The Kremlin is back at the drawing board while continuing improving the health of the Russian economy by updating the 12 National Projects that were launched in 2019 and are designed to improve the lives of average Russians.

During his state of the nation speech Putin put forward a raft of new projects for the National Projects 2.0 that will go down well with the voting public.

Putin proposed to extend the budget planning from the current three years to six to improve the long-term planning of the state finances. The current three-year planning period and the use of the so-called budget rule to siphon off excess oil and gas revenues to the National Welfare Fund (NWF) has been highly successful.

"I consider it necessary now not only to prepare a draft budget for the next three-year period, but also to set all the main investment expenses further, for the period until 2030," he said. "In fact, we need to form a six-year long-term financial plan of the country's development, which we, of course, will supplement with new initiatives." In another major change of policy, Putin also suggested introducing a system of progressive income tax rates.

"I suggest thinking over approaches towards modernization of our fiscal system, more fair distribution of the fiscal burden to the side of those having higher personal and corporate incomes. And, on the contrary, the tax burden should be lowered for families, including at the expense of deductions I have already mentioned today," Putin said.

A progressive tax system is needed to incentivize businesses investing in development and implementation of infrastructural and social projects, the president said.

"At the same time, various loopholes used by certain companies to evade taxes or understate their fiscal payments should be definitely closed," Putin added.

Amongst the very first things that Putin did on taking office in 2000 was introduce a system of flat taxes – 13% income tax and 24% corporate tax – that everyone pays regardless of their level of income. They have been the bedrock of his early reforms and the low rates have contributed to his popularity.

In two decades, he has not dared touch these taxes, so the suggestion that he might hike taxes on the better off is a major change and an acknowledgement of the growing pressure on the federal budget.

He also focused on boosting industrial production and retooling the economy to make more of the things its needs, many of which have been sanctioned. Russia needs to scale up manufacturing of consumer goods, pharmaceuticals, equipment, lathes and motor vehicles, Putin said. The number of technology parks in Russia will be increased to 100 by 2023.

"We should produce ourselves in much larger volumes consumer and other goods - pharmaceuticals, equipment, lathes, motor vehicles, and so on. We cannot do everything, and we do not need to seek after producing everything. The government nevertheless knows, what should be worked out," Putin told the assembled delegates.

By the end of 2023, Russia's industrial production increased by 3.5%, and by 4.1% compared to two years ago - one of the biggest gains in the last decade.

Industrial production gains y/y in 2023

- Food production: 5.9%

- Clothing manufacturing: 4.1%

- Leather and leather products manufacturing: 12.3%

- Chemical substances and products manufacturing: 4.6%

- Rubber and plastic products manufacturing: 9.2%

- Manufacture of metal products, excluding machinery and equipment: 27.8%

- Manufacture of computers, electronic and optical products: 32.8%

- Manufacture of electrical equipment: 19%

- Manufacture of motor vehicles, trailers, and semi-trailers: 13.6%

- Furniture manufacturing: 20.7%

- Bearing production increase: 27%

- Passenger cars: 19%

- Buses: 10.9%

- Freight wagons: 26.6%

- Passenger wagons: 16.9%

Source: Rosstat

The country will also boost the portfolio of infrastructural loans to regions by at least RUB250bn ($2.7bn) annually, Putin added. The Russian authorities will allocate another RUB200bn to subsidize loans for priority industrial product manufacture. The capital of Russia’s Industrial Development Fund will be doubled to RUB300bn that is tasked with supporting high-tech projects.

"We set a goal that by 2030 the volume of investment in key industries should increase by 70%. By the way, our dynamics here are good. I’d like to say, even very good," he said.

Another unintended consequence of the war has been a military Keynesianism bump in investment – both by the state as it invests heavily in converting civilian production facilities to military, but also by Russia’s private companies that have been retooling to take account of the effects of sanctions.

Over the past three years, the actual growth in the rate of investment in key sectors exceeded government’s expectation: in 2021 it was 8.6% with a plan of 4.5%; in 2022 it was 15.9% against the planned 9.5%; and in the first nine months of 2023 the growth in investment was 26.6% against a plan of 15.1%, according to the official statistics.

Putin also suggested increasing the basis for depreciation and amortization, which will total 200% of costs for domestic equipment, and for research and development to stimulate the upgrade of production capacities of plants.

