginalization. These are segments of the population that derive their income from state coffers and who prefer to work for a small but stable salary without the risks of starting their own business; millions of Russian workers choose reliable careers in the security services, the military, and law enforcement, as well as various levels of the civil service.

One of the authors’ previous studies showed that most Russians choose stable jobs, particularly in the state sector, even though they dream of greater independence for their children, mainly in small businesses.22 However, because of the realities of the Russian labor market, young people are more likely to opt for predictable, leisurely career paths in the state apparatus or in large companies. Members of this generation do not have much choice; even if they view careers in the private sector favorably, it is hard to ignore the fact that more and more parts of the Russian economy are coming under the increasing control of the state.23 (This attitude is evidenced by the results of opinion polls and focus groups that the authors conducted in August 2021 as part of a research study on the views of Russian youth.24)

As noted by one expert on education who wished to remain anonymous due to his partial affiliation with the government, this category includes families that cannot afford to send their children to a good college.25 There is also a belief in such quarters that a college education is not necessary because it is easier and faster to enter the job market by putting on the uniform of a police officer or the name tag of a sales floor manager, jobs for which a vocational degree is sufficient.26

The same expert said that this situation reflects a reduction in family resources and in the time horizon considered when selecting educational paths: they are not thinking (strategically) about a distant future. This is indirect evidence that the economy is not developing [and] that there is no demand for complex knowledge and modern skill sets. The same applies to continuing professional education: all calls to develop it go unheeded. Professional skills are not being advanced, [as] the economy does not necessitate it, and continuing professional education in some sectors (even for esteemed professions like doctors and teachers) is increasingly [hit or miss]. The time horizon when the population will clearly recognize [the scale of the problem] and that [these] children “don’t have a good future” is five to seven years.27

One of the key problems this interviewee was alluding to is the uneven nature of Russia’s educational system. Some low-end universities pass off shoddy degrees as high-quality credentials; though the shortcomings of these programs are apparent to education specialists, they may not become apparent to the families that are being duped for several years.

The diminishing quality of Russia’s human capital is linked with several other problems. These include uneven regional development (in part because the remaining skilled workers tend to cluster in major metropolitan areas like Moscow and Saint Petersburg), mediocre healthcare and education systems (with analogous regional inequalities); a shrinking and aging working-age population; stagnant labor productivity due to difficulties with adapting to technological change; pervasive inequality and poverty, and a sharp deterioration in the observance of human rights and property rights, which diminishes the potential for economic returns from disenfranchised and apathetic workers.

There are already signs of depopulation as a result of Russia’s high mortality rate, low birth rate, and decreasing migrant inflows.28 As Dmitry Prokofyev noted, the population is becoming more concentrated in three major metropolitan areas—Greater Moscow; Greater Saint Petersburg; and the urban centers of Rostov, Krasnodar, and Sochi, exacerbating the population declines in the country’s remaining regions, which are beginning to run out of working-age laborers. Vladimir Gimpelson stressed that the labor force is growing older.29 While the experts do not expect mass emigration, they did stress that the brain drain trend will likely continue.

All these economic woes are leading to a high degree of social apathy, a lack of readiness to try to improve one’s social status, and acclimatization to deteriorating conditions as the new normal. One leading Russian expert on social policy, who views this apathy as the most serious challenge, posited, “this crisis is systematically developing into other types of crises.”30

Oleg Buklemishev referred to one aspect of this challenge as “socio-technological.”31 Unmotivated and underpaid workers cannot overcome the technology-related challenges underway in the Russian economy, including technological lag and stalled labor productivity. As Buklemishev went on to say, adaptation to new technological frontiers requires buy-in from citizens too.

A significant proportion of modern technology is social in nature and requires a certain state of society for its implementation ([such as] digitization or vaccinations). The existing mechanisms of public administration in Russia do not rely on feedback from the public and therefore do not facilitate the implementation of modern technological solutions in the interests of the majority, or [even] results in the perversion of these solutions.

