Central to Russia’s model of political economy is a ‘rent management’ system (RMS). The state transfers economic rents generated by export-oriented sectors – primarily oil and gas – to budget-funded spheres (such as social welfare or public administration), and the military and civilian industries. It does this in part by means of formal mechanisms, notably the budget. The state also uses informal distribution channels, requiring rent producers to supply cheap energy to wholesale and retail consumers; fund prestige infrastructure projects; subsidize the regions in which they operate; and invest in ‘relational capital’ (i.e. buying political protection from state officials). Two features of the RMS stand out. The first is the role of the state, which sets priorities for rent allocation and tries to ensure that these are met. The second critical feature is the oil price and volume of production, which are the main factors determining the size of rent flows. As a rule, high oil prices boost the size of rents, making it easier for the authorities to satisfy demand for resources. Conversely, low oil prices tend to reduce the size of rents. This can generate political friction, as domestic constituencies compete over tighter resource flows.
Russia’s economic system has other notable features. The relationship between the state and business can be described as neopatrimonial: weak property rights make good relations with the state essential for commercial security and prosperity. Besides reinforcing the foundations of the country’s authoritarian political system, this relationship is the principal cause of systemic corruption. The state controls key branches of the economy, in particular oil, gas, infrastructure, finance and defence. There is a strong political commitment to the preservation of macroeconomic stability. National security considerations exert growing influence on economic policymaking. Lastly, Russia’s external economic ties are increasingly with non-Western countries (notably China, India, Türkiye and the Gulf states).
Any significant restructuring of this model would be unlikely in the scenario under discussion. Sectional interests, baked into the political system, would resist such an outcome. Far-reaching change would stir memories of the upheavals of the 1990s, which many Russians would oppose. Major efforts at structural reform, such as rationalizing or closing large uncompetitive enterprises, could prove politically and socially destabilizing. This would be the opposite of what a new leadership committed to regime consolidation would want, particularly if the state had become an even bigger employer by 2027. The military-industrial complex would retain its strategic importance as Russia rebuilt its conventional military capabilities. Moreover, the economic system is tried and tested. Despite its shortcomings, it has functioned for many years and has so far weathered unprecedented Western sanctions. In addition, it confers discretionary rights on the political leadership, the members of which enjoy broad powers of patronage to solidify control (and to enrich themselves and their networks).
Yet, subject to the views of a post-Putin leadership, it is possible to envisage a spectrum of limited changes in this scenario. At one end would be ‘authoritarian modernization’, which would aim to squeeze greater efficiency out of the existing system. This approach might plausibly blend continued control of key sectors with certain ideas floated during the Medvedev presidency (2008–12): limited privatization; further steps to commercialize state-owned enterprises (SOEs); an overhaul of parts of the government bureaucracy; and modest deregulation and legal reform to stimulate the small and medium-sized enterprise (SME) sector, which might be a beneficiary of growing ties with non-Western economies.
At the other end of the spectrum would be even greater state control over the economy. Falling far short of Soviet-style central planning, this might entail: a further expansion of state ownership (perhaps into export-oriented sectors such as mining and metals); even closer administrative oversight of strategic industries, SOEs and major private corporations; the introduction of selective price controls; more crackdowns on corruption (doubling up as attacks on political and corporate rivals); even more intrusive regulation of certain business activities; and the long-term retention of capital controls introduced in 2022 in response to Western sanctions. Tighter state control could be implemented along formal channels and via the myriad informal levers of the ‘network state’.
An even more authoritarian political system would dovetail with greater state control over the economy. Equally, a slightly more pluralistic political system would complement a cautious reduction in the size of the state’s economic footprint. Yet a mixture of greater political authoritarianism and modest economic reform should not be ruled out. A more authoritarian leadership might embrace limited business-friendly reforms to boost efficiency and, perhaps, to gather political support among certain constituencies, such as SME owners.
An important issue to watch would be whether a post-Putin leadership encountered major financial problems. One view is that for this to happen, the oil price – the most important variable affecting economic performance and the RMS – would have to fall a long way from current levels and stay there for several years. In the meantime, Russia has large buffers, including international reserves of just under $600 billion (although about half of this sum has been frozen abroad) as of 21 April 2023 and a National Wealth Fund worth slightly more than $154 billion as of 1 April 2023. In addition, the RMS grants the state broad scope to juggle priorities. According to this argument, Russia would be unlikely to burn through its financial reserves before the end of 2027. An alternative point of view highlights the possible cumulative impact of sanctions, particularly the imposition by Western governments of various restrictive measures on exports of Russian crude oil and petroleum products. This line of analysis holds that, over time, these sanctions would squeeze the rent flows available to decision-makers. Evidence of stress might be a competition for rents among elite groups that the political leadership struggled to manage; the forced sequestration of federal and regional budgetary spending; and even the eventual reappearance of large-scale budgetary arrears, arguably the economic phenomenon that did most political damage to the central authorities in the 1990s.
Russia has large buffers, including international reserves of just under $600 billion as of 21 April 2023 and a National Wealth Fund worth slightly more than $154 billion as of 1 April 2023.
In this scenario, the author assumes that some Western sanctions would be lifted following an armistice and a Russian withdrawal from Ukraine. Even then, many restrictive measures would almost certainly remain in place pending a final settlement, which would be a remote prospect given the contested questions involved. Depending on which sanctions were lifted, a limited revival of trade and investment between Russia and the leading Western powers could take place by 2027. But by then, the EU would have significantly lessened its dependence on Russian hydrocarbons through supply diversification, energy conservation and further moves towards green energy. Russia’s business environment would remain unattractive, particularly if the state’s economic profile grew. Even if Western companies were unaffected by sanctions against the Russian regime, for reputational reasons many firms would think twice about re-engaging with Russia; business travel might be dangerous for Westerners; and Western embassies in Moscow would be smaller and unable to offer much support. In short, many commercial ties between Russia and the West would be gone for good.
Russia’s economic interaction with Asia, Türkiye, the Middle East and the Gulf would therefore deepen by 2027. Alongside the financial cushions mentioned above, this would mitigate the impact of Western sanctions and business withdrawal. Even so, it is unlikely that Asia would have fully replaced Europe as a market for Russian crude oil and petroleum products. Russia would not be able to sell to Asia all the gas that it had sold to the EU. And it is most unlikely that Russia would find foreign substitutes that fully compensated for lost Western investment and technology, thus depressing the long-term productivity of key industrial sectors. Nor would further import substitution fill the technology hole, as this has at best had a mixed record since 2014.
By the end of 2027, the basic contours of Russia’s economic model would be unchanged. If restructuring occurred, the likeliest outcomes would be slightly less or slightly more state control, but neither would alter the system’s fundamental characteristics. In any case, supporting the defence industries would remain one of the political leadership’s top concerns in terms of economic policy. Economic performance would continue to be heavily reliant on the vagaries of the oil price. Even if Russia’s economy avoided a crisis, it would remain inefficient and incapable of achieving sustained high rates of GDP growth. Besides depressing living standards, underlining interregional economic disparities and causing intra-elite tensions to spike when the size of rents was reduced – potentially stoking wider political tensions – this would hamper Russia’s attempts to realize its foreign policy ambitions.
