Russia's Economy, 2009-2021: The Road to War

 

 

 

Russia's Economy, 2009-2021: The Road to War

 

Introduction

In the previous post, we saw how Putin built a strong, centralized economic system in the 2000s. This part answers a different question: how did that system become the Kremlin's main line of defense against Western sanctions, international isolation, and a long war?

The pivotal date in this transformation is 2014. The Western sanctions imposed after the annexation of Crimea, combined with the sharp drop in oil prices, convinced the Kremlin that export revenue alone could no longer guarantee Russia's economic security. What followed was a buildup of reserves, the shielding of financial channels (alternative infrastructure), and tighter state control over strategic sectors.

This is how the construction of the so-called "fortress economy" began - a model built not for citizens' welfare, but for the state's endurance. This model created the financial and institutional foundation that let Russia absorb the first blow of unprecedented sanctions in 2022.

One thing needs to be singled out in this architecture from the very start: corruption. It's usually treated as a separate subject; here, it is an inseparable part of the fortress's construction. The Kremlin built mechanisms of defense and resource distribution at the same time. Controlling state resources meant controlling who the money went to - including through corrupt channels - and granting access to that money became the main instrument for buying loyalty.

For that reason, this text does not treat corruption as a list of separate scandals, but as the fortress's mortar: it is what holds the bricks together - and it is also the wall's weakest point.

A Transitional 2009-2013: The Quiet Years

The 2008 global financial crisis left many with the impression that Putin's "economic miracle" was over. Growth built on oil prices had shown its fragility, and Russia needed economic diversification and complex institutional reform.

The Kremlin read the crisis differently. It didn't set out to change the old model - it set out to reinforce it.

At first glance, 2009-2013 is a quiet period in Russia's economic history. The economy was slowly climbing out of recession, oil prices were rising again, and President Dmitry Medvedev spoke of modernization, innovation, and diversification. Under his patronage, "Skolkovo" was created - a state center for innovation and high-tech startups, with ambitions of becoming Russia's "Silicon Valley."

Skolkovo - A Russian "Silicon Valley," or  "Vasyuki"? At the end of 2009, Dmitry Medvedev launched a project meant to cost $3-5 billion. More than 300 global giants were supposed to take part, including Siemens, IBM, Intel, Microsoft, and Cisco. In short, the whole affair closely resembled the story of the fictional utopian town of "Vasyuki" from a beloved Soviet novel - a town whose promoter dazzles the locals with grand promises of glory that never materialize. But after Vladimir Putin returned to the presidency in 2012, political interest in the project gradually cooled. In April 2013, anti-corruption officers raided Skolkovo's offices and uncovered serious violations. The audit found that more than $45 million had been embezzled. Investigators detained two senior managers, and a visiting foreign Intel representative was caught up in the process by chance. Funding was frozen during the investigation, and the budget was later cut several times, by 20-40%. Medvedev himself, then Prime Minister, admitted openly in 2017: "Today, instead of new technology, we're exporting oil, gas, and, unfortunately, brains." In 2022, the US Treasury placed the Skolkovo Foundation on its sanctions list.

Medvedev's changes remained largely declarative, and Prime Minister Putin remained the real center of power. Russia remained dependent on commodity exports, and state corporations grew even stronger. Medvedev was a formal, weak ruler - he was never going to be the one to carry out real economic or structural change.

Seen this way, 2009-2013 is more accurately described not as illusory stability, but as a transitional period - a bridge between the economic growth of the 2000s and the defensive architecture built after 2014. The system gave up none of its tools during these years; it was simply waiting for the moment it would need them.

1. 2014 - The Pivotal Year

In modern Russia's economic history, 2014 is a watershed. Before it, the Kremlin's main task was sustaining revenue and growth; from this point on, the priority shifted - the system now had to withstand external pressure.

Russia found itself facing two powerful shocks almost simultaneously. The first was political, the second was a market shock. Either one alone would have been a heavy blow; together, they became a far more serious test for the whole system.

Crimea - Annexation and Sanctions

In March 2014, Russia annexed Crimea. The West's first response was quite modest and largely ineffective. Sanctions touched only a handful of specific individuals - their assets were frozen and travel bans were imposed.

