Russia’s current economic model has exhausted its capacity to drive growth and must be restructured to ensure future development, Maxim Oreshkin, Economic Adviser to President Vladimir Putin, said on June 16, Vedomosti reported.

Speaking at a strategic session in the Tula region, Oreshkin said a new approach is required to move beyond short-term resilience and achieve sustained progress.

“The model that ensured growth in recent years has largely reached its limit,” Oreshkin said according to Vedomosti. He added that while Russia had adapted well to the initial impact of sanctions and external pressures, it now needs to shift its focus toward increasing productivity and long-term competitiveness.

Russia has been the fastest growing major economy for the last two years turning in 4.3% growth in both years, largely thanks to the military Keynesianism boost from heavy state spending on the defence sector. However, the economy contracted in the first quarter of this year in real terms and only put in a nominal 1.4% of growth in unadjusted terms as the crushing weight of high interest rates, persistent inflation and a chronic labour shortage began to take their toll.  

Moreover, unable to bring down inflation using traditional monetary policy means, the Central Bank of Russia (CBR) has artificially been reducing growth by stamping on various credits and other non-military spending in an effort to reduce inflation that are kicking in now. With industrial capacity utilisation currently at an estimated 81%, its theoretical maximum, there is no additional capacity in production to grow further. The effect of the continued military spending, which now accounts for around 7.7% of GDP, just fuels more inflation as a result.

Russia has been here before, when the petro-dollar growth model of the noughties was exhausted in 2013 when GDP growth fell to zero despite the fact oil prices were still over $100 per barrel. The Kremlin launched the National Projects 2.1 programme to modernise the economy with some success, but that remains a work in progress.

Oreshkin attributed Russia’s recent economic performance to the mobilisation of existing resources and adaptation to external constraints, including Western sanctions. However, he warned that continued reliance on this framework would not be sufficient to sustain growth. “The economy requires more complex solutions that go beyond the simple redistribution of resources,” he said.

According to Oreshkin, the next phase of development must prioritise investment in technology, structural reforms and the creation of more efficient institutions. He stressed that future growth cannot depend solely on fiscal support or short-term stimulus measures.

“Investment must become the key factor in development. Only investment in infrastructure, technology and human capital will allow us to ensure sustainable growth,” he said.

Oreshkin also highlighted the need to raise the quality of public administration and improve conditions for private enterprise. “We need to change the model to one that will provide a qualitatively new trajectory of economic growth,” he said.

Russian President Vladimir Putin is well aware of the problems associated with heavy military spending and called on the six heads of Russia’s military districts to balance investment into the defence with the civil sector in his “guns and butter” speech last year.