Resurrecting Soviet five-year plans
Hello! Welcome to your weekly guide to the Russian economy — written by Alexander Kolyandr and Alexandra Prokopenko and brought to you by The Bell. This week our top story is about the “May decree” that Putin signed following his inauguration this week, and how it resembles Soviet-era practices. We also look at the mechanism on which the EU has agreed to release frozen Russian funds to Ukraine.
Putin’s ‘May decree’ sets ambitious development targets
Vladimir Putin has followed each of his inaugurations as Russian president since 2012 by issuing a new “May decree.” And this week – which saw him embark on his fifth presidential term – was no exception. After the formal ceremony in the Kremlin on Tuesday, Putin signed a decree that sets out a series of targets for Russia’s development. They extend not just for the six years of his current term in office, but through 2036.
In official circles, these decrees enjoy a hallowed status very similar to the five-year plans that were promulgated with great fanfare by the Soviet authorities. When the Soviet Union collapsed in 1991, this practice was quietly forgotten.
Putin’s most recent “May decree” reflects a general move towards state capitalism, interventionist government and economic isolationism. One of the main measurable economic targets it sets is that Russia should break into the top four nations in terms of purchasing power parity (PPP). According to the World Bank, in 2022, Russia was in fifth place, just ahead of Germany. IMF calculations, however, put Russia in sixth. To get to fourth, Russia would need to overtake Japan within six years. This may be achievable given Japan's economic stagnation (in the last decade its economy grew by an average of just 0.8% each year). Russia’s current economic growth is driven by oil windfalls and high levels of state spending. It seems the Kremlin expects more of the same in the coming six years.
The decree also promised increased labor productivity, and a fall in structural unemployment. Apparently this will happen thanks to the development of innovative technology. However, this process will be hampered by Western sanctions. If it falls short, Russia will have to choose between low unemployment, and high productivity.
Another goal is to reduce the Gini coefficient – which measures income inequality – to 0.37 (a score of 0 is considered to mean a perfectly equal society). The Gini coefficient in Russia last year was 0.403 (up from a historic low of 0.395 in 2022). Inequality in Russia traditionally grows along with an expanding economy: the rich get richer faster than the poor see their incomes rise. But the nature of the current cycle of economic growth may mean a different outcome: spending on the war has caused lower income groups to gain wealth faster.
The decree also envisages the Russian stock market to grow to two-thirds of GDP (from its current level of one-third). That means average annual growth of 12%. This is achievable if the Central Bank is able to reduce interest rates, and avoid economic shocks. In 2023 the stock market grew 43% after à slump of 2022, but is still well below the pre-invasion level.
The decree is also designed to help achieve greater economic self-sufficiency. Imports are ordered to fall to 17% of GDP (they are currently worth 19% of GDP). However, there will almost certainly be problems with this. For example, the decree calls for 50% of Russia’s civil aviation fleet to be domestically produced by 2030. This contradicts a 2022 aviation industry development program, which envisaged hitting the 50% mark by 2027 and achieving 1,440 domestically produced planes (almost 82% of the fleet) by 2030. However, by the beginning of this year it was clear the program could not be realized.
The goal for Russia’s average life expectancy has also been adjusted. By 2030, this is now supposed to be 78 years (the current figure for Saudi Arabia). However, that was originally the target for 2024. Current life expectancy in Russia is 73.5 years. Few people remember that, back in 2012, Putin’s first May decree promised a life expectancy of 74 years by 2018.
In all the targets and goals, there is no mention of increased competition, or a more open economy. This implies that the state’s dominant role in the economy is set to continue.
Finally, it seems clear that the 2024 decree is only achievable if the economy grows, and spending levels remain high. Notably, neither the 2012 decree, nor the one issued in 2018, was fully achieved. Several targets that were set back then, such as life expectancy, remained unfulfilled. Others have been officially scrapped.
Indeed, these May decrees could be appropriately characterized with a quote from German social democrat Eduard Bernstein that is often used by Putin (though he falsely attributes it to Leon Trotsky): “The movement is everything, the final goal is nothing.”
