What is Russia’s economic growth strategy? (part 1)

• 1990 – 2000 – difficult political situation, privatization.
• 2000 – 2004 – consolidation of oil assets within the perimeter of state-owned companies, creation of the Stabilization Fund.
• 2004 – 2008 – creation of major state corporations: Rostechnologies, Rosatom, United Aircraft Corporation, United Shipbuilding Corporation, etc. Launch of national projects: “Affordable and Comfortable Housing for Russian Citizens”, “Healthcare”, “Education”, “Development of the Agro-industrial Complex“.
• 2008 – 2012 – the program of technological modernization, establishment of Skolkovo and Rusnano JSC, commercial application of GLONASS system.
• 2012 – 2018 – “May” decrees, 5-6% target GDP growth rate, the need for innovation of the Russian economy, establishment of SME development institutions, Industry Development Fund and the Russian Export Center.
• 2018 – 2024 – COVID-19 pandemic, appointment of Mikhail Mishustin as Prime Minister, creation of the “Development Group” headed by VEB.RF, application of state support measures, development of the defense industrial sector.

This is one of the commonly asked questions: What is Russia’s economic development strategy? Is there a plan?

Yes, there is a plan. The strategy is regularly outlined in state bodies’ performance reports, mass media publications announced in the form of executive authorities’ messages to the Federal Assembly, etc.

Since 2006, Russia has been adopting national projects for the development of important areas of its economy.

In 2006 – 2018, the priority national projects focused on the growth of “human capital” and included “Affordable and Comfortable Housing for Russian Citizens”, “Healthcare”, “Education”, and “Development of the Agro-industrial Complex”.

The following national projects were adopted in 2018 – 2024: the “Human Capital”, “Comfortable Living Environment” and “Economic Growth”, as well as projects related to unmanned systems, creation of data economy, to be implemented until 2030, establishment of an independent domestic industry of space services, technologies and products based on the modern organizational and financial mechanisms, with an increased participation of private companies.

The launch of new national projects was announced in February 2024.

The website of the Ministry of Economic Development of the Russian Federation has also published a Unified Plan for Achieving the National Development Goals of the Russian Federation for the Period until 2024 and for the Planning Period until 2030.

Unified Plan to Achieve the National Development Goals of the Russian Federation for the Period until 2024 and for the Planning Period until 2030 | Ministry of Economic Development of the Russian Federation (economy.gov.ru).

The plan puts forward the following national goals: maintaining of population, improvement of health and well-being of people, promoting opportunities for self-realization and talent development, comfortable and safe living environment, decent payment for efficient work, successful entrepreneurship, digital transformation and regional development.

Each of these objectives has indicators to be achieved and a set of activities to be carried out to achieve these goals. These activities are described in federal projects aimed at the fulfillment of specific purposes.

Plans for the long-term economic development were also announced on February 29, 2024 in the President’s address to the Federal Assembly.

Issues faced by the Russian economy have been also regularly voiced by the business community, citizens, and government authorities and traditionally include:

1. Dependence on the energy sector, the so-called “oil curse”.
2. Corruption.
3. Low incomes, low pensions, obstacles to the improvement of housing conditions.
4. Underdeveloped supply chains.
5. High share of imports, low quality of domestic products (electronics, cars, production equipment).
6. Underdevelopment of technologies.
7. Difficulties in attracting investment.
8. Criticism regarding consequences of the 1990s and early 2000s: organized crime, illegal privatization, demolition of the defense industrial sector, low incomes of public sector employees (nonpayment of salaries to public institution employees).

Let us now briefly review the process of Russia’s economic development since 2000, what were its underlying documents, how the reporting was organized and what results were achieved in this area.

Economic development of Russia in the period from 2000 to 2024.

Gross domestic product (GDP) is the main indicator of economic development.

GDP is a macroeconomic indicator reflecting the market value of all goods and services (i.e., those intended for direct consumption, use or application) yearly produced in all sectors of the economy in the territory of a particular state for consumption, export or accumulation, regardless of the national belonging of the applied production factors.

GDP growth rate reflects the speed of a state’s economic development and the increase of its citizens’ well-being.

Russia’s GDP growth rate for the period from 2000 to 2023.

• 2000   + 10%,
• 2001   + 5.10%,
• 2002   + 4.7%,
• 2003   + 7.3%,
• 2004   + 7.1%,
• 2005   + 6.4%,
• 2006   + 8.2%,
• 2007   + 8.5%,
• 2008   + 5.2%,
• 2009   – 7.8%,
• 2010   + 4.5%,
• 2011   + 4.3%,
• 2012   + 4%,
• 2013   + 1.8%,
• 2014   + 0.7%,
• 2015   – 2.0%,
• 2016   + 0.2%,
• 2017   + 1.8%,
• 2018   + 2.8%,
• 2019   + 2.2%,
• 2020   – 2.7%,
• 2021   + 5.6%,
• 2022   – 2.1%,
• 2023   + 3.5%.

