ECONOMY
‘Economy Without an Engine’: How the Russian Economy Has Developed since Independence and What Lies Ahead
November 13, 2025
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Abel Aganbegyan
Economist
Abel Aganbegyan, an RAS academician and a former Gorbachev economic advisor, looks at why, since 1991, Russia’s economy has grown only a third, yet US GDP has doubled, EU GDP has added 50%, and Chinese GDP and Indian GDP have ballooned thirteenfold and ninefold.
This material was originally published by RBC. Below is a summary.
According to Abel Aganbegyan, an advisor to Mikhail Gorbachev during the perestroika years, Russia’s economy is stagnating because the country has built a “socioeconomic system without an engine” – that is, it lacks an effective engine of development. The capital market and competitive environment that drive growth in a market economy are underdeveloped. As a result, Russia is falling back in global rankings, particularly in terms of technological development. While the country accounts for about 5.5% of global GDP (in purchasing power parity terms), its share of global high-tech output is only 1.3% and that of global trade in high-tech goods and services is just 0.3%. To overcome this stagnation, Aganbegyan proposes a two-stage reform plan to accelerate economic growth to 4-6% annually and take Russia up to the average level of EU countries in economic and social development by 2036.
According to Abel Aganbegyan, an advisor to Mikhail Gorbachev during the perestroika years, Russia’s economy is stagnating because the country has built a “socioeconomic system without an engine” – that is, it lacks an effective engine of development. The capital market and competitive environment that drive growth in a market economy are underdeveloped. As a result, Russia is falling back in global rankings, particularly in terms of technological development. While the country accounts for about 5.5% of global GDP (in purchasing power parity terms), its share of global high-tech output is only 1.3% and that of global trade in high-tech goods and services is just 0.3%. To overcome this stagnation, Aganbegyan proposes a two-stage reform plan to accelerate economic growth to 4-6% annually and take Russia up to the average level of EU countries in economic and social development by 2036.
Vardan Papikyan / Unsplash
Why growth has been weak
Official data shows that from 1991 to 2025, Russia’s GDP grew only a third – the lowest rate among major economies, comparable only to Japan’s. By contrast, the former socialist countries of Eastern Europe have seen their economies more than double in size on average, while large developing economies have recorded three- to fivefold growth.
Only a few years of this period were marked by objectively difficult conditions, such as the pandemic or sanctions, while for much of the time the external backdrop was relatively stable. Yet Russia still failed to achieve sustainable growth.
Aganbegyan concludes that throughout these decades, the Russian economy has lacked an effective engine of growth. Market institutions were established, but neither a full-fledged capital market capable of providing investment nor a competitive environment that stimulates efficiency emerged. The public sector, which produces roughly 70% of output, dominates the economy and remains less efficient than private business.
The technological level of production remains low: labor productivity is a third or fourth of what it is in leading economies, and energy efficiency is only about half their level. Many high-tech sectors, from civilian aircraft manufacturing to microelectronics and pharmaceuticals, have degraded.
Venture capital and a startup ecosystem are virtually nonexistent. Since 2020, not a single unicorn (a startup valued at more than $1 billion) has appeared in Russia, while Russian entrepreneurs have created dozens of such firms abroad. With a near-total absence of long-term private capital and infrastructure for innovation, the economy has lost its technological and entrepreneurial engine of growth.
Emergency measures through 2030: Jump-starting growth
Aganbegyan believes that emergency measures are required to overcome stagnation, with the first phase of reforms lasting through 2030. The goal is to accelerate economic growth to 3-4% a year and improve living standards, creating the conditions for a deeper transformation.
The emphasis should be on investment both in physical and in human capital, including industry, infrastructure, science, education and technology. Russia remains a predominantly industrial economy: industry accounts for about a third of GDP, while the “knowledge sector” is roughly half the size of that in developed countries. Thus, as in China, the main source of growth must be large-scale investment in manufacturing.
The main obstacle is the lack of long-term fiscal resources. The Russian economy’s level of monetization, like its share of borrowed capital in investment, is among the lowest in the world. Aganbegyan proposes increasing lending for investment three- to fivefold through major state-owned banks, which are supposed to offer loans at 3-5% annual rates. The difference in rates could be subsidized by the state, with grants (bezvozvratnyye dotatsii) being replaced by repayable loans, which would make recipients more accountable for how the funds are used.
Additional sources of investment include:
Official data shows that from 1991 to 2025, Russia’s GDP grew only a third – the lowest rate among major economies, comparable only to Japan’s. By contrast, the former socialist countries of Eastern Europe have seen their economies more than double in size on average, while large developing economies have recorded three- to fivefold growth.
Only a few years of this period were marked by objectively difficult conditions, such as the pandemic or sanctions, while for much of the time the external backdrop was relatively stable. Yet Russia still failed to achieve sustainable growth.
Aganbegyan concludes that throughout these decades, the Russian economy has lacked an effective engine of growth. Market institutions were established, but neither a full-fledged capital market capable of providing investment nor a competitive environment that stimulates efficiency emerged. The public sector, which produces roughly 70% of output, dominates the economy and remains less efficient than private business.
The technological level of production remains low: labor productivity is a third or fourth of what it is in leading economies, and energy efficiency is only about half their level. Many high-tech sectors, from civilian aircraft manufacturing to microelectronics and pharmaceuticals, have degraded.
