Economy 3 January 2020

The 2010s in review: stagnation, crackdown and a stock market surge

The 2010s in Russia began with hopes for economic growth, but ended in stagnation. In this special newsletter, we highlight the major changes that took place in the economy, politics, the stock market, relations with the West and the internet.

The economy: achieving stagnation

President Vladimir Putin likes to claim stability as one of the most important economic achievements of the 2010s. He is correct: each year, the numbers are almost exactly the same. But this sort of stability is much more accurately described as stagnation. In Russia, people are not so bothered by the economy treading water. Unlike in the U.S. or Europe, Russians rarely demand positive change from their governments — they are much more preoccupied with the possibility of things taking a turn for the worse.

  • Russia began the first decade of the 21st century with huge growth: 10 percent in 2000, and between 5 percent and 8 percent the following years (in comparison, the country is ending the following decade with 1.8 percent growth). During the early 2000s, it was reform that fueled growth: lower taxes and a new deposit insurance system. But the main driver was the high price of oil.
  • The good years came to an end in 2009. Crude prices crashed during the global economic crisis, and Russian companies turned out to be too dependent on Western debt. One after the other, they went bankrupt. Unemployment jumped to 26 percent, and Russia experienced the largest production decline of the world’s 20 major economies. Market reforms were forgotten; the goal became stability at any cost.
  • The state’s share in the economy began to rise, while the effectiveness of the market and legal institutions declined. A new crisis in 2014 saw another collapse in the oil price and a massive ruble devaluation, leading to a five year-long fall in real incomes. The situation was exacerbated by the annexation of Crimea and the war in eastern Ukraine, and the Russian market became toxic for foreigners. Foreign direct investment shrank to just $8.7 billion in 2019, a tenth of what it was in 2010.
  • The only undeniable economic achievement of the 2010s was the Central Bank’s victory in its battle with inflation. During the crises of 2009 and 2014, inflation surpassed 13 percent, but since 2016 it has not risen above 5.4 percent. This means debt is more accessible and has contributed to the head of the Central Bank, Elvira Nabiullina, being ranked among the world’s most influential women.

Politics: tightening the screws

Officials in the Kremlin at the end of the 2000s were optimistic: they had avoided an economic meltdown and the political system appeared stable. But when then-Prime Minister Vladimir Putin announced his plans to return to the presidency in 2011, the approval ratings of Putin, Dmitry Medvedev and the ruling United Russia party plummeted and huge opposition protests broke out in Moscow. Since then, the Kremlin has focused on restoring sky-high approval ratings — in practice, this has meant ordinary Russians have been almost entirely excluded from any participation in political life.

  • The Economist ranked Russia 107th in its annual democracy ranking in 2010, but just 144th in 2018.
  • Restrictive new laws have been passed in almost all areas of political life: elections, protests, independent media, and public opposition or criticism. We have written (Rus) before about all the things Russians have been banned from doing.
  • While the screws were tightened, this didn’t reduce the potential for anger to be expressed on the streets. Even state-funded sociologists estimated (Rus) the number of people who thought protests were possible to be 33 percent in 2010 and 35 percent in 2019. Indeed, the 2010s began with protests over Putin’s return to power and ended with protests in Moscow over local elections.
  • One new trend at the end of the decade was a series of successful public campaigns: journalist Ivan Golunov was saved from going to prison after the police planted drugs on him, and actor Pavel Ustinov was spared jail for participation in a protest.

The stock market: unprecedented bull run

The performance of Russia’s stock market surprised everyone in the 2010s. After a crash during the 2008-2009 economic crisis, it returned to growth, and since 2015 has been on an electrifying bull run. By the end of 2019, Russia’s stock market was the best performing in the world, up 40 percent for the year (including dividends), and was written up by Bloomberg as a top investment story with the headline “the Russian revolution”.