Russia’s economy is certainly affected by oil prices. While economic growth from 2000 to 2008 correlates with the oil prices trend, the sharp fall in oil prices from 2009 has not led to an equally sharp fall in the economy.

Dynamics of changes in Brent crude oil prices, 1990 – 2023.

Economic development in the period from 2000 to 2004. (the first presidential term)

Key takeaways:

• The keynote article “Russia at the turn of the millennium” published on 30.12.1999 outlined the main economic problems of Russia are and proposed the ways to overcome them.
• Key problems were seen as follows: a twofold reduction of Russia’s GDP in the 1990s, significant lagging behind other economies, the prevalence of raw materials sector in the economy, low investment activity.
• Solutions: to ensure that Russia’s GDP growth rate is at least 8% per year, achieve public consolidation and civil accord, develop long-term strategies for 15-20 years and more, create the Center for Strategic Research, introduce new expertise and technologies in the industry, squeeze out the shadow economy, integrate Russia’s economy into global economic structures.
• Return of oil assets to the perimeter of state-owned companies. In 2000, only 8.25% of Russia’s total oil production facilities were owned by state-owned companies.
• Creation of the Stabilization Fund in 2004 to preserve oil revenues.

The described period was preceded by 1990s, which saw privatization and loans-for-shares auctions, including those in oil and gas sector.

There is quite a lot of detailed information on the Internet regarding privatization and loans-for-shares auctions. In short, the scheme was as follows:

The Russian government obtained loans from commercial banks that won auctions, giving them shares in state-owned enterprises as collateral (the Ministry of Finance of the Russian Federation initially opened an account in each of the banks depositing funds approximately equal to the loan amount). The government did not repay the loan on maturity date; the government’s stock of shares was transferred to the bank under the non-repayment clause of the loan contract.

Loans-for-shares auctions in Russia – Wikipedia (wikipedia.org)

Quote from Pyotr Aven’s book “Berezovsky’s Time”, p. 287: “Yukos was bought with the money from the Ministry of Finance and Yukos itself one way or another. It was an unfair scheme.“

After oil and gas sector privatization held in 2000, state-owned Rosneft’s share of the total Russian oil production only amounted to 4.68% and Gazprom’s share was 3.57%.

That is, the share of state-owned companies in total oil production sector in Russia in 2000 was only 8.25%. The balance of the “oil needle” assets fell into the private hands, mostly through loans-for-shares auctions.

The conflict with owners of major oil companies ensued after state-owned companies attempted to strengthen their positions in the oil production market in 2003 through consolidation (Rosneft was expected to join Gazprom) and the purchase of “Northern Oil” that had substantial oil reserves.

The amount of taxes collected in oil and gas sector increased by 250% in 2004 after the above conflict occurred.

The Stabilization Fund was created in 2004, to preserve oil revenues.

Active consolidation of oil industry within Rosneft’s perimeter continued between 2000 and 2014. As of 2023, Rosneft boasts of 40% of total oil production; together with Gazprom, state-owned companies produce about 55-60% of Russia’s oil.

The key strategy of economic growth in 2000-2004 was the consolidation of oil assets into the perimeter of state-owned companies and tax collection improvement.

Here are the President’s comments on the events of early 2000s in his article “We Need a New Economy” in Vedomosti newspaper:

“At that time, a conflict had flared up between those who had appropriated in the 1990s the main financial flows based primarily on the sale of commodities, fuel and, and those who wanted to return them to the state and use them for the benefit of the entire society. It is my opinion that we did the right thing at the time, increasing the state’s influence in commodity sectors.

This is not only because certain oligarchs had tried to continue directly buying their way through the political system. At the very beginning of my first presidential term, we faced persistent attempts to sell key assets abroad. The preservation of this country’s strategic resources in the hands of several private owners for a period of five to ten years meant subsequent outside control over the Russian economy.”

Economic development in the period from 2004 to 2008. (the second presidential term)

Key takeaways:

• Russia’s priority national projects focused on the growth of “human capital” and included: “Affordable and Comfortable Housing for Russian Citizens”, “Healthcare”, “Education”, and “Development of the Agroindustrial Complex”.
• The concepts of home mortgage and maternity capital were developing.
• Large state corporations and vertically integrated holdings were created: Rostechnologies (2007), Rosatom (2007), United Aircraft Corporation (2006) and United Shipbuilding Corporation (2007).
• Creation of BRICS in 2006.
• Russia has accumulated the third largest official reserve assets after China and Japan between 2000 and 2007.
• Capital outflow from Russia continued. Between 2000 and 2010, there was a significant increase in foreign investment in Russia: from $11 billion in 2000 to $115 billion in 2010. At the same time, from 2000 to 2016, the total capital outflow from Russia reached $568.9 billion.