Why the world should care
Putin’s “May decrees” are different from Soviet five-year plans because they lack a lot of detail, and have significantly fewer goals. Yet they set even more ambitious targets than the five-year plans. As in the Soviet Union, failures to meet the targets are swept under the carpet rather than being publicly called out and punished.
EU to send frozen Russian funds to Ukraine
EU ambassadors agreed Wednesday to send frozen Russian funds to Ukraine. We’re talking about roughly €3 billion a year that is generated by about €229 billion of Russian Central Bank reserves currently frozen in Europe. €190 billion of this is held at Belgium’s Euroclear depositary. In total, approximately €260 billion in Russian funds are frozen in G7 countries.
- Since the invasion of Ukraine, Euroclear has earned about €5 billion in profits from the Russian investments. Earnings from before 2024 will be set aside in case of legal challenges from Russia (they are already on the way). Of the remaining sum, 90% will be spent on weapons and military assistance. The rest will be used for humanitarian aid – a compromise achieved with neutral EU countries: Austria, Hungary, Malta.
- The decision puts an end to efforts by the United States, Canada and the United Kingdom to persuade the EU to seize all of Russia’s frozen assets in support of Ukraine. And it comes despite efforts by some nations to ensure the funds remain untouched. Outlet Politico reported last month that China, Saudi Arabia and Indonesia had been actively lobbying EU politicians not to yield to U.S. and UK pressure over the Russian assets.
- For the moment, the EU plan is to tax the frozen Russian assets, generating funds to aid Ukraine that will be collected twice a year. However, they could be used in a different way if the G7 summit in June approves NATO General Secretary Jens Stoltenberg’s plan to create a $50 billion fund to aid Ukraine. Either way, the principle will remain the same: profits from Russian investments will go to Ukraine, but the reserves will remain in Russian hands. At least for now.
Why the world should care
While Russia will undoubtedly say that the EU’s seizure of these profits is theft, it will be more interesting to see if they take any concrete steps. It’s hard to imagine that the Kremlin will opt for a dramatic move like nationalizing all foreign assets owned by “unfriendly” countries. Even stripping foreign companies of their Russian profits would only accelerate the departure of Western companies from Russia – something Moscow does not really want. On the other hand, if the response is limited to scooping up profits from funds that foreigners hold in C-type accounts in Russia, it will have no significant consequences.
Figures of the week
Amid payment complications, exports of Chinese goods to Russia fell 15.5% to $8.3 billion in April compared with the same month a year ago. Although China’s overall exports are up, this was the second month in a row that volumes to Russia recorded a fall. However, these statistics may be misleading as some Chinese goods may have been rerouted to Russia via third countries. China’s trade balance with Russia remains negative at -$3.1 billion.
Russia’s oil-and-gas revenues came to 1.23 trillion rubles in April. That’s far more than usual, but the surge was driven by a one-off tax on additional income from extraction worth 450 billion rubles. Under Russia’s budget rules, currency purchases in May will be 110.9 billion rubles, or 5.6 billion rubles per day. That’s less than the 11.8 billion per day the Central Bank will sell on the market. This will help prop up the ruble.
Inflation in Russia from April 23 to May 2 (a 10-day period) was 0.06%, compared to 0.08% between April 16 and April 22 and 0.12% from April 9 to April 15. Weekly inflation is still slowing despite the “extra” holiday days. The main reason is a fall in prices for air travel (which shoot up in April as the May holiday season approaches, then cool during the holiday itself). Annual inflation in Russia on May 2 slowed to 7.64% from 7.82% on April 22.
Further reading
Russia’s Pro-Putin Elites. How the Dictator Recruited Them to His Anti-Western Agenda
Behind the Scenes: China’s Increasing Role in Russia’s Defense Industry
The smuggling trail keeping Russian passenger jets in the air
Trump Is Unlikely to Abandon Ukraine—and Might Dangerously Escalate the War