  • The main drivers of growth (admittedly from a low starting point) were a stable oil price, falling interest rates (from 17 percent in 2014 to 6.25 percent today) and generous dividend policies (almost double the emerging market average). 
  • As much as half of all shares traded on the Moscow Exchange (about $170 billion) are owned by U.S. investors — a seven-fold growth since 2012. Admittedly, the volume of European investments is falling; but probably because European investors are using U.S. ETFs. In the low interest rate environment, Russian retail investors have also moved into the equity market. While retail investors currently make-up just 2 percent of the equity market (compared to 55 percent in the U.S.), the first 9 months of 2019 saw a 93 percent increase in their numbers.
  • The Russian stock market reflects the state’s dominance of the economy. Almost half of the blue chip stocks traded on the Moscow Exchange are state-owned, and it was these companies that have offered record returns since 2014 (for example, banking giant Sberbank is up 343 percent in the last five years). But most of the increases are in ruble terms — if denominated in U.S. dollars, these stocks were generally unable to make up for the 2014 ruble collapse. Gazprom, for example, has lost half its value. Only privately-owned Yandex significantly increased its market capitalization in U.S. dollar terms (despite the Russian government doing everything it could in the last two years to gain control of the company).

Relations with the West: from bad to worse

Perhaps the most dramatic changes this decade have occurred in Russia’s relations with the Western world. In 2009, newly elected U.S. President Barack Obama spoke of a reset in relations and then-Secretary of State Hillary Clinton and Foreign Minister Sergey Lavrov pushed the famous red button together. Today, Russia’s international reputation is in tatters, the country is under international sanctions, and up to 4 million Russians (mostly employed in law enforcement) are forbidden (Rus) from travelling abroad.

  • Addressing Western leaders in 2018, Putin said that: “Everything you were trying to stop has already happened. No one succeeded in holding Russia back!” Indeed, he achieved his goal: according to data from Pew Research, between 48 percent and 52 percent of people in Western countries believe that Russia’s influence in international politics has increased. But this does not mean Russia is more loved. In 2018, 54 percent of those surveyed across the world spoke of a negative perception of Russia (in 2009, the figure was 44 percent). 
  • Most Russians have now shed the anti-Western feeling of 2014 (amid the annexation of Crimea and the Ukraine crisis), and levels of hostility are now back at their pre-crisis levels. This shift is because Russian public opinion is extremely dependent on what is shown on TV, according to political scientist Fyodor Lukyanov. Sociologist Denis Volkov added that people are tired of conflict, and that there is hope for a new start with the West. But attitudes are complex. While this is true to an extent, in response to questions about the role of the U.S. in the world Russians continue to respond negatively — they do not trust Western countries.

Internet: the state steps in

Like most countries, the internet was one of the main drivers of economic development in Russia in the 2010s. The country produced its own internet giants, and the digital economy has boomed. Toward the end of the decade, however, the state began taking an active interest in the internet — and this interest only looks set to grow. 

  • The internet was obviously important in the early 2010s, but it was insignificant in the context of the country’s broader economy. But, in the last ten years, Russia’s internet market has grown from being worth $8 billion to $73 billion. And a revolution in contactless and internet payments has led to a nine-fold increase in e-commerce (to $43 billion) and an eight-fold increase in electronic payments (to $22 billion).
  • The first years of the 2010s were a golden age for Russian tech IPOs, and Russia is now ranked third globally after China and India in terms of the level of penetration of new financial technology, according to an EY study. Russian start-ups also went international (just look at Telegram’s Pavel Durov).

  • After 2014, private money in the internet market began to dry up (private venture funds invested $376 million in Russian start-ups in 2012, but only $77 million in 2019) — but then the state began to get seriously involved. The government rolled out an effective new electronic system for the provision of state services, but has also tightened control. As of 2019, the state not only censores the internet and monitors users with the help of the SORM system, but it also has a legal tool to isolate Russia’s internet from the rest of the world. At the same time, large amounts of state money has been invested in internet companies. Last year, state-owned Sberbank bought Rambler, one of the country’s largest media-internet companies, Rambler, and acquired a 20 percent stake in internet giant Mail.Ru. The biggest player in the market, Yandex, remains privately owned, but has been forced to alter its management structure so the state can exert more influence over its decision-making.

Peter Mironenko, Anastasia Stognei