In his book, American professor Marshall Goldman argues that the main contribution of 2000-2008 to economic policy was the creation of “national champions” (major state-controlled companies) and renationalization of basic energy assets.

First of all, since the early 2000s, work on consolidation of oil sector assets began. Later on, starting from 2007, major state corporations in other strategic industries have been established.

• “Rostechnologies” – defense industrial sector.
• “Rosatom” – nuclear technologies and power engineering.
• “United Aircraft Corporation” – aircraft construction.
• “United Shipbuilding Corporation” – shipbuilding.

In the sphere of “human capital”, in 2006, the practice of planning and setting tasks originated within the framework of national projects system. Priority national projects were launched: “Affordable and Comfortable Housing for Russian Citizens”, “Healthcare”, “Education” and “Development of the Agro-Industrial Complex”.

Russia has accumulated the third largest official reserve assets after China and Japan between 2000 and 2007.

Between 2000 and 2010, there was a significant increase in foreign investment in Russia: from $11 billion in 2000 to $115 billion in 2010. At the same time, from 2000 to 2016, the total capital outflow from Russia reached $568.9 billion.

The creation of Stabilization Fund was undoubtedly a positive decision for the state’s economy, which, in particular, made it possible to get through the financial crisis of 2008-2009. At the same time, investments of the Stabilization Fund in government bonds of foreign countries attract criticism:

“It is a curious fact that the Government’s Resolution “On the Procedure for Managing the Resources of the Stabilization Fund of the Russian Federation” No. 229 dated April 21, 2006, the states in whose securities the Ministry of Finance was allowed to invest were arranged alphabetically, but according to the English alphabet.

“debt obligations in the form of securities issued by the governments of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, the United Kingdom and the United States denominated in U.S. dollars, euros and British pounds sterling.”

This fact gave grounds for the opposition to say that the law on the placement of the Stabilization Fund’s money had been originally written in the English language.

The argument put forward by some economists about the need to invest the Stabilization Fund’s money in foreign assets in order to reduce inflation has been criticized by opposition economists on the following grounds:

• the main tool to reduce inflation is the development of competition, while the current government policies lead to an increased role of the state and do not contribute to the reduction of monopolization;
• rates on investments in other countries’ government bonds, primarily of the U.S., are significantly lower than the rates of loans attracted by state-owned companies (Gazprom, Rosneft, etc.), so the volume of money in the Russian economy is not declining, while the volume of interest expenses increases”.

Source: Stabilization Fund of the Russian Federation – Wikipedia (wikipedia.org)

Critical Assessments of the Economy: In the early 2000s, Russia was swamped by a flood of petrodollars that masked economic problems.

Economic development in the period from 2008 to 2012. (Dmitry Medvedev’s presidential term)

Key takeaways:

• The global economic crisis of 2008.
• Medvedev’s modernization program was publicized in 2009 in his article “Forward, Russia!”. Technological development was named a priority social and state task.
• The following problems were outlined in the article: primitive raw material economy, chronic corruption, a long-standing habit of relying on state support, help from foreign countries, on “omnipotent doctrines” to solve the existing problems, shamefully low energy efficiency and labor productivity of most of the Russian
• The program was based on 5 main priorities in the country’s technological development: an efficient use of energy, nuclear technologies, information technologies, medical technologies and pharmaceuticals, space technologies combined with telecommunications.
• Establishment of Skolkovo Innovation Center, transformation of the “Russian Corporation and Investor in Nanotechnologies” into Rusnano JSC.
• The start of GLONASS commercial use.
• Yuri Luzhkov’s resignation, creation of Greater Moscow. Alexei Kudrin’s resignation.

The President outlined his program in his article titled “Forward, Russia!” which was published online in September 2009.

The modernization program was aimed at modernizing Russia’s economy and society, reducing the country’s dependence on oil and gas revenues and creating a diversified economy based on high-tech solutions and innovation.

The program was based on the 5 main priorities in the country’s technological development:

1. efficient use of energy,
2. nuclear technologies,
3. information technologies,
4. medical technologies and pharmaceuticals,
5. space technologies combined with telecommunications

State projects were launched in order to implement these priorities, which implicated concrete actions, responsible persons and volumes of financing.