How Moscow’s fixation with fiscal prudence undermined its regional power

In a sweeping analysis, the author contends that Russia’s decline as a regional power began not with the war in Ukraine but during its boom years of the 2000s, driven by a post-1998 macroeconomic consensus that prioritised budget and trade surpluses at the expense of investment, reform and the provision of public goods across Eurasia. The default of August 1998, described as the foundational event that gave rise to Putinism, imposed upon the country’s political and technocratic elites an inviolate necessity: that Russia must run twin surpluses at all costs to maintain stability, a logical response at the time that would later accelerate its decline and inflame the tensions that erupted into violence in Georgia and Ukraine. The author argues that the stabilisation measures adopted out of necessity in the late 1990s were retained amid the energy windfall of the 2000s, creating an irreconcilable tension between fiscal prudence and the investment needed to sustain growth and development.

The reliance on oil and gas revenues, taxed progressively to capture the overwhelming majority of any windfall, shifted the tax burden away from the public but also rendered the state hostage to energy prices, a vulnerability exposed when Russia’s oil production contracted in 2008 despite soaring prices. The regime, having run out of money to redistribute to lift incomes, faced a choice between taxing the public and businesses or paring back non-essential spending, and it chose the latter, even as it pursued a costly military modernisation programme. This austerity, the analysis suggests, had pernicious effects across the region, denying Russia’s neighbours their best potential source of aggregate demand and forcing Ukraine and other states to seek alternative economic partnerships, a westward pivot that Moscow sought to prevent at all costs.

The author contends that the Ukraine policy file consumed so much political energy and capital that it trebled the damage done by previous policy mistakes, and that the annexation of Crimea in 2014 marked a final farewell to alms, accelerating the fragmentation of Eurasia. By the time of the full-scale invasion in 2022, Russia had already entered stagnation, and wartime spending, while providing a temporary stimulus, has since driven the country into a prolonged structural recession. Looking ahead, the author predicts that the era of large energy windfalls is over, and that Russia will be forced to increase its tax take on the public and business to offset declining revenues, while the energy transition shifts the correlation of economic forces against the current regime. The article concludes that the war has sealed a qualitative decline in Moscow’s power that cannot be arrested without radical changes to its political economy, and that the region faces a more fragmented future with fewer opportunities for growth and stability.