ECONOMY
The Putin Era: Seven Factors Driving Russia’s Economy Over the Last 25 Years
August 12, 2024
Sergey Vakulenko
Senior fellow at the Carnegie Russia Eurasia Center
August 9 marked 25 years since Vladimir Putin came to power in Russia, first as prime minister. Economist Sergey Vakulenko looks at the development of Russia’s economy under his rule.
The original text in Russian was published on Substack and is being republished here with the author’s permission
Both Russia and its economy have changed a lot over the 25 years of Putin’s rule. This is not a surprise – find 25 years in the last three centuries when there were no major changes in almost any country.
Almost always, 25 years later people are better off than they were before, unless the end of those 25 years comes during a devastating war (note that the current war is still relatively insignificant in economic terms for Russia) or an economic cataclysm like the Great Depression.
Global economic and technological progress is oftentimes the main driver of a country’s development – and this has been true for Russia too, both in the last 250 years and in the last 25. But there are other factors, both internal and external, that may prove more significant for certain countries in certain periods.
We will try to identify such factors for the Russian economy at the beginning of the 21st century in the hope that, when combined, they explain (econometrically and statistically) its development.
I have identified seven factors, though I do not claim this is an exhaustive list and there can be no alternatives. These factors were all interconnected and influenced one another in some way; take one away and the dynamics of the others would have been different.
Factor 1: The natural transformation of the Russian economy and its maturation
In economic terms, the Yeltsin era was about the destruction (or rather, the collapse) of the Soviet economic model and appropriation of the pieces by people who were brave, cruel, persuasive and/or lucky enough.
Both Russia and its economy have changed a lot over the 25 years of Putin’s rule. This is not a surprise – find 25 years in the last three centuries when there were no major changes in almost any country.
Almost always, 25 years later people are better off than they were before, unless the end of those 25 years comes during a devastating war (note that the current war is still relatively insignificant in economic terms for Russia) or an economic cataclysm like the Great Depression.
Global economic and technological progress is oftentimes the main driver of a country’s development – and this has been true for Russia too, both in the last 250 years and in the last 25. But there are other factors, both internal and external, that may prove more significant for certain countries in certain periods.
We will try to identify such factors for the Russian economy at the beginning of the 21st century in the hope that, when combined, they explain (econometrically and statistically) its development.
I have identified seven factors, though I do not claim this is an exhaustive list and there can be no alternatives. These factors were all interconnected and influenced one another in some way; take one away and the dynamics of the others would have been different.
Factor 1: The natural transformation of the Russian economy and its maturation
In economic terms, the Yeltsin era was about the destruction (or rather, the collapse) of the Soviet economic model and appropriation of the pieces by people who were brave, cruel, persuasive and/or lucky enough.
“Putin came to power just as the dust began to settle from the great redistribution of property in the 1990s.”
Vladimir Putin and Mikhail Khodorkovsky, then Russia's wealthiest man, in 2001. In 2003 Khodorkovsky was arrested and went on to serve 10 years in jail.
Source: Wiki Commons
Source: Wiki Commons
By then, former Komsomol bureaucrats, “red directors,” criminals, cooperative society members and others who, by hook or by crook, had taken control of the wreckage of the Soviet industrial empire realized that there was nothing left to divvy up; it would be hard to seize anything else; everything that had been there to be easily picked up, squeezed out or taken off was already in the hands of tenacious people who would not give it up without a fight.
The time had come not to steal and divide, but to build up and multiply, to build normal capitalist businesses with the seized assets.
These people no longer sought to quickly grab something, turn it into money and set sail for the Cote d’Azur, the “pomegranate islands” or a quiet retirement in London. They already had eight figures; they could already afford caviar and goose liver for the rest of their lives. Instead, they sought to build large, competitive and sustainable businesses that would be worth tens of billions, not hundreds of millions, that would put their owners on the global Forbes billionaire list, and that would satisfy their ambitions for power and creating something great.
In some other reality, these people could try to “seize the state.” Some of them did try in one way or another, but they ended up in emigration or in prison. The majority, meanwhile, found it acceptable to pay taxes, negotiate with the state on tax rates through fairly standard lobbying practices, and not try too hard to influence policy, first at the federal and then even at the regional level.
At that time, the new owners of the Russian economy wanted to capitalize their businesses and consult with analysts from international banks, and this required transparency and compliance with the law.
