Russia’s economy is holding up, but Putin is on trial

Western sanctions have hit Russian banks, certain wealthy individuals and Russian imports of technology, but after a year of sweeping restrictions aimed at debasing Moscow’s war chests, the economic lives of ordinary Russians don’t look all that different than usual. as it was before the invasion of Ukraine.

There is no mass unemployment, a free-falling currency, and no lines at failing banks. The assortment in supermarkets has changed little, with international brands still available or local substitutes instead.

Crowds may have thinned out at some Moscow malls, but not drastically. Some foreign businesses like McDonald’s and Starbucks have been taken over by local owners planting another name and offering essentially the same menu.

“Economically, nothing has changed,” says Vladimir Zharov, 53, who works in television. “I work like before, I go shopping like before. Well, maybe the prices have gone up a bit, but not enough to be noticeable.”

Russia’s economy has withstood unprecedented sweeping economic sanctions from the West better than many expected, but now that the latest restrictions finally take full aim at the Kremlin’s biggest moneymaker — oil — the coming months will be a test. even tougher for the economic strength of President Vladimir Putin.

Economists say that sanctions on Russian fossil fuels that are just now tightening — like the cap on the price of oil — should reduce the profits that finance military strikes against Ukraine. Some analysts are forecasting signs of trouble — stretched government finances or a sinking currency — in the coming months.

But other economists believe the Kremlin has significant reserves of money that have not been affected by sanctions, while Russia’s ties to new trading partners in Asia have quickly taken shape. They say Russia is not likely to run out of money this year, but instead will face a slow slide into multi-year economic stagnation.

“You’ll have enough money in any kind of reasonable scenario,” Chris Weafer, managing director and Russian economy analyst at consultancy Macro-Advisory, said during a recent online discussion by media company bne IntelliNews.

Russia will continue to generate oil revenue, even at lower prices, so “currently there is no pressure on the Kremlin to end this conflict due to economic pressures,” he added.

Although the economy is teetering between sanctions and resilience, what ordinary Russians can buy has remained remarkably the same.

Apple has stopped selling products in Russia, but Wildberries—the country’s largest online retailer—offers the iPhone 14 for about the same price as in Europe. Online retailer Svaznoy offers Apple’s AirPods Pro.

Furniture and household items that remained after IKEA left Russia are sold on the Yandex. Nespresso coffee pods sold out after Swiss-based Nestlé stopped shipping them, but imitations are already available.

Labels on cans of Budweiser and Leffe beer for sale in Moscow indicate they were brewed by ABInBev’s local partner, even though the company has written off a stake in its Russian joint venture and put it up for sale. In stores you see Coca-Cola bottled in Poland alongside local colas.

ABInBev says it no longer receives money from the joint venture and Leffe production has stopped. Wildberries and Svyaznoy did not respond to emails asking about their supply.

However, it is clear that these products have circumvented sanctions through third countries that do not participate in the criminalization of Russia. For example, exports from Armenia to Russia increased by 49% in the first half of 2022. Chinese phones and vehicles are becoming more widely available.

The auto industry faces greater obstacles to adapt. Western automakers including Renault, Volkswagen and Mercedes-Benz halted production, so sales fell 63%. Various local entities took over some factories and tendered for others.

There are still foreign cars available, but far fewer and at higher prices, says Andrei Olkhovsky, general director of Avtodom, which has 36 dealerships in Moscow, St. Petersburg and Krasnodar. “Porsche-brand shipments, like those of those other manufacturers, are not possible through official channels,” he adds. “What is on the market are scattered offers of cars that were imported by individuals or through friendly countries through official channels.”

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Unlike the European automakers, some corporations are far from gone.

While 191 foreign companies have left Russia and 1,169 are working to do so, some 1,223 remain and 496 take a wait-and-see approach, according to a database compiled by the Kiev School of Economics.

The companies face public pressure from kyiv and Washington, but some have found that it is not so easy to find a Russian buyer or say they only sell essential items such as food.

Moscow residents, meanwhile, have downplayed the impact of the sanctions.

“Maybe it hasn’t affected me yet,” says Alexander Yeryomenko, a 63-year-old retiree. “I think we will bear everything.”

Dmitry, a 33-year-old man who declined to give his last name, said only the clothing brands had changed.

“We’ve had even worse periods of time in history and we’re through it,” he says. “We need to develop our own production and not depend on imported products”, she adds.

One huge reason for Russia’s resilience: record fossil fuel profits of $325 billion last year when prices soared. The rising costs were due to fears that the war would spell a severe loss of energy for the world’s third-largest oil producer.

Those revenues, coupled with a collapse in what Russia could import due to sanctions, led the country to a record trade surplus, meaning that what Russia earned from sales to other countries far exceeded its purchases abroad.

That profit helped support the ruble after a temporary slump after the invasion and provided cash for government spending on pensions, salaries and, most importantly, the military.

The Kremlin had already taken steps to shield the economy from sanctions after facing some penalties for annexing Ukraine’s Crimean peninsula in 2014.

Businesses began buying parts and food at home, and the government hoarded huge amounts of cash from the sale of oil and natural gas. However, about half of that money was frozen because it was kept abroad.

Those moves helped defy predictions of an 11% to 15% collapse in economic output. The economy contracted 2.1% last year, Russia’s statistics agency reported. The International Monetary Fund forecast growth of 0.3% this year: not huge, but not disastrous either.

The big change could originate from the new energy sanctions. The major democracies of the Group of Seven had avoided far-reaching sanctions against Russian oil for fear that energy prices would rise further and fuel inflation.

The solution was a $60-a-barrel price cap for Russian oil heading to countries including China, India and Turkey, which took effect in December. Then came a similar cap and European embargo on Moscow’s diesel fuel and other refined petroleum products last month.

Estimates differ about how strongly those measures will affect them. Experts at the Kiev School of Economics believe the Russian economy will face a “turning point” this year when oil and gas revenues fall 50% and the trade surplus plunges to $80 billion from $257 billion. dollars from last year.

They explain that it is already happening: revenue from oil taxes fell 48% in January compared to the previous year, according to the International Energy Agency.

Other economists are skeptical about the possibility of a breaking point this year.

Moscow could possibly weather even a short-term drop in oil earnings, reckons Janis Kluge, an expert on Russia’s economy at the German Institute for International and Security Affairs.

Even if Russia’s oil revenues were cut by a third, something that “would be a heavy blow to GDP, would not bankrupt the state or lead to a collapse,” he says. “I think, as of now, we are talking about gradual changes in the economy.”

The real impact will occur in the long term, he points out. The loss of Western technology, such as advanced computer chips, means an economy permanently stuck in slow gear.

Russia may have successfully got factories running again after the Western exodus, “but the business issue of producing something fancy in Russia is gone and won’t come back,” Kluge warns.

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