The decline in the quality of Russia’s human capital is also driven by low living standards, stubbornly high levels of poverty, and falling or stagnant incomes. Essentially, the authorities factor in a degree of stagnation into the important economic targets they set for the country, perhaps without even realizing it. As Vladimir Gurevich observed, “Even the national target for 2030 is income growth that is not below inflation (in other words, the target will be considered achieved as long as real income simply remains stagnant over the coming decade).”32

Income stagnation is exacerbated by inflation risks and reductions in consumers’ purchasing power. Multiple experts noted that this problem could fuel protest sentiments, so the state will do everything it can to “put food on the table,” in the words of Johan Vanderplaetse. Of course, the problem cannot be solved through handouts: a lasting solution would require changing the country’s model of economic development, something that the authorities are unwilling to do.

Inequality is another facet of Russia’s daunting human capital story, linked closely with the prevalence of stagnant incomes.33 “The staggering poverty of some [is mirrored by] the exorbitant wealth of others,” as Oleg Vyugin said.34 This is not just a question of income, regional, and wealth inequality. One expert described the problem as follows:

[It is not just a matter of] inequality in the classical definition, but inequality from the viewpoint of basic social services. Different segments of the population have vastly different access to healthcare, education, state services, and other infrastructure and basic services. . . . When I talk about inequality, I mean not only social inequality and income inequality, but also inequality of rights.35

THE STRUCTURAL DRIVERS OF RUSSIA’S LACK OF MACROECONOMIC COMPETITIVENESS

Russia’s tendency to underinvest in its human capital has profound economic consequences that manifest in a multitude of areas, including public health, technological innovation, the environment, and general macroeconomic competitiveness.

There is a clear link between economic risks and the pandemic. Its consequences are difficult to assess: the forecasts are unstable and constantly are being upended by the latest epidemiological developments and the contagion’s effects on markets, including the labor force.

Meanwhile, the surveyed experts attributed Russia’s technological underdevelopment to the nature of the country’s political regime, which is not receptive to innovations and tends toward self-isolation. Among other things, “technological underdevelopment is linked to challenges in maintaining military parity and creating innovative weapons,” said Vladimir Gurevich.36 He went on to estimate:

The military sphere is highly classified, but Russia [likely] will not be able to maintain military-technological autonomy beyond a period of fifteen to twenty years. It should also be taken into consideration that in modern realities—and this is a global trend—the development of weapons is sustained by the transfer of technologies from civilian industries to the defense industry rather than the reverse, as was the case several decades ago.

At the same time, there are limits to this technological lagging, said Sergei Guriev, especially when it comes to maintaining societal control. He went on to say,

The Russian authorities will invest in technologies that allow them to collect information on the lives of the [Russian] people through video surveillance, facial recognition, and social media data mining systems, as China already does, in order to try to prevent protests and identify where protests might break out. In this sense, new technologies could help the Russian authorities curtail problems related to a lack of [societal] feedback.37

ENERGY TRANSITION AND DECARBONIZATION

The general economic risks Russia faces are linked directly to unaddressed environmental challenges too. This includes not only overt ecological problems but also the obvious structural changes in global markets prompted by decarbonization. Will Russia be able to compete in a low-carbon world economy and identify new market niches? According to one expert, “A green economy, above all, requires a successful search for new types of economic activity (such as plants that produce batteries, electric vehicles, and wind turbines).”38

Decarbonization is perhaps one of the few challenges of which the Russian authorities have taken note, albeit because they may ultimately need to replace certain lucrative rents from hydrocarbons with other revenue streams without giving up the underlying extractive and redistributive state policies they favor. The challenge of decarbonization will materialize in the medium term and the long term. “The reduction in demand for oil could create serious problems for Russia’s budget as early as 2040,” said Mikhail Krutikhin.

Incentivizing oil production through tax concessions won’t help, because by slightly increasing the potential for oil exports, Russia will [presumably] reduce its budget revenues ([in effect] robbing Peter to pay Paul). Oil suppliers with lower-priced oil would take over the market, and Russian oil would no longer be competitive.39

The way the Russian establishment views this challenge will depend on how frightened the elites get. Not long ago, no one with power in Moscow took the global energy transition seriously; today, everyone has started analyzing the consequences of this shift with great bureaucratic zeal.