Putin appointed effective and loyal managers as ministers, not prominent politicians and publicists, as was the case in the Yeltsin era. Leading the economy were Alexei Kudrin as minister of finance and German Gref as minister of economic development (this mandate was much broader than it is now), who started by putting in place sensical and rather effective mechanisms for managing the economy and public finances.
Russian companies quickly adopted the best world practices, and a new class of modern managers emerged in Russia.
People with experience in the West started coming back to Russia in droves, chasing bigger paychecks and more exciting career opportunities.
The time had come not to steal and divide, but to build up and multiply, to build normal capitalist businesses with the seized assets.
These people no longer sought to quickly grab something, turn it into money and set sail for the Cote d’Azur, the “pomegranate islands” or a quiet retirement in London. They already had eight figures; they could already afford caviar and goose liver for the rest of their lives. Instead, they sought to build large, competitive and sustainable businesses that would be worth tens of billions, not hundreds of millions, that would put their owners on the global Forbes billionaire list, and that would satisfy their ambitions for power and creating something great.
In some other reality, these people could try to “seize the state.” Some of them did try in one way or another, but they ended up in emigration or in prison. The majority, meanwhile, found it acceptable to pay taxes, negotiate with the state on tax rates through fairly standard lobbying practices, and not try too hard to influence policy, first at the federal and then even at the regional level.
At that time, the new owners of the Russian economy wanted to capitalize their businesses and consult with analysts from international banks, and this required transparency and compliance with the law.
Putin appointed effective and loyal managers as ministers, not prominent politicians and publicists, as was the case in the Yeltsin era. Leading the economy were Alexei Kudrin as minister of finance and German Gref as minister of economic development (this mandate was much broader than it is now), who started by putting in place sensical and rather effective mechanisms for managing the economy and public finances.
Russian companies quickly adopted the best world practices, and a new class of modern managers emerged in Russia.
People with experience in the West started coming back to Russia in droves, chasing bigger paychecks and more exciting career opportunities.
“By 2008, these trends had combined to produce excellent results. Russia looked like a promising economy, and many international companies, from banks to automakers, wanted to enter the Russian market.”
If Putin had stepped away at that point, most likely he would have gone down in memories and textbooks as the most successful Russian leader in decades or centuries, despite the assault on democracy that was launched under him and the Yukos affair.
Moscow International Business Center (Moscow City) is a still-evolving project that started in 1995. By 2014, about $12 billion had been invested in Moscow City. Source: Wiki Commons
Factor 2: Rising commodity prices
Putin got incredibly lucky with commodity markets. Just from oil exports Russia earned an average of about $300 billion a year (in 2022 dollars) in 2000-22, whereas the figure was $77 billion a year in the Yeltsin period and $113 billion under Gorbachev (though this was for the whole USSR).
Unlike many other countries – and despite the taste of Russian kleptocrats and millionaires for German-built yachts, real estate in Biarritz and Mayfair, and shopping on Via Monte Napoleone – a very large part of this money returned to Russia, albeit in the form of Lanfranco Cirillo-designed estates with fur storage and a house for a duck. Still, these estates and houses were built by Russian builders from Russian cement and with Russian paneling.
Of course, it would have been better if it was housing, roads, factories and laboratories being built, so that the effect would have multiplied, so that productive capital, capable of creating new value for the Russian economy, appeared.
That did not happen, but at least money spent on luxury went into the Russian economy, creating domestic demand and filling the closets, apartments and garages of ordinary Russians. This domestic demand, coupled with the size of the market, created large, often foreign-owned operations in Russia – many of which, after 2022, were bought out for next to nothing as foreign companies exited Russia.
Putin got incredibly lucky with commodity markets. Just from oil exports Russia earned an average of about $300 billion a year (in 2022 dollars) in 2000-22, whereas the figure was $77 billion a year in the Yeltsin period and $113 billion under Gorbachev (though this was for the whole USSR).
Unlike many other countries – and despite the taste of Russian kleptocrats and millionaires for German-built yachts, real estate in Biarritz and Mayfair, and shopping on Via Monte Napoleone – a very large part of this money returned to Russia, albeit in the form of Lanfranco Cirillo-designed estates with fur storage and a house for a duck. Still, these estates and houses were built by Russian builders from Russian cement and with Russian paneling.
Of course, it would have been better if it was housing, roads, factories and laboratories being built, so that the effect would have multiplied, so that productive capital, capable of creating new value for the Russian economy, appeared.
