ECONOMY
Why Putin’s Megaprojects Will Come to Naught
September 11, 2024
Tatiana Rybakova
Journalist and writer
Recounting her own experience in the Russian bureaucracy, journalist Tatiana Rybakova explains why Russian officials love Putin’s national projects so much and why they fail.
In September, the Presidential Council for Strategic Development and National Projects will review the national project for an “efficient and competitive economy.”
The project is gigantic, encompassing eight other national projects: for small and medium-sized businesses (they, as always, must be supported); the financial market (it must be stabilized and developed); competition (a perennial issue); labor productivity (it must be increased, as there is nowhere to get new workers – everyone is at the front, while the Investigative Committee is chasing away migrants); investment activity (for now it is seen only in financial market speculation and state investments via the National Wealth Fund); and – for good measure – a project to achieve carbon neutrality as a vestige of a Western agenda.
At the last minute, two more projects were squeezed in – for technological development and a so-called “national technological initiative” – with the cost of the megaproject rising from RUB 1.9 trillion to RUB 2.7 trillion.
The authorities mean business: following the last presidential council meeting on May 29, Vladimir Putin gave instructions about improving the planning for the megaproject and its scope. The money is serious, the plans ambitious, the deadlines tight – by all indications, the Russian economy should stage a big comeback by 2030. But why am I skeptical? Because I have seen before how such endeavors emerge and how they end.
Problems with the Russian economy
The Russian economy, of course, really does need reform. Even if we put aside the current imbalances and overheating due to the Kremlin’s war in Ukraine, the economic problems were obvious back in 2013, when the recovery from the 2008-09 crisis ran out of steam. In fact, the megaproject correctly identifies the areas in need of attention.
Last year, small and medium-sized businesses accounted for 24% of Russian GDP, even though back in 2019 their share was projected to reach 40% by 2024.
The Russian financial market is in turmoil: inflation is rising; the inflow of currency, even Chinese yuan, is falling due to sanctions; Russian investors can access foreign markets only indirectly; and their foreign assets are frozen. It seems impossible to build any long-term investment strategies, including for retirement: with the Central Bank’s key rate at 18%, the only reasonable course of action is to buy government bonds and foreign currency or foreign currency surrogates.
The project is gigantic, encompassing eight other national projects: for small and medium-sized businesses (they, as always, must be supported); the financial market (it must be stabilized and developed); competition (a perennial issue); labor productivity (it must be increased, as there is nowhere to get new workers – everyone is at the front, while the Investigative Committee is chasing away migrants); investment activity (for now it is seen only in financial market speculation and state investments via the National Wealth Fund); and – for good measure – a project to achieve carbon neutrality as a vestige of a Western agenda.
At the last minute, two more projects were squeezed in – for technological development and a so-called “national technological initiative” – with the cost of the megaproject rising from RUB 1.9 trillion to RUB 2.7 trillion.
The authorities mean business: following the last presidential council meeting on May 29, Vladimir Putin gave instructions about improving the planning for the megaproject and its scope. The money is serious, the plans ambitious, the deadlines tight – by all indications, the Russian economy should stage a big comeback by 2030. But why am I skeptical? Because I have seen before how such endeavors emerge and how they end.
Problems with the Russian economy
The Russian economy, of course, really does need reform. Even if we put aside the current imbalances and overheating due to the Kremlin’s war in Ukraine, the economic problems were obvious back in 2013, when the recovery from the 2008-09 crisis ran out of steam. In fact, the megaproject correctly identifies the areas in need of attention.
Last year, small and medium-sized businesses accounted for 24% of Russian GDP, even though back in 2019 their share was projected to reach 40% by 2024.
The Russian financial market is in turmoil: inflation is rising; the inflow of currency, even Chinese yuan, is falling due to sanctions; Russian investors can access foreign markets only indirectly; and their foreign assets are frozen. It seems impossible to build any long-term investment strategies, including for retirement: with the Central Bank’s key rate at 18%, the only reasonable course of action is to buy government bonds and foreign currency or foreign currency surrogates.
Alexander Bastrykin, chair of Russia's Investigative Committee. In June, he called for Russian business to hire Russians instead of migrants: “let’s make sure that the Russian (russkiy) people are happy, with good salaries and good jobs." Source: Wiki Commons
Investment in fixed capital is growing, true, but this growth is mainly attributable to sectors working for the war and comes, of course, at government expense. Another source of the growth was construction, which, after the government cancelled subsidized mortgages and housing sales plunged, will fade.