Granted, the “global energy transition and decarbonization will not necessarily follow the most radical scenarios,” Vladimir Gurevich posited.40 He went on to estimate:

However, even a modest transformation is certain to mean growing losses for the Russian economy within this decade. Annual losses [that will likely total in the billions] for exporters on the back of the European Union’s introduction of the carbon tax are the least of the problems. Much more serious is the potential loss of former positions as a result of shrinking key markets for the sale of natural resources (as well as other products that [will] become subject to ‘responsible production’ requirements). How quickly this process develops will largely depend on the dynamics of the electric transportation market, which already differ from the expectations of just two years ago; the same dynamics can be observed with a retrospective analysis of forecasts for the development of green energy generation throughout the 2010s.

The challenge is not confined to the potential loss of stable budget funds (and consequently a reemergence of the issue of state debt) due to the loss of oil and gas revenues. What is at stake is a fundamental change in the architecture of the global economy. As Nikita Maslennikov noted, trendlines suggest that the Russian economy is projected to grow measurably slower than the global economy over the next fifteen or so years. “This is classic stagnation with elements of a structural crisis.”41 Citing a multitude of other looming macroeconomic shifts like a global minimum corporate tax, regional trade and investment partnerships, and the prospect of World Trade Organization reforms, Maslennikov went on to state that “for now, Russia is still [near] the proverbial train, but maybe out [on the station platform] rather than in the passenger compartment.” In short, Russia is at risk of falling behind and barely carving out a place for itself amid monumental global economic changes, rather than being in control of these shifts.

THE RUSSIAN STATE’S ECONOMIC MEDDLING AND AVERSION TO REFORMS

Many of the economic challenges Russia faces are political in nature, or at least shaped by international geopolitics and domestic politics. This is a fundamental theme that highlights a major underlying problem: “The key contradiction” for Moscow, in the words of Vladimir Gimpelson, “is the disconnect between long-term trends toward technological, educational, and cultural modernization on the one hand and the protective, conservative policies of the establishment on the other.”42

All the surveyed experts repeatedly stressed that these economic challenges and, above all, what Oleg Vyugin called “the loss of economic competitive ability on a global scale” have their roots in politics.43 Elaborating on this point, Sergei Guriev claimed that “the main challenges facing the Russian political system are those related to the lack of economic growth.”44 Furthermore, he went on to say, “Russian political institutions have ossified; their current state does not make it possible to create incentives for investment, raise foreign capital, protect property rights, sustain competition, or ensure equality before the law. Without [these things], it is impossible to count on economic growth.”

A fundamental cause of the country’s enduring economic problems, according to a number of the experts, is the entrenchment of powerful elites and their skepticism of the kinds of major changes needed to keep Russia economically competitive and to keep their hold on power secure. Above all, this dynamic concerns state interference in all aspects of the country’s political, social, and economic systems.

The Russian state’s dominant political role and tendency to interfere in the economy limits investment and has rendered many citizens dependent on the state, thereby reducing the activities of small- and medium-sized businesses and bringing down labor productivity. To borrow a term used by Vladimir Gurevich, this challenge can be described as “the expansion of the nonmarket space.”45 Gurevich further said, “As the economic situation deteriorates . . . the state’s interference in practically all key aspects of the economy is rising. . . . The economy continues to function, albeit not efficiently, because it is still market-based. However, if the rate and nature of the regulatory expansion continue, over the course of several years, the market space could shrink [even more],” making these problems even harder to resolve.

Even so, as Oleg Buklemishev noted, the government’s interference in the economy also has some constraints due to resource limits (since the state cannot take over everything, and state officials still see the benefits of leaving some things in the hands of private businesses) and administrative limits (given that the government cannot manage everything, especially since it is not a very effective manager).46

A political regime that interferes excessively in all aspects of life inhibits economic growth, a general point that Sergei Guriev reinforced.47 Such a regime also creates an overcentralized administrative state (something almost all discussion participants mentioned), one that “does not work well for governing a country as large as Russia,” as Elina Ribakova said.48

In addition, such a regime tends to exhibit extremely poor day-to-day governance because lower-level officials want to avoid responsibility for making decisions. Furthermore, the overcentralization of decisionmaking (as well as the diminished levels of competence displayed by individuals working inside the system) is at odds with objective trends of social development. Contradictions arise, according to Oleg Bulkemishev,

between the centralization of authority and the existence of management competency, between the centralization of governance and the interests of the growing minorities that are not taken into account, between the centralization of authority and a reluctance to take real responsibility, and between the centralization of resources and the real engines of power determined by the market.49