Within a few months, the picture changed radically. On July 17 of that year, in eastern Ukraine, armed formations under Russian control shot down Malaysia Airlines flight MH17, reportedly by mistake. Two hundred and ninety-eight innocent people were killed. After that, the United States and the European Union rolled out broad sectoral restrictions and forceful sanctions. The restrictions hit state banks, energy companies, the defense industry, access to Western capital, and certain modern technologies needed for oil extraction. For the first time, the Kremlin saw plainly what financial and technological isolation could mean for a modern economy.

The Second Blow: The 2014 Oil Crisis

Alongside the sanctions, Russia's economy took a second hit that same year - this one entirely outside its control.

In June 2014, Brent crude traded at about $115 a barrel. By year's end, it had nearly halved. The cause was several factors converging at once. The rapid growth of shale oil production in the US significantly boosted global supply, while slowing growth in China and Europe reduced demand. Against that backdrop, in November, OPEC - at Saudi Arabia's initiative - declined to cut production, choosing to defend market share instead. The resulting oversupply accelerated the price decline further.

For Russia, this was not just another fluctuation in the energy market. A significant share of the country's exports and budget depended on oil and gas revenue. As a result, the effects of sanctions and the price collapse compounded: Russia simultaneously lost access to financial resources and the ability to generate them.

The Ruble Crisis

The most visible consequence - the litmus test of the economy - was the devaluation of the national currency. Over 2014, the ruble lost nearly half its value against the dollar.

The crisis peaked on December 16, so-called "Black Tuesday." Amid market panic, the ruble briefly traded above 80 to the dollar during the day (the rate had stood at 33 rubles/dollar at the start of the year). At an emergency overnight meeting, the Central Bank raised its key rate from 10.5% to 17% - one of the most radical monetary decisions of Putin's entire tenure.

The Central Bank spent tens of billions of dollars defending the exchange rate, but eventually had to let the ruble float freely anyway. That decision was reinforced by the experience of 2008-2009: propping up the ruble artificially had drained international reserves quickly while only delaying the shock.

The First Test the System Passed

The economic indicators painted a grim picture. In 2014, net private capital outflow from Russia reached roughly $152 billion - about 40% of that year's federal budget revenue. The economy still grew slightly on momentum, but slid into recession in 2015, ending the year with GDP down 3.7%; consumer price inflation (CPI) hit roughly 17% early in the year.

But the real lesson of this story isn't economic - it's political.

The 1998 financial crisis shook Russia's political elite to its core: the government resigned, prime ministers came and went, and the Central Bank's leadership changed. Nothing like that happened in 2014-2015. No senior official stepped down, and no mass protest movement got underway. If anything, against the backdrop of the Crimea annexation, Putin's approval rating stayed near a historic high.

This is precisely where the difference between 1998 and 2014 shows up. In the first case, an economic crisis turned into a crisis of government; in the second, the political system absorbed the economic shock.

The Kremlin saw that authoritarian rule shielded it well from the political consequences of economic shocks. The "fortress economy" of the following years was built on that lesson - a model calibrated not for fast growth, but for weathering sanctions, isolation, and prolonged confrontation.

Russian-Georgian Parallels: When a System Absorbs a Shock In 2024-2025 Georgia, this pattern is not unfamiliar. Falsified elections, a brutally suppressed mass street protest, EU integration frozen, personal sanctions on specific officials - all of it unmistakably looks like a political crisis. And yet, no one has resigned. The course hasn't changed. Protest has not, so far, translated into political accountability. The causes and the scale differ between Russia and Georgia, but the mechanism is the same: a sufficiently centralized system can pay an economic or reputational price and still concede nothing. This is precisely the lesson Georgia's government has studied, in fine detail, from the Kremlin.

 

2. The National Welfare Fund - A New Phase

In the autumn of 2014, the Kremlin faced a question that looked technical but was, in fact, fundamental: what were Russia's financial reserves actually for?

Western sanctions had cut off Rosneft, like other state companies, from long-term international financing, while the ruble's collapse and the falling oil price made servicing the company's enormous foreign debt far harder. So Rosneft's CEO, Igor Sechin - one of Putin's closest allies - asked the government to release 2.4 trillion rubles from the National Welfare Fund. At the exchange rate of the day, that was roughly $42 billion, and it amounted to nearly 65% of the entire fund.

Formally, the fund existed for the long-term sustainability of the pension system. Some Russian economists - former Finance Minister Alexei Kudrin among them - argued that its money was never meant to solve current problems. Two economic philosophies collided: one held that reserves should be kept for future crises; the other treated them as available to finance strategic companies and other projects the regime deemed important.