By 2030, the labor shortage is expected to be 2-4 million people – and that is a rather optimistic forecast by pro-Kremlin experts. Meanwhile, immigration might not be the solution: not only is Investigative Committee head Alexander Bastrykin coming down hard on migrants, but they themselves also have fewer and fewer incentives to go to Russia. In particular, the ruble is weakening (in their home countries in Central Asia, meanwhile, incomes are rising), while obtaining Russian citizenship automatically entails registration for military service and possible dispatch to Ukraine.
The state’s share of the Russian economy exceeded 50% even before the war.
By 2030, the labor shortage is expected to be 2-4 million people – and that is a rather optimistic forecast by pro-Kremlin experts. Meanwhile, immigration might not be the solution: not only is Investigative Committee head Alexander Bastrykin coming down hard on migrants, but they themselves also have fewer and fewer incentives to go to Russia. In particular, the ruble is weakening (in their home countries in Central Asia, meanwhile, incomes are rising), while obtaining Russian citizenship automatically entails registration for military service and possible dispatch to Ukraine.
The state’s share of the Russian economy exceeded 50% even before the war.
“It has been actively growing of late as the Prosecutor General has sought to overturn privatization deals and nationalize the assets of foreign companies that left Russia after the start of the war and those of Russian businessmen who condemned the Kremlin’s aggression.”
The new management of these assets is such that, for example, the former owners of the nationalized winemaker Ariant Group have written a complaint to Putin favorite and State Council Secretary Alexei Dyumin – the business is being destroyed, they say, do something!
There is nothing to say about competition: it was bad before, but now, as Russian businessmen joke, there is no competing with an investigator.
Why the new national megaproject will not be realized
I have no doubt that nothing will come of the “efficient and competitive economy” project – except perhaps money spent, and here the plan may even be overfulfilled.
I remember very well how previous projects ended. Take the national project for health care and demography from 2018 – during the pandemic, however, Russia surpassed all developed countries in mortality due to ill-considered measures, while demographic trends have only worsened. In the early 2000s, while I was in charge of a ministry’s press service, I observed from the inside the administrative reform launched by then-Minister of Economic Development German Gref. The result was not less pressure on business and fewer bureaucrats but a bloated state apparatus and corruption at all points of interaction between business and the state.
So, why does the government, with unflagging persistence, continue to come up with more and more chimeras that require huge public funds, even as the flow of money gradually dries up?
Chiefly because these projects are wanted by the leadership. And the leadership in today’s Russia – like the Soviet bureaucracy – thinks exclusively in terms of plans. Plans are especially important: with reality changing daily, plans have become the key illusion of control. New sanctions? China is not accepting payments from Russia even in yuan? Ukraine attacked Kursk Region? The answer: we need to draw up a plan for a big improvement and a large-scale increase – of what exactly, it does not matter. The more grandiose the plan, the greater the calming effect.
Subordinates enthusiastically undertake to carry out assignments, motivated largely by opportunities for material gain. A lot of people are brought in to draw up this or that project: working groups at the concerned government agencies, research teams and industry experts. They all receive grants, bonuses and honoraria for their work. Meanwhile, no progress, as can be seen from the abovementioned national projects, does not necessarily mean no funding. Money will be allocated, encouraging lobbyists to get their clients the biggest piece of the pie possible.
The numerous corruption cases that emerged from such megaprojects, from construction for the Sochi Olympics to the Vostochny Cosmodrome, suggest that participants start lining their pockets at this stage.
Besides corruption, there is also the purely bureaucratic interest in “blurring” the lines of superiors’ instructions so that, even if (when) the project is not realized, there is nothing to find fault with. For me, a striking example was the story of how the website of the ministry where I worked in the early 2000s was created.
Agencies were ordered to create their own websites by Alexei Volin, then a deputy head of the Apparatus of the Government. There was no funding for the mandate, nor did the agencies have specialists capable of setting up websites. At a meeting of the agencies’ press services, Volin said: “do what you want, force the companies subordinate [to your agencies] to finance the work, just make sure there are websites.”
Certain agencies, such as the Ministry of Transport or even the Ministry of Agriculture, had no problem with “forcing subordinate companies.” But my agency was engaged in antitrust policy, and we did not have and could not have any “subordinate companies.” So, the minister issued an order for our IT department to set up the website. None of the employees had the necessary skills, but we could not just refuse to carry out an order.