The lack of feedback channels and communication, including between professional communities, limits the Russian political establishment’s ability to formulate sensible economic policy. “Structural policy,” observed Nikita Maslennikov, “always means communication and continuous dialogue between those who make decisions about the economy and those who are affected by these decisions. So far, we’re not doing very well with that.”50 Similarly, Sergei Guriev pointed out that

the Russian authorities don’t get feedback because of centralization, the repression of media freedom, and censorship. The Russian authorities don’t have a very good understanding of what life is like for ordinary Russians. To some extent, this is a part of their conscious strategy: they are intentionally destroying the feedback system because the risks that this system presents in the development of alternative viewpoints are more severe for the Russian establishment than the advantages of receiving feedback.51

Self-isolation begets general economic underdevelopment, and serious consequences follow. After all, as Mikhail Krutikhin noted, “Without participating in international cooperation, and without access to the innovative ideas and technologies and the experience and capital of developed countries, Russia is doomed to remain behind.”52 The surveyed experts believed that Russia’s course toward political self-isolation and confrontational behavior in foreign policy is counterproductive not only because it corrodes the country’s investment climate and closes it off from new ideas and technologies; these actions also result in excessively dangerous tensions with the United States and the EU, depriving Russia of the potential benefits of greater international cooperation. In parallel, according to a number of the experts including Oleg Vyugin, there is a risk that Moscow will fall further behind and lose military-related technological parity with the United States and China.

RELATED ANALYSIS FROM CARNEGIE

Digital Authoritarianism With Russian Characteristics?

How Proponents and Opponents of Political Change See Russia’s Future

The political course of the Russian regime is self-protective. Such conservative instincts affect nearly all aspects of policymaking and make it more difficult for Russia to benefit from global trends or pursue meaningful modernization. This course not only drags down development but also distorts the regime’s understanding of important happenings in Russia and around the world. The result is all too predictable: inaccurate and often irrational reactions to major global events.

As a result, this distorted risk assessment itself becomes one of the main dangers as “the risks of change are considered higher than the risks of the status quo,” in the words of Vladimir Gurevich.53 “When changes become inevitable and unavoidable,” he continued, “the associated risks can materialize in the most radical form. That’s the magnitude of [these] status quo risks.” In such circumstances, irrationality is closely linked with the choice to pursue self-isolation. As Gurevich put it, “The Russian authorities will not necessarily react rationally to . . . challenges. It is quite possible that the confrontation between Russia and its neighbors will intensify, and this will lead to even greater isolation and to harsher sanctions, which will further undermine economic growth.”

The behavior of the elite Russian siloviki holds special significance for real-world politics—in challenging ways that affect the deterioration of the investment climate, social systems, human capital, and even public sentiments. In describing the nuances of this challenge, Andrey Movchan suggested that there is a transformation of the self-identity of the elite siloviki from a position of ‘protect[ing] the power [structure] in exchange for privileges’ to [exercising power for its own sake]. An intermediate challenge is the growing economic influence of the [business interests of the siloviki] including the development of underground and illegal businesses (as well as the export of services), the redirection of tax flows toward shadowy power structures, and so on.54

The majority of the economists and business leaders interviewed (including those who are close to political decisionmakers) agree that the Russian establishment is well aware of these problems. The main challenge is the authorities’ condescending attitude toward society at large and an unshakable complacency. “They consider their economic policy to be ideal, Dmitry Prokofyev said.55 He went on to say:

They [have managed] to carve up the Russian economy into several parts—the export economy, which is doing splendidly; the state-run economy, which is doing just as well; and the domestic consumer economy, which gets worse with every year, but its participants have the option of moving to one of the other two sectors. It’s almost like several countries with informal borders.

The result is that political and economic elites are a rule unto themselves and do not answer to the people. As Oleg Buklemishev put it, “The public has been deprived of its agency, just like under the Communists: [the operating mentality is that] the chef knows [best] what you want to eat. Meanwhile, the chef lives in a world of his own and has little contact with reality, feeding the public” whatever he sees fit.56

In other words, the very limited understanding of the need for change will paradoxically inhibit the decisionmaking necessary for these changes. Mikhail Dmitriev described this mechanism as follows:

