STAGNATION has a particularly unpleasant resonance to the Russian ear, conjuring up memories of the ossified gerontocracy of the Brezhnev era. But with year-on-year GDP growth at just 1.2% last quarter and growth in investment and industrial production nearing zero, stagnation seems to be the most apt description of the Russian economy. Speaking at an investment forum last month, Alexei Ulyukayev, the economic-development minister, paraphrased an old joke: “Practically, there is no economic development,” he said, “but the economic-development minister is here in front of you!”

Throughout the 2000s, the Kremlin funnelled profits from oil and gas into the rest of the economy, largely through state-led investment projects and increases in wages and pensions. Consumption soared. Spare industrial capacity left over from the Soviet era meant that firms did not have to invest to produce more. They could simply unlock capacity that had been sitting unused.

That model is now outdated. According to the World Bank, the Russian economy “could be running very close to its maximum capacity”. Manufacturing is slowing and private consumption is also starting to cool, despite higher levels of household credit, unemployment of only around 5% and wage growth.

High prices for hydrocarbons will not solve this, because the economy has now “adapted” to expensive oil, says Natalia Akindinova of the Higher School of Economics. Future growth will require investment in new technology as well as gains in efficiency and labour productivity. Yet state-driven investment is tapering off as big projects such as the preparations for the Winter Olympics in Sochi near completion. Private investment is flat. Relatively high wages mean that Russian firms struggle to compete on price. The trouble is that Russian businesses cannot compete on quality either, since they are not investing in technology and equipment. This is related to the uncertainty of the business climate and the attractiveness of imports thanks to the strong rouble. According to a survey by the Gaidar Institute, 43% of businesses say they have kept investment levels static and another 33% have invested even less than they did last year. The lack of opportunities has led to capital flight. This amounted to $48.2 billion in the first three quarters of the year, as firms took their savings abroad. An underdeveloped financial system offers no efficient way to channel surplus savings to the small and medium-sized businesses that need them.

The Kremlin seems to have decided to put those who rely on state munificence at the head of the queue. Regional governments were forced to raise salaries at the expense of their investment budgets. A country of 140m people, Russia has 20m state-sector workers and 40m pensioners. The Duma recently passed a law that calls for what is technically a temporary confiscation of $7.6 billion in individual pension savings, but which many fear may be used to plug the growing hole in the pay-as-you-go portion of the pension system.

Mr Putin has discussed using the National Welfare Fund to pay for infrastructure projects such as a high-speed railway between Moscow and Kazan, which may provide a short-term jolt for the stagnating economy. So far the central bank has resisted pressure from some inside government and business to lower interest rates. That is wise: the real problems in the economy are not monetary but structural. Any loosening of monetary policy, says Ms Akindinova, is “more likely to stimulate inflation than growth”.

Mr Putin has also made a show of his goal to move Russia up the World Bank’s annual “Doing Business” rankings. Early results are impressive: Russia advanced 19 slots, to 92nd place this year, largely by cutting red tape. Russia improved more in this year’s report than any of its BRICS peers, but it was also the only one to see GDP growth slow significantly. Further progress to reach Mr Putin’s stated goal of 20th place by 2018 will require profound reforms to the courts and law enforcement, which would meet resistance with powerful constituencies inside the ruling system.

Even without meaningful structural reform, Russia’s low government debt and high reserves mean that the state could buy itself a minimum level of social—and thus political—stability for some years to come. But it will be more vulnerable than ever to outside shocks. The oil price at which Russia can finance budgeted spending without borrowing has increased from just $34 a barrel in 2007 to above $100 for the years ahead.

More than anything, says Natalia Orlova of Alfa Bank, the hazard of stagnation is the “lost opportunity” to make the economy more robust. For the time being the price of oil remains high, but it could fall with increased shale-oil production in America and new oil provinces in Africa. A large downward lurch would leave the Kremlin with less freedom to act than it has now. The good news for Russia, says Ms Orlova, is that Mr Putin does not need to spend a lot of money to make the financial system more efficient or the state’s role in the economy less heavy-handed; but the bad news, she adds, is that he has to embrace “a new idea of how to structure the economy”.