Another direction is to make more private capital available to private firms to fund their own investments. Putin said that the launch of special treatment of IPO for Russia’s high-tech companies should be accelerated. Separately, the capitalization of the capital market should double by 2030 to 66% of GDP, Putin added.

"The Russian stock market needs to strengthen its role as a source of investment. Its capitalization by 2030 should double compared to the current level, amounting to 66% of GDP. At the same time, it is important that people have the opportunity to reliably invest their savings in the development of the country and receive additional income," he said.

Putin also called for more than doubling public and private investment in research and development. "I believe that we must more than double the total investments of the state and business in research and development, bring their share to 2% of GDP by 2030 and become one of the leading scientific powers in the world according to this figure," he said.

New Projects

As for the national projects, they will also be deepened and expanded aimed at enhancing the quality of life for the average Russian citizen and bolstering the country's global standing, Putin said.

“Housing” has been a key element of the projects and during his speech Putin boasted that new residential construction had expanded by 1.5 times in 2023, beating all Soviet records.

The new "Family" project is designed to support families with lots of children that also a disproportionally represented amongst Russia’s poorest families, as well encourage higher birth rates. Russia is in midst of a demographic crisis, as the dent put in the population curve in the chaos of the 1990s has now hit the labour pool.

"Continuous work is needed directed at improving the quality of life of families with children, at supporting the birth rate," Putin declared. As detailed by bne IntelliNews in Putin’s babies, demographics has been a core concern of Putin’s since he first took office in 2000.

The "Long and Active Life" project seeks to extend life expectancy in Russia to at least 78 years by 2030, with ambitions to reach over 80 years in the future. Federal projects targeting major health concerns such as cardiovascular and oncological diseases, as well as diabetes are included in the plan.

The "Russia’s Youth" project is supposed to nurture the younger generation's aspirations, successes and life values, which Putin said are crucial to the country's sovereignty and historical continuity.

The "Human Resources" project focuses on professional development, education, and training, aiming to equip Russia's growing younger generation with the skills needed for the 21st-century economy.

The "Data Economy" project, with a budget of over RUB700bn ($7.6bn) for the next six years, aims to integrate digital platforms across various social and economic sectors.

"We will be able to continue adjusting work at all levels of government around each person and family’s interests," Putin stated, underlining the project's focus on efficient and accessible state and municipal services.

How much of this will be implemented. In the past Russia has been famous for having lots of good ideas, but always falling down on the implementation. The 1990s were marred by the chaos of the Yeltsin administration. In the noughties companies began to invest and focus on profitability, especially after oligarch Mikhail Khodorkovsky started a widely adopted fad of improving corporate governance.

And it is not clear where the money to pay for all this will come from. This will all  ostensibly include RUB4.5 trillion ($49 billion) to modernize Russia’s ailing public utility infrastructure, which caused a series of accidents and disruptions in multiple regions in January and February; at least a trillion rubles ($11bn) for improving health care infrastructure and schools; and several family and child support measures. The total sum of Putin’s promises is around RUB10 trillion  ($109bn) over 6 years.

It is unclear where this money will come from, as Russia’s 2024 budget and its budgetary plans for 2025-2026—which are based on optimistic assumptions about fiscal incomes as it is—do not foresee such generous spending on these goals.

The planned spending is twice the value the liquid part of Russia’s National Welfare Fund. It seems that the promises are based on the assumption that Russia will achieve a decisive advantage in the war in Ukraine as early as this year, after which its economy will enter a period of sustained growth. 

The first serious systematic reforms like the changes to the banking sector and tax system only really began in the following decade, but the more general reforms enshrined in the National Projects have not been a success.

And Russia has some serious obstacle to overcome. While Russian are very good at things like tech – Russian internet giant Yandex is a world class company and still the most valuable the company in Europe even after its market capitalisation was halved after the war started – but on things like precision tools and electronics, Russia remains hopeless far behind the other advanced economies and heavily dependent on imports.

Progress has also been made on rooting out corruption and improving the rule of law, but Putin’s increasingly repressive political system works against more progress as people and companies remain vulnerable to the whims of the state.

As Ian Bremmer, the founder of the Eurasia Group, argued in his book The J curve, in the early stages of a country’s transformation the stability an authoritarian government brings allows for more rapid economic development as the president can simply order things to happen. However, despite the chaotic confusion and debate of democracies, the freedoms that comes with it allows for greater innovation and risk taking that ultimate leads to a higher level of prosperity that autocracies can’t achieve. What remains to be seen is where Russia lies on this curve.