In the end, the second camp won. Even so, Rosneft received only 300 billion rubles (roughly $4.8-5 billion) of the 2.4 trillion it had requested. But the precedent had already been set: a fund meant to serve future pensioners and long-term stability had become an instrument for propping up sanctioned state companies too.

Rent Distribution - A Sophisticated Mechanism of Corruption

There is an important nuance here: Sechin's request wasn't only about rescuing a sanctioned company. It was the allocation of access to state money according to political closeness - what economists call "rent distribution." For those close to the Kremlin, the door to the state reserve opened. From this moment on, the fund was no longer just a financial buffer; it became an instrument for rewarding loyalty - a function it never lost in the years that followed.

This was not a transparent process. Decisions were formalized through government resolutions, but there was no actual published criterion for who deserved access and who didn't. This is exactly where corruption's most sophisticated form hides: money didn't change hands in envelopes - political loyalty to the system itself became the currency used to buy access to state resources.

From this period on, the National Welfare Fund gradually turned, in practice, into a universal state reserve that could be tapped equally to cover budget deficits, to finance strategic companies and major projects, or to support the defense industry.

Transformations like this rarely come with loud reforms - often an institution keeps its name while its real purpose quietly changes.

One Fund for Every Crisis

At the start of 2014, the Reserve Fund held $87.4 billion. Low oil prices kept widening the budget deficit, and the Reserve Fund's resources were used to cover it - as a result, within four years it was practically spent down to nothing.

On January 1, 2018, the Reserve Fund was formally dissolved and merged into the National Welfare Fund. On the surface, this looked like a mere technical reorganization. In reality, an entire economic era had ended.

The two-fund architecture built in 2004-2008 had drawn a clean line between short-term stabilization and long-term savings. One fund absorbed budget shocks; the other was reserved for future obligations.

A Parallel Story: Putin Also Reached Into Citizens' Own Savings Alongside the National Welfare Fund drama, in that same year, 2014, the state also directly appropriated citizens' individual pension savings. On December 8, Putin signed a law "freezing" the mandatory funded portion of the pension system. The 6% of wages that had previously gone into people's personal pension accounts was redirected in full to the pension fund, to finance current pension payments. This "temporary" measure, adopted in 2014, is still in effect today. In its very first year alone, it brought the budget roughly $6.4 billion (244 billion rubles) in additional funds. In that same year, through two different channels, the state used money set aside for the future to cover its present-day needs.

 After 2018, only one fund remained, and it now had to perform crisis management, budget support, state investment, and support for strategic companies all at once. Along with that, any talk of using it to guarantee pensions essentially stopped.

Epilogue: A Buffer That Wasn't Enough Before the war, in February 2022, the National Welfare Fund's liquid portion held $113-114 billion; of that, roughly $46 billion remains today. Analysts (Gazprombank, RANEPA, the Gaidar Institute) forecast that at the current pace, liquid reserves could run out by the end of 2026 or the start of 2027. The buffer built for a shock the scale of 2014 has proven insufficient for a full-scale war.

 In the wake of the 2014 crisis, reserves that had previously served only macroeconomic stability turned into a direct instrument of national security. Over the following four years, that logic found expression in one particular, quite radical decision.

 

3. Currency Reserves and De-dollarization

In April 2018, the United States sanctioned aluminum magnate Oleg Deripaska and his company "Rusal." It was the first time the West had struck a serious blow against one of Russia's largest, globally integrated businesses.

Russia's countermove came on an entirely different front. In April and May, the Central Bank sold off nearly four-fifths of its US Treasury bond portfolio. In April alone, that portfolio was cut in half, from $96.1 billion to $48.7 billion. By early 2019, the Central Bank had sold more than $101 billion in US Treasury securities in total. As a result, the dollar's share of reserves fell to 22% within six months.

The freed-up resources moved in one direction: toward gold.

The Central Bank's First Deputy Chairman, Dmitry Tulin, put the logic simply: gold is "a 100% guarantee against legal and political risk." International sanctions can't freeze it.

Between 2015 and 2020, Russia spent more than $40 billion buying gold and became the world's largest buyer. In 2020, for the first time in its history, the value of gold in Russia's reserves exceeded its dollar holdings.

The scale of the shift is clear year by year: in 2014, the dollar accounted for 43% of reserves; by 2021, just 16.4%. The yuan's share rose from zero to 13% - Russia became the largest holder of yuan outside China itself (Goldman Sachs estimated it held over 70% of the world's yuan currency reserves).