Adaptation to the conditions of the global energy transition will be constrained by influential special interests that represent traditional natural resource sectors of the economy. Other obstacles will include higher risks of doing business, particularly for medium-sized and large companies. This will stall innovation and the exploration of new markets in non-resource-based sectors, where accelerated growth is necessary to make up for the losses in traditional sectors of the Russian economy.57

At the same time, as observed by Oleg Vyugin, for example, the authorities “do not believe that these challenges can disrupt the material benefits collected from the existing political system” while they remain in charge.58 This is another side of the same “after us, the deluge” logic. These optics can be described with a phrase from sociologist James C. Scott: “seeing like a state.”59 Furthermore, as Vladimir Gimpelson observed, “the costs of changing the course grow with every new kilometer of repression and prohibitions. Fear of change rules politics.”60 Similarly, in the words of Vasily Solodkov, “the establishment does not respond to questions, because its own key performance indicator is [being] irremovable, and everything else is secondary.”61 The overriding goal is simple: “The responses to the challenges are reasonable if you presume that the objectives of the authorities are to collect rents and to stay in power as long as possible,” as Dmitry Travin stated. “When these are the objectives, it’s difficult to expect different actions.”62

“The Russian authorities fully understand all of the risks and problems that Russia faces,” said Sergei Guriev.63 “It is simply that their interests differ from those of ordinary Russians. Their interests contradict the interests of national development, and they are completely content with the status quo. Their goal is to hang on to power. Therefore, we should not be surprised that their actions are aimed at shoring up the apparatus of repression, strengthening censorship, investing in propaganda rather than human capital, and using foreign policy for their own benefit.”

Other experts agreed with this perspective. “It’s not possible that they don’t understand the challenges, but the authorities behave as if they are only here temporarily, without real long-term plans and prospects,” said Mikhail Krutikhin. “The behavioral model of the higher echelon [of Russian elites] is monetization of administrative resources, urgent monetization.”64 A change in the establishment’s behavioral model, according to Nikita Maslennikov, “would require the elites to revise their habits and the regime’s customs. . . . Whether the regime is ready for [a change to more moderate leadership by way of] a self-initiated Thermidor [counterrevolution] is a big question.”

“Everything is obvious to everyone: there is no escaping the arithmetic or the spirit of stagnation,” maintained Oleg Buklemishev.65 “None of the economic decisionmakers pursue optimization because of its high personal and administrative risks; there is a tacit agreement regarding the preservation of the status quo in the relatively short temporal horizon of the current political administration, and hardly anyone looks beyond that horizon.”

The result is a “consensus of inaction.”66 Andrey Movchan described this consensus as follows. He notes that Russia’s economy is heavily driven by natural resources (especially hydrocarbons) that produce lucrative revenue streams that are especially susceptible to elite capture. These elites would rather keep the economy structured in this way than allow a more diversified economy with entrepreneurial energy to develop. Both ordinary citizens and fellow elites acquiesce to this arrangement by way of the aforementioned consensus. As Movchan puts it,

Because the elite maintains an effective [stranglehold on the economy], the public . . . prefers to receive its modest share [of the proceeds] . . . rather than risk changing the model and embarking on a struggle with the elites. . . . At the same time, all of the elites reason that in such conditions a consensus of inaction is the wisest strategy, especially considering the fact that serious problems have been forecast repeatedly and have always been fended off, and there is a hope that they will not materialize during the planning horizon. . . . [Meanwhile,] the role of the leader is also important: his value depends on his ability to maintain a consensus of inaction or, in Kremlin speak, stability; aware of this, the leader opposes any change, trying to respond to challenges by making the system even more rigid.67

The sobering thing is that the system seems to operate this way due to calculated design. According to Mikhail Dmitriev, “The potential growth of populism in society due to the effects of the crisis in conjunction with weakened demand for development is seen as a significant risk. This will be an obstacle to the long-term democratization of the political system and will restrict options for conducting development-oriented economic policy.”

As one of the foreign businessmen in the study reported, “My Russian friends often tell me: ‘Don’t underestimate how cynical the people in power are.’ This makes me think that the authorities are counting on ordinary Russians to remain passive and loyal. It appears that the current state of affairs is exactly what the elite wants.”

WHEN WILL THESE RISKS MATERIALIZE?