That did not happen, but at least money spent on luxury went into the Russian economy, creating domestic demand and filling the closets, apartments and garages of ordinary Russians. This domestic demand, coupled with the size of the market, created large, often foreign-owned operations in Russia – many of which, after 2022, were bought out for next to nothing as foreign companies exited Russia.
“Despite the jump in oil earnings, the Russian economy did not become completely dependent on imports. The volume, diversity and complexity of Russia’s domestic industry show that Russia is not a classic petrostate.”
President Putin and Sergei Karaganov (in the center), who heads up the Council for Foreign and Defense Policy think tank, at the St Petersburg International Economic Forum in June 2024. “The ideal model for Russia is authoritarian social capitalism,” Karaganov said there. Source: Kremlin.ru
It is closer to Australia or Canada – countries in whose economies the extractive sector also plays a significant role – than to Saudi Arabia, Azerbaijan, Kazakhstan and Turkmenistan, where the share of natural resources is considerably higher.
Sure, oil money served as a kind of lubricant and fertilizer for the growth of everything else; without it, the economy would have grown much more slowly (you can look at Russia’s closest Western neighbors for an example).
Dependence on oil could have made Russia vulnerable to inevitable drops in oil prices, but even here Putin got very lucky. The fall in prices in 2008 turned out to be short-lived, while that in 2014 was more significant, though even after 2014, Russian oil export earnings averaged $230 billion a year, including $144 billion in the annus horribilis of 2020 (that figure was more than in any year from 1986 to 1999).
Factor 3: Globalization
Globalization, the pace of which has rapidly accelerated in the 21st century, did not bypass the Russian economy. Most importantly, it led to a significant increase in the scale of the global division of labor and specialization.
As a result, it has become simply impossible to have modern and advanced full-cycle production in one country. For any product, at least some of its components and parts, not to mention the machines for their production, have to be imported – if, of course, the goal is to use the best that is available, without settling for costlier and less efficient analogues.
This is true for every country in the world, and Russia is no exception. Overall, the Russian economy became significantly more integrated into global supply chains than during Soviet times. (A comparison to Yeltsin’s decade, a period of deep economic crisis, would be rather odd.)
A symbol of the globalization trend was Russia’s accession to the WTO right in the middle of Putin’s rule, in 2012. Before the 2008 crisis, Russian companies actively sought to acquire assets abroad, but after 2008 this slowed.
Sure, oil money served as a kind of lubricant and fertilizer for the growth of everything else; without it, the economy would have grown much more slowly (you can look at Russia’s closest Western neighbors for an example).
Dependence on oil could have made Russia vulnerable to inevitable drops in oil prices, but even here Putin got very lucky. The fall in prices in 2008 turned out to be short-lived, while that in 2014 was more significant, though even after 2014, Russian oil export earnings averaged $230 billion a year, including $144 billion in the annus horribilis of 2020 (that figure was more than in any year from 1986 to 1999).
Factor 3: Globalization
Globalization, the pace of which has rapidly accelerated in the 21st century, did not bypass the Russian economy. Most importantly, it led to a significant increase in the scale of the global division of labor and specialization.
As a result, it has become simply impossible to have modern and advanced full-cycle production in one country. For any product, at least some of its components and parts, not to mention the machines for their production, have to be imported – if, of course, the goal is to use the best that is available, without settling for costlier and less efficient analogues.
This is true for every country in the world, and Russia is no exception. Overall, the Russian economy became significantly more integrated into global supply chains than during Soviet times. (A comparison to Yeltsin’s decade, a period of deep economic crisis, would be rather odd.)
A symbol of the globalization trend was Russia’s accession to the WTO right in the middle of Putin’s rule, in 2012. Before the 2008 crisis, Russian companies actively sought to acquire assets abroad, but after 2008 this slowed.
“And after 2014, the Kremlin started to call for the ‘nationalization’ of the elite and the repatriation of capital, while in the West, Russian money and economic activity began to be treated with greater suspicion.”
Yandex, launched in 1997, was the biggest technology company in Russia and one of the most successful search engines globally. In 2024, Yandex’s parent company registered in the Netherlands sold the Russian business.
Source: Wiki Commons
Source: Wiki Commons
Factor 4: Digitalization
Both the internet and digital businesses developed rather quickly in Russia, perhaps faster than in many other countries. For quite a while, the state did not interfere with the expansion of the country’s cellular network and mobile and wired internet, or the growth of online businesses.