This policy had a price. Exiting the dollar and shifting into lower-yielding assets (gold, euros, yuan) cost Russia roughly $8 billion in forgone returns, since the dollar strengthened over that period and dollar-asset holders earned more. Elvira Nabiullina, the Central Bank's chair, didn't flinch, and said: "We are not currency speculators, and we are not trying to profit from short-term exchange-rate swings."

In other words, the Central Bank knowingly chose lower returns in exchange for security. That logic recurs throughout this blog series: trading short-term financial gain for long-term economic and political security.

 

4. Central Bank Policy

Elvira Nabiullina took the helm of the Central Bank in 2013. Within a few months she inherited the crisis discussed above - the oil price collapse, the sanctions, and the ruble's sharp devaluation.

In November-December 2014, she made three radical decisions at once: she let the ruble float freely, formally announced the shift to inflation targeting with a 4% goal (though the move to an inflation-targeting regime had actually been planned earlier), and raised the key (refinancing) rate to 17%.

All three steps were taken simultaneously, at the epicenter of the crisis, and this wasn't a cautious, gradual reform - it was a big bet, and it paid off. By the end of 2015, annual inflation stood at 12.9% (having reached as high as 17% during the year), but thanks to the reforms it had already fallen to 5.4% by 2016, and to 2.5% by 2017 (as noted, the target was 4%). In parallel, the key rate gradually came down from 17% to 7.75%.

Nabiullina's results also brought international recognition: Euromoney named her Central Bank Governor of the Year for 2015, and The Banker named her Europe's best central banker for 2016.

But this success came with a social price of its own. The high key rate made credit more expensive, held back investment, and kept economic growth at a minimal level for years. Real incomes fell steadily from 2014 to 2017. The price of these reforms was stagnation and a falling standard of living - even as the public was left with the impression that life was, more or less, proceeding normally.

This is exactly the recurring formula at the center of this blog: stability is preserved, growth is slowed, and citizens accept the trade-off, because the memory of a 1998-style collapse was still very much alive.

 

Part II: Building the Fortress (2018-2021)

From the 2014 crisis, the Kremlin drew one clear lesson: a system less dependent on the outside world is less vulnerable to outside pressure. In the years that followed, this approach hardened into a fully-formed "fortress economy" (Fortress Economy) - a model oriented not toward economic growth and prosperity, but toward endurance and autonomous survival under isolation.

The term itself captures the model's logic precisely: a fortress's main job is to withstand a siege. The next four sections survey the fundamental pillars of this "fortress": fiscal rules, technological independence, control over strategic assets, and military-industrial capacity.

What Is the "Fortress Economy"? The term "Fortress Russia" took hold in Western analytical circles in 2014-2015 - the exact period where this overview begins. It is not an official Russian doctrinal term; it is an international researchers' label for a process they were observing from the outside. The concept is narrower and more specific than it might first appear. It refers not to shielding the entire economy from outside shocks, but specifically to fully insulating the state's balance sheet - its currency reserves, foreign debt, and payment systems - from Western leverage. This model has a fairly close historical precedent: Iran walked a similar path decades earlier, gradually building alternative banking channels, gold-based trade arrangements, and domestic payment systems after the 1979 Islamic Revolution. After 2022, Iran and North Korea became Russia's main partners in evading sanctions, and the experience they had accumulated fed directly into Russian practice. How effective has this model actually been? Analysts are divided. February 2022 showed that, in the short run, the model did its job - the Russian economy didn't collapse overnight. But those same events also exposed a fundamental structural weakness: shifting from the dollar into euros and gold never solved the real threat - the risk tied to where those assets sat, geographically and legally. The West simply froze roughly €260 billion of Russian reserves that, despite abandoning the dollar, were still held at Western financial institutions. As researchers at the Carnegie Endowment put it: by insulating Russia from global shocks, sanctions did genuinely strengthen the "fortress" in the short run - but weakened it structurally over the medium and long term.

 

5. Fiscal Rules and Low Government Debt

In 2017, on its third attempt after two earlier failures, Russia tried by law to limit its dependence on oil. The new fiscal rule was simple: only oil revenue up to a $40-a-barrel benchmark (in 2017 prices), indexed 2% a year, could go into the budget. Everything earned above $40 was automatically channeled into the National Welfare Fund. The IMF called the rule "broadly appropriate."