The surveyed experts did not speak directly about the political consequences of their economic predictions. However, most study participants agreed that most of the socioeconomic risks discussed will become pressing in ten to fifteen years. This means that as of 2024, when Putin is next up for reelection, Russian society and elites will likely not yet feel the true impact of these problems. Thus, one can presume that the regime has every chance of continuing through the next presidential election without significant stress and without a need for serious change.

The presidential term after that, however, will not be such smooth sailing. In 2030–2036, if not earlier, the challenges described will most likely materialize. Above all, the energy transition coupled with the further deterioration of Russia’s human capital and the intensification of paternalist sentiments will make it harder for the state to satisfy the population if state budget revenues fall. The regime will become a hostage to its own state budget–centric position—extremely exaggerated in recent years—and its desire for major state interventions in the economy. This will be augmented by the aging of the Russian establishment, including the president (Putin will turn seventy-eight in 2030), and the eventual arrival of new faces will further complicate matters. It is doubtful that the increasingly elderly establishment will be able to overcome the impending challenges.

At the same time, as one expert noted, “it will be far more difficult to resolve this situation than it was in the 1990s, when developed countries were growing dynamically and were interested in Russia, including as a new market. In the near future, the developed world will have many problems of its own and will pay very little attention to Russia.”68

The result is a vicious circle: the regime likely will not create resources to advance the country’s economic development other than rents. The gradual dwindling of these revenue streams and the reduction of opportunities to redistribute national wealth through state channels, along with the oppressed state of small and medium-sized businesses and civil society, all promise very serious problems for the future generations that will live beyond the ten to fifteen years remaining in the expected lifetimes of Russia’s Putin-led elites.

This research was carried out with the support of the Embassy of Finland in Moscow.

APPENDIX 1:

The authors thank all the questionnaire respondents, including those who wish to remain anonymous. The following is a partial list of some of the respondents for this study. The surveys were conducted in June and July 2021.

Sergei Aleksashenko, Oleg Buklemishev (Moscow State University’s Department of Economics), Mikhail Denisenko (Higher School of Economics), Mikhail Dmitriev (New Economic Growth), Vladimir Gimpelson, Evgeny Gontmakher (European Dialogue), Vladimir Gurevich (RANEPA), Sergei Guriev (Sciences Po), Mikhail Krutikhin (RusEnergy), Nikita Maslennikov (Center for Political Technologies), Andrey Movchan (Movchan’s Group), Igor Nikolaev (FBK Grant Thornton), Alexander Plekhanov (EBRD), Dmitry Prokofyev, Elina Ribakova (Institute of International Finance), Ilkka Salonen (East Office of Finnish Industries Oy), Vasily Solodkov (Higher School of Economics), Dmitry Travin (European University at Saint Petersburg), Johan Vanderplaetse (chairman of the Belgian-Russian Business Club), Alexey Vedev (Gaidar Institute), and Oleg Vyugin.

APPENDIX 2: INTERVIEW QUESTIONS

Below is a listing of the questions that the survey participants were asked. The interviewees were free to respond to the questions in any order and were not obliged to answer all of them. Rather, it was important for the authors to holistically understand the experts’ overall views of what challenges Russia is facing.

In your opinion, what are the three or four main challenges (not necessarily socioeconomic) facing Russia?

What do you view as the key challenges for the Russian establishment relating to trends in Russia’s economic development/stagnation? When will these challenges materialize?

Which of the challenges that you have mentioned are the most serious and why? What crises could they prompt?

Which challenges/crises could arrive faster than others, and in 

approximately what time frame?

What are the possible consequences of the worst-case scenarios: mass protests, upheaval or mutiny among political and business elites, a large wave of emigration, an even more hardline political regime, further interference of the state in the economy, regime change, or something else?

In your opinion, do the Russian authorities recognize the economic and social challenges facing the political system, and are they taking any steps to curtail them? Or are they satisfied enough with economic policy that they do not see or do not want to see most of these challenges (or are choosing incorrect approaches to solving these problems)?

What do you consider to be the biggest obstacles to appropriate responses by the state and society to these challenges?

How likely are the Russian authorities to be able to overcome these challenges and crises within the current political system, or are the problems impossible to solve within that framework?

Andrei Kolesnikov

Kolesnikov is a senior fellow and the chair of the Russian Domestic Politics and Political Institutions Program at the Carnegie Moscow Center.

@ANDRKOLESNIKOV

Denis Volkov

director of the Levada Center in Moscow