Tracing Russia’s Political Economy as a Driver for the War in Ukraine

By Pavel Luzin, Visiting Scholar of the Russia and Eurasia Program at The Fletcher School

Russian leadership had made its decision towards the full-scale aggression against Ukraine by 2022. Its goal was to eliminate the statehood of Ukraine and the Ukrainian culture as well as to destroy the post-Cold war global order in order to prolong the stability and viability of the Russian political and economic system. This aggression is derived from the will of Russia’s leadership itself as well as from the political economy challenges plaguing Russia. First, Russia’s society has been demoralized by the decade-long stagnation of income. Second, the authoritarian regime has collided with the ongoing modernization of the Russian economy and society that resulted in an economic and cultural gap between the big cities, the capitols of the relatively developed regions, and the vastly rural areas. This gap has created a massive political resentment among a large segment of the Russian population. Third, the tens of millions of the Russian citizens employed in the state-owned sectors of economy represent beneficiaries of the authoritarianism. Consequently, as it was becoming harder to balance the economic system of Russia, and keeping beneficiaries of the authoritarian regime loyal was becoming increasingly problematic, the war was considered by the Kremlin as the only tool for preserving its regime.

Stagnation of Income

By the beginning of the 2020s, Russian society went through a contradictive processes which had a significant impact on Russia’s political economy and the Kremlin’s decision to launch a full-scale aggression against Ukraine.

In 2021, the real disposable income of the average Russian citizen was 7.8 percent lower than in 2013, the last year of recovery growth after the global economic crisis of 2008–2009. If compared with 2011, when Vladimir Putin decided to come back into the Kremlin, the real disposable income in 2021 was only 0,3% higher. In current dollars, the situation looked even worse. For instance, the average per capita monthly income since the global economic crisis was the following:

 The official data for median income available only for 2015 and for 2018–2021 exhibits an unstable dynamic which does not allow the Russians to hope for a prosperous future:

With the added economic downtown of the pandemic years, this totals more than a decade of economic stagnation in Russia.

Core Beneficiaries of Authoritarianism and Anti-capitalist Policy

Russia’s economic stagnation has domestic origins: for their part, the Russian authorities have limited entrepreneurship and private initiative for years. These regulations have weakened the private sector with the aim of avoiding any challenging political requests from people who could make their money independently and were not afraid of market competition.

As a result of these strict controls, the state became the primary investor and coordinator in the Russian economy. For instance, small private businesses had a share of 24.4 percent in total annual investments (20,118 billion rubles/$279 billion), while large and mid-sized businesses that mostly belonged to or at least affiliated with the government and political elite had a share of 75.6 percent. Moreover, the share of direct budget investments in the total annual investments achieved 18.7 percent by the end of 2020.

At the same time, Russia’s public sector and state-owned corporations employ about 39 percent of the 75 million people work force, while the private sector employs 49 percent. However, many of the entities formally belonging to the private or mixed ownership sectors are also state-owned de facto, such as the oil company Rosneft or the largest bank, Sberbank. This means the actual share of the state-owned sector should be closer to 50 percent. Even if only part of these employees is forced to demonstrate political loyalty to the Kremlin openly, all of them must avoid any criticism of the Russian leadership. As a result, they created a relatively loyal core of the authoritarian regime, and the Kremlin tried to pay for this loyalty. Even if salaries at the bottom levels of the public sector and state-owned enterprises and entities did not surpass the average level or even the median level of income, people had guaranteed job security, career prospects, and priority access to state-sponsored social benefit programs. All the employees had to do was abide by the political rules: while public demonstration of loyalty was not required, it was important to avoid public demonstration of disloyalty to the Kremlin and to avoid participation in any opposition political activity.

Economic Geography: Modernization vs. Conservatism

Besides Moscow (17.3 million citizens including agglomeration), Saint Petersburg (5.4 million citizens including agglomeration), and the sparsely inhabited but relatively wealthy regions that relied on oil and gas production (2.2 million citizens), the remaining drivers of the Russian economic modernization were the major cities and surrounding agglomerations with a total population of about 20 million people. The total number of Russians who could survive on a mid-level standard of living and moderately sustainable economic prospects hardly surpassed 45 million people by the beginning of the current decade. Of course, not all of them achieved economic prosperity at the end. However, the majority of the other 100 million of the Russian citizens could not say that their economic prospects in rural areas would improve in the foreseeable future.

This gave a dominant conservative orientation, which aimed to keep the existing level of prosperity instead of implementing risky economic and political changes to improve it. This planted resentment towards the global world where most Russians would never be competitive within the existing economic and political frameworks they were constrained by.

To address the challenges facing these major cities, the Kremlin combined its economic interventionism with political measures. As a result, most of the regional capital cities lost the institution of popularly elected mayors during the previous fifteen years. Further, since the constitutional coup of 2020, the whole Russian system of local governance has lost even its formal and already limited autonomy from the regional and federal authorities. Therefore, the authoritarian regime tried to prevent any potential request for democratization that could rise on the level of local governance and, especially in the major cities, the most modernized and the less loyal to the Kremlin parts of Russia. One of the major side effects of this political activity was the elimination of the last remaining political communication avenue between the Kremlin and society.

Challenge of Balancing and the War

There was a problem for the Kremlin: during the 2010s, it became harder to balance the political economy system and to keep control in the Kremlin’s hands. The state sector did not generate much profit, and sometimes generated net losses. The Western sanctions from 2014 to 2017 also had negative economic effects. For example, the defense industry, which provided jobs to 2 million Russians and was proclaimed to be a main driver of the Russian technological and economic modernization, has generated net losses amounting to hundreds of billions of rubles annually since 2016.

Another example was the failure of several major private banks in 2017, which showed a hole of at least 1 trillion rubles within the Russian banking sector and resulted in further economic interventionism of the state. The Kremlin tried to increase the amount of sources redistributed by the government, but the total amount of sources within the Russian economy did not increase; the nominal growth of GDP was much lower than the average global rate.

The fragile balance of Russian authoritarianism will likely lead to turbulence, if not collapse, in the coming years. However, the option of major reforms remains absent because it would inevitably damage the core of loyal citizens to the Kremlin. Recognizing this, the Kremlin dove deeply into political radicalism both in domestic politics and in foreign policy.

Russia’s political economy, plagued by a decade of income stagnation and a deepening economic and cultural gap, has pushed the Kremlin to wage war on Ukraine as a means to maintain its authoritarian regime. The Kremlin’s decision to eliminate Ukraine’s statehood and challenge the post-Cold War global order aims to sustain the fragile balance of Russian authoritarianism and protect its core base of loyal citizens. Even if these “loyal citizens” do not fully support the aggression against Ukraine out of fear of repercussions from the state, it inevitably shares the responsibility for the war in Ukraine with the Kremlin.

(This post is republished from The Fletcher Forum of World Affairs.)