This rule also had a significant indirect effect on government debt. Whenever a budget deficit arose - from low oil prices or other causes - the government had two options: borrow on the market, or draw on the fund. Russia consistently chose the latter, in effect substituting the fund's resources for new borrowing. As a result, by 2017 Russia's government debt stood at just 14.3% of GDP. For comparison, the eurozone average at the time was in the 85-90% range.

This wasn't just caution. After the 2014 sanctions, Russia's access to Western lending markets was already constrained, and it simply couldn't have borrowed large sums even if it had wanted to.

For its part, low external debt worked in the Kremlin's favor on two levels:

Economically: the budget was no longer hostage to swings in oil prices or to foreign creditors;

Politically: the West's leverage - through debt restructuring or interest rates - was sharply limited.

Still, the émigré Russian economist Igor Lipsits offers an important qualification here: low debt and a strict fiscal rule did not, on their own, mean Russia had escaped real dependence on the outside world. By his 2023 estimate, the oil-and-gas sector still accounted for roughly 57% of federal budget revenue - almost the same share as in the mid-2000s. The fiscal rule limited how much the state could spend at once, but it never changed the more important thing: where the money came from in the first place.

6. Preparing to Break from the Western Financial System

In March 2014, the moment Crimea was annexed, Visa and Mastercard cut off service to Russian banks caught up in US sanctions. As a result, customers of those banks suddenly couldn't use their payment cards at all.

This was a clear signal to the Kremlin: the national financial infrastructure was entirely dependent on foreign payment systems. Having recognized its own vulnerability, the Kremlin spent the next five years building alternatives. The result was three parallel systems, each meant to plug one of the gaps exposed in 2014.

The first step was building a direct Russian alternative to SWIFT: the Central Bank's own payment messaging system, SPFS (СПФС - Система передачи финансовых сообщений, the Financial Message Transfer System). Development began in 2014 itself, right as talk intensified in the West of possibly cutting Russia off from SWIFT. As of January 2024, 557 institutions across 20 countries were connected to the system (mostly countries of the former Soviet space - Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan - and the Global South - Iran, Turkey, Cuba), though from China only a single bank participated - Bank of China (one of the country's largest state commercial banks). These facts make plain both the real scale, and the real limits, of this "independence."

The second instrument was the rollout of the national payment system "Mir" (an alternative to Visa and Mastercard). The relevant legislation passed in May 2014, and the first cards were issued in December 2015. Today, roughly 75% of Russia's domestic card transactions run through Mir. Its international use, however, remains sharply limited, and depends largely on a handful of Russia's partner states and a few individual foreign banks.

From Visa to "Mir" - Why Did the Kremlin Build Its Own Payment System? Visa and Mastercard aren't just global brands - they are international financial infrastructure. When a customer made a transaction with a Russian bank card, the data was physically processed on these companies' foreign servers. That's exactly why it became possible, in 2014, to instantly block specific banks: the "off switch" sat in Western hands. In Mir's case, that technical lever no longer exists abroad. The entire clearing cycle - transaction processing, authorization, and final settlement - runs entirely inside Russia's domestic system, under the Central Bank's direct control. As a result, outside actors no longer have the technical means to halt the process. This fact underscores the central point of this whole blog series once again: building your own national infrastructure is far more expensive and far less convenient in the short run - but in the long run, it either neutralizes external dependence, or turns it into geopolitical leverage of your own. This independence was ultimately put to the test in 2022-2026: Visa and Mastercard's formal exit from the Russian market failed to stop domestic payments - old cards kept working on the very same domestic infrastructure, until "Mir" took their place entirely (a 75% share by mid-2026).

 

The third step was preventive rather than reactive. In May 2019, Putin signed the "sovereign internet" law (it took effect on November 1). The explanatory note stated its rationale plainly: the United States' 2018 national cyber strategy, which the Kremlin judged to be aggressive. Under the amendments, Roskomnadzor was given the authority, in a crisis, to fully isolate Russia's internet space from the global network.

The same logic underlay all three initiatives: by reducing dependence on foreign infrastructure, the Kremlin sought to strip the West of any leverage it could use against it in return.

 

7. Control Over Strategic Sectors

In June 2019, a seemingly harmless, single-paragraph bill was introduced in Russia's State Duma. The proposal would cap foreign ownership at 20% in "significant information resources." The document named no specific target, but everyone understood the intended one was Yandex - Russia's largest search engine and one of Europe's most valuable technology companies. At the time, Yandex was registered in the Netherlands, 85% of its shares traded on Nasdaq, and the company's founder, Arkady Volozh, controlled 48% of the voting rights.