Russia had a certain advantage in the absence of legacy infrastructure. This is why, for example, Russian internet and mobile banking, many say, is markedly better than its Western counterparts.Much was built from scratch, without having to follow outdated laws and practices.
In Russia, national digital champions emerged (captured by the state after 2022) that were competitive with global players, while the segment of digital services expanded. Digitalization became an essential part of doing business, from housing and communal services to the largest corporations.
Perhaps, for the Russian Rip Van Winkle, having fallen asleep in 1999 not in Moscow, but, say, in Vologda or Perm, or even in a far-flung regional capital (perhaps especially in a distant regional capital), and woken up in 2024, the biggest surprise would be how much is done on your phone and on the internet in ways completely unfamiliar to him.
Factor 5: Less competition and more concentration
Both the internet and digital businesses developed rather quickly in Russia, perhaps faster than in many other countries. For quite a while, the state did not interfere with the expansion of the country’s cellular network and mobile and wired internet, or the growth of online businesses.
Russia had a certain advantage in the absence of legacy infrastructure. This is why, for example, Russian internet and mobile banking, many say, is markedly better than its Western counterparts.Much was built from scratch, without having to follow outdated laws and practices.
In Russia, national digital champions emerged (captured by the state after 2022) that were competitive with global players, while the segment of digital services expanded. Digitalization became an essential part of doing business, from housing and communal services to the largest corporations.
Perhaps, for the Russian Rip Van Winkle, having fallen asleep in 1999 not in Moscow, but, say, in Vologda or Perm, or even in a far-flung regional capital (perhaps especially in a distant regional capital), and woken up in 2024, the biggest surprise would be how much is done on your phone and on the internet in ways completely unfamiliar to him.
Factor 5: Less competition and more concentration
“Compared to 1999, when there were many companies and brands on the market, the Russian economy in 2024 is much more oligopolized in almost every segment.”
National (“federal”) retail chains, national banks, just a few airlines, large metallurgical and oil companies – concentration is higher almost everywhere than 25 years ago.
In part, this is a symptom of a mature economy and a mature market – stronger companies cannibalize competitors and create barriers to entry for newcomers. This happens not only in Russia – recall what the internet market looked like in the early 2000s, how many players there were, and what it looks like now. What does the Western automotive market look like now versus 25 years ago? In any case, the economic environment in Russia has become less competitive.
Factor 6: The new nobility and its role in the economy
At the end of Yeltsin’s rule, the role of the “seven bankers” was already diminishing. The motto at the beginning of Putin’s rule was “equidistance from power” for the oligarchs. As it turned out later, this was simply to make space for “Rabbit’s friends and relations.”
The share of the Russian economy controlled by Putin’s friends from the Leningrad judo section, the KGB, the St Petersburg mayor’s office and the Ozero dacha cooperative and their relatives, together with the relatives and Chechen allies of Ramzan Kadyrov, is now much higher than what the Yeltsin family directly or indirectly controlled in the late 1990s and much higher than anyone could have imagined in the early 2000s. Putin’s people and their companies receive government contracts and monopolies on much more favorable terms in the areas of the economy that interest them.
Factor 7: Growing participation of the state and state-owned companies in the economy
The beginning of Putin’s rule is probably when the state’s share of the economy was the smallest – several waves of privatization had just been completed.
Moreover, in 1999 many companies were state-owned in name only – in practice, they were controlled by their managements. This was the case with Rosneft and Aeroflot, just to name a few. These companies also did not enjoy any special state support. Now, managed mostly by people close to Putin, they have swelled due to acquisitions, occupy a special position in their industries and enjoy many preferences.
In part, this is a symptom of a mature economy and a mature market – stronger companies cannibalize competitors and create barriers to entry for newcomers. This happens not only in Russia – recall what the internet market looked like in the early 2000s, how many players there were, and what it looks like now. What does the Western automotive market look like now versus 25 years ago? In any case, the economic environment in Russia has become less competitive.
Factor 6: The new nobility and its role in the economy
At the end of Yeltsin’s rule, the role of the “seven bankers” was already diminishing. The motto at the beginning of Putin’s rule was “equidistance from power” for the oligarchs. As it turned out later, this was simply to make space for “Rabbit’s friends and relations.”