The IT department submitted a proposal to the minister to increase its staff tenfold, purchase equipment and hire contractors – of course, with the corresponding funding included – none of which was realistic. In the end, my friends made the website for the ministry, free of charge, simply out of sympathy for me.
This experience helps me to understand when bureaucrats are serious about doing something versus when they are feigning support for unreasonable orders from their superiors. When plans are grandiose and stretch way into the future – anything beyond the next year is distant in the current environment – this is a sign of such “support.” The current “efficient and competitive economy” megaproject is a case in point. You can be sure that it will not be realized and just as sure that money will be spent. On the other hand, it will be better if money goes toward bureaucratic games than shells and missiles for the war.
There is nothing to say about competition: it was bad before, but now, as Russian businessmen joke, there is no competing with an investigator.
Why the new national megaproject will not be realized
I have no doubt that nothing will come of the “efficient and competitive economy” project – except perhaps money spent, and here the plan may even be overfulfilled.
I remember very well how previous projects ended. Take the national project for health care and demography from 2018 – during the pandemic, however, Russia surpassed all developed countries in mortality due to ill-considered measures, while demographic trends have only worsened. In the early 2000s, while I was in charge of a ministry’s press service, I observed from the inside the administrative reform launched by then-Minister of Economic Development German Gref. The result was not less pressure on business and fewer bureaucrats but a bloated state apparatus and corruption at all points of interaction between business and the state.
So, why does the government, with unflagging persistence, continue to come up with more and more chimeras that require huge public funds, even as the flow of money gradually dries up?
Chiefly because these projects are wanted by the leadership. And the leadership in today’s Russia – like the Soviet bureaucracy – thinks exclusively in terms of plans. Plans are especially important: with reality changing daily, plans have become the key illusion of control. New sanctions? China is not accepting payments from Russia even in yuan? Ukraine attacked Kursk Region? The answer: we need to draw up a plan for a big improvement and a large-scale increase – of what exactly, it does not matter. The more grandiose the plan, the greater the calming effect.
Subordinates enthusiastically undertake to carry out assignments, motivated largely by opportunities for material gain. A lot of people are brought in to draw up this or that project: working groups at the concerned government agencies, research teams and industry experts. They all receive grants, bonuses and honoraria for their work. Meanwhile, no progress, as can be seen from the abovementioned national projects, does not necessarily mean no funding. Money will be allocated, encouraging lobbyists to get their clients the biggest piece of the pie possible.
The numerous corruption cases that emerged from such megaprojects, from construction for the Sochi Olympics to the Vostochny Cosmodrome, suggest that participants start lining their pockets at this stage.
Besides corruption, there is also the purely bureaucratic interest in “blurring” the lines of superiors’ instructions so that, even if (when) the project is not realized, there is nothing to find fault with. For me, a striking example was the story of how the website of the ministry where I worked in the early 2000s was created.
Agencies were ordered to create their own websites by Alexei Volin, then a deputy head of the Apparatus of the Government. There was no funding for the mandate, nor did the agencies have specialists capable of setting up websites. At a meeting of the agencies’ press services, Volin said: “do what you want, force the companies subordinate [to your agencies] to finance the work, just make sure there are websites.”
Certain agencies, such as the Ministry of Transport or even the Ministry of Agriculture, had no problem with “forcing subordinate companies.” But my agency was engaged in antitrust policy, and we did not have and could not have any “subordinate companies.” So, the minister issued an order for our IT department to set up the website. None of the employees had the necessary skills, but we could not just refuse to carry out an order.
The IT department submitted a proposal to the minister to increase its staff tenfold, purchase equipment and hire contractors – of course, with the corresponding funding included – none of which was realistic. In the end, my friends made the website for the ministry, free of charge, simply out of sympathy for me.
This experience helps me to understand when bureaucrats are serious about doing something versus when they are feigning support for unreasonable orders from their superiors. When plans are grandiose and stretch way into the future – anything beyond the next year is distant in the current environment – this is a sign of such “support.” The current “efficient and competitive economy” megaproject is a case in point. You can be sure that it will not be realized and just as sure that money will be spent. On the other hand, it will be better if money goes toward bureaucratic games than shells and missiles for the war.
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