This wasn't the first attack on Yandex. Back in 2009, facing a hostile takeover threat from businessmen close to the authorities, the company was forced to hand Sberbank a so-called "golden share." That gave the state bank veto power over any deal touching more than 25% of Yandex's stock. But the 2019 bill posed a threat of an entirely different order - this wasn't about blocking a single deal, it was about forcibly restructuring the company itself.

The market's reaction came fast. Simply because the Kremlin voiced public support for the bill, Yandex's market capitalization dropped by $1.5 billion in a single day.

After long, difficult negotiations, the two sides reached a compromise in November 2019. Yandex created a "Public Interest Foundation" - a council of 11 Russian citizens - and handed it the so-called "golden share." The foundation received veto power over any deal that would concentrate more than 10% of voting rights in any single party's hands. The bill's author withdrew the document that same day, citing the need for "further work."

Formally, Yandex remained a foreign company. In practice, every one of its key decisions now fell under the control of those same 11 individuals.

In the end, in February 2024, a much-battered Yandex sold off its entire Russian business for $5.4 billion, to a consortium of buyers close to the Kremlin that included the company's own top management along with representatives of the oil giant Lukoil.

The Yandex case is worth attention precisely because it's a textbook example of how the system operates. The same pattern - first a formal compromise, then the gradual tightening of control, and finally the full transfer of assets into "trusted hands" - spread across media, telecommunications, banking, and energy (comparable high-profile cases are listed in the table below). The legal basis for this process dates back to a 2008 law that designated 42 sectors as "strategically important" and required state approval for foreign investment in them. After 2018, this mechanism was increasingly used not just to screen new investment, but to redistribute and renationalize already-successful, established companies.

A Few Examples of the State Acquiring Businesses

Industry	Year	Company	Control Mechanism
Energy	2014-2016	Bashneft	Court annulled the 1990s privatization; controlling stake transferred to Rosneft
Banking	2014	Sberbank	State controlling stake (>50%); sectoral sanctions (see Part 1)
Banking	2017	"Otkritie"	Central Bank nationalized what was then the largest private bank. In 2025, "Otkritie" (Russian for "Opening") was shut down (merged into another bank).
Media	2014-2015	CTC Media	2014 law capped foreign ownership at 20%; as a result, Usmanov acquired 75% of this American holding for $200 million.
Telecom	2014-present	Rostelecom	State holds 51.4% of shares. In 2024, Dmitry Medvedev became chairman of Rostelecom's supervisory board.

 

Corruption as a Working Mechanism

The logic behind this redistribution of assets is simple: the Kremlin places its trust not in the honest, but in the weak and the compromised. Property transferred illegitimately can be taken back just as easily as it was handed out. The scholar Alena Ledeneva calls this arrangement "the System" (Система): it profits from corruption on one hand, while controlling it through internal levers on the other. The System preserves informal influence over assets and appointees, rationally keeping in its own hands the mechanism for redistributing property rights and positions. Karen Dawisha describes the same thing more bluntly: it functions as a tribute system, in which the right to do business in Russia is granted in exchange for total loyalty and for contributions to specific projects favored by those in power.

For that reason, corruption in this system is not a defect that weakens control - it is the mechanism of control itself. Every beneficiary is, at the same time, both someone who profits and someone who is exposed, and the constant threat of selective punishment gives the Kremlin leverage even in places where it has no formal instruments at all.

This is exactly why no stage of building the "fortress" ever produced real institutional oversight. Independent audits, a free press, and parliamentary control all proved fundamentally incompatible with the system. A mechanism that buys loyalty cannot tolerate transparency.

Another Parallel With Today's Georgia The same picture holds true in Georgia: here too, there is no independent audit, free media, or parliamentary oversight - the state's architecture has proven fundamentally incompatible with independent institutions in today's Georgia as well. In sum, not a single institution here remains independent - including the most important one, the judiciary. The resemblance is not a coincidence: any system that buys loyalty through informal channels treats every independent actor as a threat. The difference lies not in the logic, but only in scale and depth.