The share of the Russian economy controlled by Putin’s friends from the Leningrad judo section, the KGB, the St Petersburg mayor’s office and the Ozero dacha cooperative and their relatives, together with the relatives and Chechen allies of Ramzan Kadyrov, is now much higher than what the Yeltsin family directly or indirectly controlled in the late 1990s and much higher than anyone could have imagined in the early 2000s. Putin’s people and their companies receive government contracts and monopolies on much more favorable terms in the areas of the economy that interest them.
Factor 7: Growing participation of the state and state-owned companies in the economy
The beginning of Putin’s rule is probably when the state’s share of the economy was the smallest – several waves of privatization had just been completed.
Moreover, in 1999 many companies were state-owned in name only – in practice, they were controlled by their managements. This was the case with Rosneft and Aeroflot, just to name a few. These companies also did not enjoy any special state support. Now, managed mostly by people close to Putin, they have swelled due to acquisitions, occupy a special position in their industries and enjoy many preferences.
Oleg Deripaska, a Russian oligarch and billionaire. In June 2009, Vladimir Putin publicly forced Deripaska, as the owner of a monotown plant, to sign an agreement (pictured) to keep the plant open. Source: YouTube
What was unthinkable in the early 2000s became the norm in the 2010s – in particular, direct government intervention in business, such as various multilateral agreements between companies and government agencies whereby the former undertake obligations to do something.
Even Russia’s participation in OPEC+ oil production cuts is carried out through informal arrangements: the Ministry of Energy informs oil companies of the maximum production volumes allocated to them, and the companies comply, even though there is no law regulating this. The story is similar in other areas of the economy, as well.
Senior company officials spend long hours in meetings in the government’s operations center“bunker,” and prepare loads of information and submit it at the request of mid-level officials so as not to anger their regulators.
The transition to this governance model was marked by the famous meeting in Pikalyovo in 2009, when Putin ordered Oleg Deripaska keep open an unprofitable plant so as to preserve jobs in the economically depressed town.
Even Russia’s participation in OPEC+ oil production cuts is carried out through informal arrangements: the Ministry of Energy informs oil companies of the maximum production volumes allocated to them, and the companies comply, even though there is no law regulating this. The story is similar in other areas of the economy, as well.
Senior company officials spend long hours in meetings in the government’s operations center“bunker,” and prepare loads of information and submit it at the request of mid-level officials so as not to anger their regulators.
The transition to this governance model was marked by the famous meeting in Pikalyovo in 2009, when Putin ordered Oleg Deripaska keep open an unprofitable plant so as to preserve jobs in the economically depressed town.
“Still, the rising role of the state is in no way a return to the Soviet-style planned economy, and certainly not to socialism.”
These are elements of state capitalism and dirigisme, but it is still a competitive capitalist economy, albeit one in which state corporations and Putin’s friends’ companies are wrapped in cotton wool compared to everyone else.
One can probably come up with several other interesting factors. Take employment: unlike in 1999, the scourge of the Russian economy is not unemployment or underemployment, but a lack of labor. One can probably break down subfactors into baskets differently and get a good framework for analysis. In economic history, claiming to be the only correct approach is completely ridiculous, and I do no such thing.
However, perhaps it would be more correct to talk not about 25 but 23 years – in February 2022, many trends snapped, if not on command, then in the form of a phase transition from quantity to quality.
Putin and many of those who run the economy for him have remained in place, yet many of the rules of the game have changed radically – some quite to the delight of Putin and at his behest. He might have been happy to keep some of the old rules, but in an environment where ties with the West are being systematically severed, this has become impossible.
As happens during a phase transition, the continuity of many functions has been disrupted, and from now on it will make sense to talk about some new trends in some other Russia.
One can probably come up with several other interesting factors. Take employment: unlike in 1999, the scourge of the Russian economy is not unemployment or underemployment, but a lack of labor. One can probably break down subfactors into baskets differently and get a good framework for analysis. In economic history, claiming to be the only correct approach is completely ridiculous, and I do no such thing.
However, perhaps it would be more correct to talk not about 25 but 23 years – in February 2022, many trends snapped, if not on command, then in the form of a phase transition from quantity to quality.
Putin and many of those who run the economy for him have remained in place, yet many of the rules of the game have changed radically – some quite to the delight of Putin and at his behest. He might have been happy to keep some of the old rules, but in an environment where ties with the West are being systematically severed, this has become impossible.
As happens during a phase transition, the continuity of many functions has been disrupted, and from now on it will make sense to talk about some new trends in some other Russia.
Share this article
Read More