Venture capital and a startup ecosystem are virtually nonexistent. Since 2020, not a single unicorn (a startup valued at more than $1 billion) has appeared in Russia, while Russian entrepreneurs have created dozens of such firms abroad. With a near-total absence of long-term private capital and infrastructure for innovation, the economy has lost its technological and entrepreneurial engine of growth.
Emergency measures through 2030: Jump-starting growth
Aganbegyan believes that emergency measures are required to overcome stagnation, with the first phase of reforms lasting through 2030. The goal is to accelerate economic growth to 3-4% a year and improve living standards, creating the conditions for a deeper transformation.
The emphasis should be on investment both in physical and in human capital, including industry, infrastructure, science, education and technology. Russia remains a predominantly industrial economy: industry accounts for about a third of GDP, while the “knowledge sector” is roughly half the size of that in developed countries. Thus, as in China, the main source of growth must be large-scale investment in manufacturing.
The main obstacle is the lack of long-term fiscal resources. The Russian economy’s level of monetization, like its share of borrowed capital in investment, is among the lowest in the world. Aganbegyan proposes increasing lending for investment three- to fivefold through major state-owned banks, which are supposed to offer loans at 3-5% annual rates. The difference in rates could be subsidized by the state, with grants (bezvozvratnyye dotatsii) being replaced by repayable loans, which would make recipients more accountable for how the funds are used.
Additional sources of investment include:
- tax incentives for businesses that reinvest profits;
- accelerated amortization to encourage equipment renewal;
- issuance of targeted bonds to support housing and automobile purchases by the population;
- a moderate rise in public debt, which would remain safe given the currently low levels.
Platon Matakaev / Unsplash
As for what to invest in, Aganbegyan identifies four priorities.
1. Industrial modernization. Large-scale equipment renewal and development of machine building, including turbine and energy production, with state support for R&D and applied research institutes.
2. Technology development. Expanding capacity in aircraft manufacturing, pharmaceuticals, biotechnology and microelectronics – where Russia lags considerably – thanks to affordable loans and state guarantees.
3. Infrastructure. Construction of roads, ports and airports financed with long-term loans at 1-2% annual rates, as in the US and China.
4. Housing construction. Doubling the housing supply, which would have a strong multiplier effect, as growth in related industries could add up to 2 percentage points to GDP.
Aganbegyan argues that the higher investment would not necessarily set off a rise in inflation – as long as supply grows in parallel. The experience in developed countries shows that higher economic growth often coincides with lower prices and interest rates.
Structural reforms and social policy
The second phase of reforms, beginning in 2030, should ensure 4-6% annual growth, driven by innovation. This would require a systemic transformation and deep structural reforms.
Key proposals include:
This, he argues, could transform Russia’s current economic model into an efficient market economy with an eye to social welfare.
Despite all the problems, Aganbegyan expresses cautious optimism. He believes Russia still possesses the key resource for a new breakthrough: human capital. The country has one of the most educated workforces in the world, and nearly every sector has firms and teams capable of operating at a world-class level.
If the proposed reforms are pushed through and this potential is fully tapped, the “engine” of the economy might finally be restarted, setting Russia on a trajectory of outstripping growth and development in the scientific, technological and social spheres.
1. Industrial modernization. Large-scale equipment renewal and development of machine building, including turbine and energy production, with state support for R&D and applied research institutes.
2. Technology development. Expanding capacity in aircraft manufacturing, pharmaceuticals, biotechnology and microelectronics – where Russia lags considerably – thanks to affordable loans and state guarantees.
3. Infrastructure. Construction of roads, ports and airports financed with long-term loans at 1-2% annual rates, as in the US and China.
4. Housing construction. Doubling the housing supply, which would have a strong multiplier effect, as growth in related industries could add up to 2 percentage points to GDP.
Aganbegyan argues that the higher investment would not necessarily set off a rise in inflation – as long as supply grows in parallel. The experience in developed countries shows that higher economic growth often coincides with lower prices and interest rates.
Structural reforms and social policy
The second phase of reforms, beginning in 2030, should ensure 4-6% annual growth, driven by innovation. This would require a systemic transformation and deep structural reforms.
Key proposals include:
- privatization of state commercial assets to reduce the public sector’s share from 70% to around 40%, which would strengthen competition;
- tax reform introducing progressive income and property taxes with exemptions for low earners;
- creation of “long money” through long-term bonds and the development of venture capital;
- administrative reform to consolidate regions into 20-25 self-sufficient entities;
- a return to a five-year plan, beginning in 2026, with clear targets for the public sector and indicative plans for private business.
- reduce inequality (lower the Gini coefficient to 0.33);
- double the minimum wage through higher corporate profits;
- raise spending on education and health care to 8-10% of GDP;
- reform the pension system by introducing a 10% funded contribution, effectively doubling the average pension;
- support agriculture and small towns through loans, cooperatives and targeted funds.
This, he argues, could transform Russia’s current economic model into an efficient market economy with an eye to social welfare.
Despite all the problems, Aganbegyan expresses cautious optimism. He believes Russia still possesses the key resource for a new breakthrough: human capital. The country has one of the most educated workforces in the world, and nearly every sector has firms and teams capable of operating at a world-class level.
If the proposed reforms are pushed through and this potential is fully tapped, the “engine” of the economy might finally be restarted, setting Russia on a trajectory of outstripping growth and development in the scientific, technological and social spheres.
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