• Russia’s spy mania has created an environment that stifles innovation, sources told BI.
• Arrests for treason in Russia have increased, human rights experts said.

Ivan Pavlov, a Russian-born lawyer now living in Europe, was 51 when he was forced to leave his native country. After years of representing Russians accused of treason, he was put on the nation’s wanted list and labeled a “foreign agent” in 2021 — a term that in Russia equates to spy, according to Human Rights Watch.

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

“My whole working life has been in Russia,” he said. “My family was inside Russia and it was a huge (suffering).”

Arrests of accused “spies” have increased dramatically since Moscow began its invasion of Ukraine, Pavlov and other human rights experts told BI.

This could have a powerful effect on Russia’s already weakened economy. Possible impacts include lower investment, lower consumption and slower growth as Russia moves away from a capitalist society, says Richard Portes, an economist at the London Business School.

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

Sergei Guriev, another economist who has been deemed a “foreign agent” by the Russian government, agrees that cracking down on perceived security threats could hurt the country economically.

He recently used the example of Russia arresting some of the rocket scientistswhich has made others in the scientific community wary of publishing new research, he said.

“We can expect this to have an impact on economic growth,” he added, although he noted that the effect may not be felt immediately.

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

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

Private investment in Russia has also declined. M&A deals and financing rounds backed by private equity and venture capital in Russia fell by around 39% from 2022 to 2023, with the nation recording only 1.4 billion dollars these types of transactions last year, according to S&P Global data. The value of M&A deals as a whole also fell 71% to $6.41 billion, down from $22.48 billion a year earlier.

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

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

“The long-term consequences, the medium-term consequences, are going to blow the (economy) out,” he said. “It’s very sad, but it is.”

Moscow’s spy mania

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

This is likely because the Russian government is focusing on creating a “climate of fear” and “paralyzing resistance” during the war in Ukraine, Pavlov said.

Constant fear of persecution does not mix with a capitalist society, says Portes.

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

Other experts noted that Russia appears to be removing the from a capitalist structure, especially as it increases public spending to finance its war efforts in Ukraine.

Earlier, Portes predicted that Russia was about to be reduced to a “the economy of natural resourcesThis 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 health care.

Moscow’s economy is not necessarily at risk of collapse, thanks large government spending on warsays Portes, though he still sees a bleak economic future ahead for the nation.

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