 

This isn't just theoretical. The story of "Bashneft" ended in precisely this way: in November 2016, just weeks after the approval of the company's $5 billion sale to Rosneft, the FSB arrested Economic Development Minister Alexei Ulyukaev - inside Rosneft's own headquarters. The official charge was extorting $2 million from Igor Sechin. According to investigators, the cash-filled bag was handed to Ulyukaev by Sechin himself. Ulyukaev pleaded not guilty and called the whole affair a setup, but he was sentenced to eight years in prison. It was the highest-ranking arrest of a Russian official since the 1990s, and the message was unmistakable: no one is untouchable. In May 2022, Ulyukaev was released early on parole. Today he lives in Moscow and writes poetry.

The same period raised another question: who watches the watchmen? In September 2016, police arrested Colonel Dmitry Zakharchenko, deputy head of the Interior Ministry's anti-corruption department. A search of his and his relatives' property turned up roughly $140 million (9 billion rubles) in cash. That "record" didn't last: in 2019, FSB economic security colonel Kirill Cherkalin was found with $185 million (12 billion rubles). Both men had been officially tasked with fighting corruption.

These two cases complement each other on two levels: the Ulyukaev case showed that selective repression reaches even ministerial rank, while the arrests of the colonels proved that the very bodies meant to provide oversight were themselves part of the corruption. Together, these examples make clear why internal controls could never have worked - the watchmen were themselves the ones who needed watching.

 

8. Strengthening the Military-Industrial Complex

Sergei Chemezov's relationship with Putin goes back to the 1980s in Dresden, where both served as KGB officers. In 2007, Putin put Chemezov in charge of the newly created state corporation "Rostec" - a giant holding company that brought together the largest part of Russia's military-industrial complex, including the Kalashnikov Concern, Russian Helicopters, and the aviation, electronics, and advanced technology sectors.

In 2018, a new ten-year state armament program (2018-2027) took effect. Its budget and scope significantly exceeded previous programs. From 2018 to 2021, Russia's military spending, in dollar terms, held fairly steady between $61 billion and $66 billion. According to the Stockholm International Peace Research Institute (SIPRI), this was not a period of dramatic rearmament. The sharp jump came only in 2022, after the war began, when spending reached $86.4 billion.

So 2018-2021 was a phase of quiet preparation - building infrastructure, industrial capacity, and supply chains. It created the base that made the massive production scale-up possible starting in 2022.

Да здравствует российская коррупция - самая гуманная коррупция в мире! Looking at Russia's military industry, one can't help thinking of a well-known Soviet-era phrase, reworked: Long live Russian corruption, the most humane corruption in the world! Things didn't always go according to plan, of course, and corruption in Russia was, true to form, right at home. The previous state armament program (2011-2020), for instance, called for producing 2,300 new-generation "Armata" tanks and at least 55 Su-57 fighters by 2020. But according to SIPRI data, as of 2019 both projects were still at the prototype stage, and the armed forces hadn't received a single serial-production unit. As a result, the focus fell back on modernizing old equipment and producing outdated models instead. None of this denies the real growth in infrastructure and funding, but it makes clear that a substantial gap often existed between the Kremlin's official declarations and its real military capabilities.

One necessary dimension is missing from this picture: the arms programs weren't just planned and funded - they were also plundered, as Russia's own state institutions confirmed. In 2011, Russia's chief military prosecutor, Sergei Fridinsky, stated publicly that roughly 20% of the state funds allocated for new weapons procurement was being stolen. He said this just after the government had announced 22 trillion rubles (about $730 billion) for the armament program through 2020.

In 2012, Deputy Prime Minister Rogozin told the State Duma that those who embezzled defense funds were traitors, since bribe-takers were, in effect, helping a potential enemy. That wasn't an idle accusation. That same year, the Investigative Committee accused the Defense Ministry's holding company "Oboronservis" of embezzling budget funds. The initial damage estimate was 3 billion rubles; a year later, Committee chairman Alexander Bastrykin raised the figure to 13 billion rubles (roughly $433 million) and added that weak financial controls meant corruption ran deep within the Defense Ministry. Defense Minister Anatoly Serdyukov was removed from his post and replaced by Sergei Shoigu - a longtime friend of Putin's.

How we read these numbers matters. A 20% loss doesn't mean the defense industry wasn't functioning. It means the system was levying a "tax" on itself, one that was tolerable in peacetime. The real problem showed up not just in overall production volume, but in quality - precisely where high precision, modern technology, and on-time delivery mattered most.

