Russia Economy: National Security Panics Could Spark ‘Disaster’ for Innovation

• Spy mania in Russia has created an environment that’s stifling innovation, sources told BI.
• Arrests for treason in Russia have soared, human rights experts said.
• Recent arrests of scientists have had a chilling effect on researchers, sources said.

Ivan Pavlov, a Russian-born lawyer who now lives in Europe, was 51 was he was forced to leave his home country. After years of representing Russians who had been accused of treason, he was put on the nation’s wanted list and labeled as a “foreign agent” in 2021 — a term that, in Russia, is equated with spy, according to the Human Rights Watch.

Eventually, he knew he had to flee, he told Business Insider in an interview.

“All my professional life was in Russia,” he said. “My family was inside Russia and it was a huge [suffering].”

The arrest of accused “spies” has risen dramatically since Moscow began its invasion of Ukraine, Pavlov and other human rights experts told BI.

That could end up having a big knock-on effect on Russia’s already-weakened economy. Possible impacts include decreased investment, decreased consumption, and slower growth as Russia shifts away from a capitalistic society, Richard Portes, an economist from the London Business School, says.

“You do have an inhibition on risk-taking, innovation,” Portes told BI on the intensifying pursuit of foreign agents in Russia. “For those who remain, you’re not going to get any dynamic economic activity. Aside from the brain drain, aside from the drain of young people, you’re not going to get any innovation. And I think that’s the medium-term consequence of all this: disastrous.”

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Sergei Guriev, another economist who was deemed a “foreign agent” by the Russian government, agrees the crackdown on perceived security threats could hurt the country economically.

He used the example of Russia recently arresting some of its missile scientists, which has made others in the scientific community fearful of publishing new research, he said.

“We can expect that it should impact economic growth,” he added, though he noted the effect may not be immediately felt.

Russia’s economy is showing some signs that the kind of risk-taking associated with innovation and entrepreneurship is on the decline. Innovation in Russia has fallen behind the nation’s level of development, according to a 2024 ranking from the World Intellectual Property Organization. Patent filings fell 13% in Russia in 2022, while patent filings from foreign applicants dropped 30%, according to data from the Russian Patent Office.

Russia minted just 240,458 new LLCs in 2022, about half of the number of new companies that registered in 2015, according to the World Bank entrepreneurship database.

Private investment in Russia is also down. Private equity and venture capital-backed M&A deals and funding rounds in Russia dropped around 39% from 2022 to 2023, with the nation seeing just $1.4 billion of those types deals last year, according to S&P Global data. Merger and acquisition deal value as a whole also dropped 71% to $6.41 billion, down from $22.48 billion the prior year.

Corporate profits in Russia also dropped around 6% in the first half of the year in 2024. Meanwhile, profits from Russia’s professional, scientific, and technical activities dropped around 19% over the first half of this year compared to the same period a year ago, Rosstat data shows.

These outcomes are partly influenced by a more restrictive environment in Russia, Portes said, in addition to some of Moscow’s other challenges, like high inflation and the flight of some of its most educated workers.

“The longer-term consequences, the medium-term consequences, are hollowing out [the economy],” he said. “It’s very sad, but that’s what it is.”

Moscow’s spy mania

The number of Russians being accused of treason has skyrocketed in recent years, Guriev says. He estimates that over 100 people each year are now being arrested for treason.

That’s likely because Russia’s government is focused on creating an “atmosphere of fear,” and “paralyzing resistance” amid the war in Ukraine, Pavlov said.

Constant fear of persecution doesn’t mix with a capitalistic society, Portes says.

“The thing about capitalism — capitalism has its defects for sure — but it works because it gives incentives to people to take risks,” he said. “The circumstances of a country that’s like what Russia is right now, the incentive to take risks, there is a strong disincentive”.

Other experts have noted that Russia looks to be drifting away from a capitalist structure, particularly as it boosts public spending to fund its war efforts in Ukraine.

Previously, Portes predicted that Russia was on its way to being reduced to a “natural resource economy.” That could lead to a lower quality of life for Russians, he predicted, hitting the nation with sluggish economic growth and a decline in everything from education to medical care.

Moscow’s economy isn’t necessarily at risk of collapse, thanks to hefty government spending on the war, Portes says, though he still sees a dark economic future ahead of the nation.

“It’s a disaster. We have plenty of examples in history where a war economy can keep on going, even though everything is crumbling around it. And I think that’s what you have now,” he added.