Russia's structural transformation plan has hit 12 of its 14 targets for the first half of this year, eight of them ahead of schedule, Deputy Prime Minister Alexander Novak told a meeting of the so-called “Third Rome”, the Presidential Council for Strategic Development and National Projects in Moscow on August 19. Yet Russia growth is still only expected to be 1% this year. 

The Kremlin is in the process of reassessing its socioeconomic development plans in light of the new realities of sanctions and war. The headline comment from the meeting is that Putin ordered the government to help rebuild the Wildberries warehouses destroyed by Ukrainian drone strikes, but the substance of the meeting was a two-hour account of an economic model being rewired under sanctions, delivered in the language of the National Projects and delivery metrics while the growth rate sits barely above zero.

Industry and investment

Novak set out the frame. "Our key task is to transition to a sustainable economic development model. This is precisely what the structural transformation plan is aimed at," he said, describing a programme covering seven areas: investment, the labour market, incomes and consumption, technology, foreign trade and the formalisation of the economy. Of 55 measures in the plan, 11 are complete and 44 are running to schedule. Last year 31 of 33 indicators were met.

Fixed investment is a key metric and reached 23.3% of GDP last year, a share Russia has not sustained in the post-Soviet period, and intellectual assets - software, R&D, design - now account for 7% of the investment mix. Over three years GDP has risen more than 10% in real terms, or about 3.3% a year, which Novak noted is above the global average. Russia is now the world's fourth-largest economy at purchasing power parity.

"The key structural shift is that we have begun financing more investment from domestic sources, replacing external financing," Novak said, TASS reported. Sanctions cut Russian borrowers off from Western capital markets in 2022; four years on, the government is presenting the substitution of domestic savings for that lost funding as a strategic achievement rather than an adaptation forced on it.

The composition of domestic investment is less flattering. State investment has fallen to 15.4% of the total - presented as evidence that private capital is carrying more of the load - but Novak also said the five largest state-owned companies alone account for more than 15% of all investment in the economy. Add the two together and the state and its corporate arms are directing close to a third of Russian capital spending, which is a description of a command allocation system rather than a private investment cycle.

Putin's own contribution was to ask for another one. "The overall economic dynamics are modest but positive. GDP growth stands at about 1%," he said, before naming a new investment cycle in industry, agriculture, services and housing as the priority. He acknowledged the mechanical reason growth in capital spending has slowed: the export-oriented megaprojects in chemicals, metallurgy, mining and petrochemicals that drove the last cycle have passed their peak investment phases. Nothing of comparable scale has replaced them.

He also ordered a review of the support system meant to generate that cycle. "We already have a range of investment support measures in place, including tax incentives, administrative mechanisms, loan subsidies, and so on," Putin said. "I believe it would be appropriate for the government to once again assess the effectiveness of these measures, analyse demand for them among businesses at both the federal and regional levels, and then, together with the Central Bank and business associations, submit proposals on how to fine-tune the investment support system."

No deadline was set and no figure was given for what the existing schemes cost.

Regions

Finance Minister Anton Siluanov handled the regions, where the strain is most visible. A bill before parliament would defer a third of regions' outstanding budget-loan repayments from 2027-2029 into 2031-2033, freeing about RUB300bn ($3.5bn) for regional development over three years. The wider fiscal recovery programmes will affect regional budgets by more than RUB800bn ($9.4bn) in 2027 alone.

His headline numbers were better than that implies. The Ministry of Finance (MinFin) runs a “traffic light system” when it comes to regional debt: well-run “green” regions are free to make whatever borrowing decisions they see fit; “yellow” regions have to report regularly to MinFin; while the ministry takes direct control of the “red” regions that fall into serious debt management problems.

Regional budget revenues are up 6% since the start of the year at more than RUB15 trillion ($176bn), market debt has fallen by RUB60bn ($705mn), of the 89 regions, in the green are 43 that carry no market debt at all and 24 hold debt below 10% of their own revenues. That leaves less than 20 in the yellow and red categories. The deferral is nonetheless a deferral: the repayments do not disappear, they move into the next decade.

Repairing the drone damage

Talking about the regions, brought the conversation back to the subject of repairing the damage being done by Ukrainian drone strikes – what Ukrainian President Volodymyr Zelenskiy has taken to calling his “long-range sanctions.”

Putin instructed the government to draw up a programme to restore the logistics and warehouse capacity hit by Ukrainian strikes, insisting the damage was containable. "There are no critical consequences from such attacks - there have not been any, and there cannot be any," he said, adding that what is rebuilt "must be rebuilt at a qualitatively new technological level", Meduza reported. As IntelliNews reported in July that the warehouse strikes had already left Wildberries sellers facing more than $1bn in losses.

The two halves of the meeting do not sit easily together. A government confident enough to set tourism at 5% of the economy by 2030 and creative industries at 6% is also committing state money to replace distribution sheds destroyed by drones, and describing that as modernisation. Novak's other headline - that friendly countries now account for 84% of Russian foreign trade - is the same move: a description of isolation reported as reorientation.

What the Council did not address is the arithmetic problem: if GDP has grown 3.3% a year for three years and is growing 1% now, the model being declared sustainable is decelerating sharply while it is being declared a success. The plan's delivery metrics measure whether measures were implemented on time, not whether they worked. This is as close as the Kremlin comes to admitting that things are not going well with the economy.