In the end, the "Armata" tank never entered serial production (by some estimates, only 20-50 units were ever built), and in 2024 Chemezov himself said the tank was "too expensive" for actual war. For the Su-57, a contract signed in 2019 called for 76 units by 2027, but by early 2026 the air force had taken delivery of only around 30 aircraft. On the other hand, that same industry managed, after 2022, to launch mass production of Soviet-design artillery shells and cheap drones. That is exactly the picture a 20% "corruption tax" produces: scale was preserved; innovation was not.

This is the backdrop against which February 2022 arrived. This was a system that had spent years systematically building a financial buffer, technological independence, and industrial capacity - though with less efficiency and on a smaller scale than official rhetoric claimed.

 

Conclusion

Let's return to our opening question: how effective was the model this piece has called the "fortress economy"?

The answer depends on what standard we use to judge "effective."

If the goal was economic growth, the model failed. From 2009 to 2021, average annual growth ran at roughly 1%, and real household incomes stagnated for years on end. This was, by no means, a continuation of the previous decade's "economic miracle."

But if the goal wasn't prosperity but endurance - not growth but survival - the picture changes completely.

Every instrument we've examined served the same underlying logic: reduce external dependence, tighten internal control:

The National Welfare Fund, originally created to support the pension system, became a resource for rescuing sanctioned companies and financing militarized spending (in 2022, just before the war began, the fund's liquid portion stood at roughly $114 billion).

The Central Bank knowingly gave up returns in exchange for greater security: by selling dollar assets and buying gold, it forwent at least $8 billion in income - but gained reserves that sanctions couldn't touch.

The state built alternative infrastructure (SPFS - a Russian SWIFT; "Mir" - a Russian Visa; and a "sovereign internet") that outsiders could no longer switch off from the outside.

Control over strategic assets shifted, step by step, into the hands of parties the Kremlin considered "trustworthy."

Taken individually, each step looked like an unavoidable response to a specific threat. Taken together, they built something else entirely - a state that had immunized itself against outside pressure.

In narrow terms, the strategy worked: the 2014 economic crisis did not shake the political regime, and the sanctions failed to trigger the system's collapse. The West's traditional levers of pressure - from the threat of expulsion from SWIFT to blocking payment systems - couldn't damage something that had already been duplicated and replaced.

Even so, three fundamental caveats stand out here:

First: this stability proved temporary and, in the end, illusory. Russia never actually escaped its dependence on energy exports (oil and gas still accounted for 57% of budget revenue). Likewise, low external debt proved temporary too - after 2022, domestic debt alone reached 74% of budget revenue. The system learned to absorb shocks, but it never fixed the deeper causes producing them.

Second: this entire architecture was built on the assumption that the worst-case scenario had already happened, in 2014. The buffers accumulated over eight years - gold and currency reserves, low debt, and alternative infrastructure - were calibrated for a crisis on the scale of 2014. In 2022, Russia faced a shock of an entirely different magnitude, as it was systematically cut off from the Western economic space. For the first time in history, the reserves of a G20 member's central bank were frozen.

A third problem: the "fortress" turned out to be incapable of honestly assessing its own real condition - and that, too, was a direct product of the corrupt system described above. Loyal managers running state corporations, funds disbursed without independent audit, and a media barred from reporting bad news: these three factors together created ideal conditions for corruption, and they stripped the system of any ability to evaluate itself objectively. One could even say the system had no need to evaluate itself objectively at all.

In a system like this, falsified reports flow upward: every link in the chain tells the one above it that "everything is going brilliantly." At the top of that hierarchy sat the Kremlin, where only the most polished, flattering information ever arrived. The consequences showed up in two places.

First, in the arms programs: what existed on paper as 2,300 "Armata" tanks and dozens of Su-57 fighters turned out, in reality, to amount to only a handful of units.

Second, in Ukraine itself: if anti-corruption department officers and FSB colonels were hiding billions of rubles in their homes, it should come as no surprise that similar questions arose about funds earmarked for covert operations in Ukraine. According to Western media and researchers tracking the FSB, in March 2022 Sergei Beseda, head of the FSB's Fifth Service, was placed under house arrest. The charges reportedly included both misuse of funds and feeding the Kremlin inaccurate information.

The Kremlin had been systematically misled by the West, which denied any plan to attack Ukraine right up until the last moment. At the same time, the Kremlin had wildly overestimated its own capabilities - and the vertical chain of command that punished the honest reporting of bad news upward was one the Kremlin had built itself. In February 2022, Moscow went to war with an army that, in crucial respects, existed only on paper.

Did the model built between 2009 and 2021 survive this new, far harsher test? That is the question our next post will take up.