Sanctions confront the Russian economy with a consumer shortage crisis
Moscow already faces serious challenges.
Unable to secure spare parts from Western aircraft manufacturers, for example, the Russian aviation sector is facing a crisis. About 80 percent of Russia’s commercial fleet is made up of foreign-made aircraft, mostly from Airbus and Boeing, both of which have ceased to do business with Moscow.
Ural Airlines, which owns more than 50 Airbus planes, has predicted it can fly safely for only a few months before it needs to start “disassembling” other planes — with some planes permanently grounded to strip them. Low-cost airline Pobeda, part of the state-run Aeroflot group, has reduced its fleet from 41 to 25 aircraft, using its grounded planes for “disassembled” parts.
Ericsson and Nokia’s decision to freeze business with Russia, meanwhile, has left cellular service providers there suddenly roaming the world in search of second-hand towers and parts to maintain and expand a network that roughly matches the United States and Europe. Even China’s Huawei appears reluctant to bridge the gap, indefinitely delaying Russia’s rollout of 5G technology, a service that service providers were testing before the Ukrainian invasion.
“In five years, there will be a huge gap between Russia and the rest of the world” in cellular service, said Grigory Bakunov, a Russian technology expert.
After the recent exit of French carmaker Renault, Russia is moving to restart production of Moskvich – a Soviet-era build that went bankrupt two decades ago after failing to meet foreign quality standards. Reviving it, perhaps with Chinese help, could either lead to the start of production of domestic alternatives or see a new generation of old cars block Russian roads.
However, supply disruptions have affected not only assembly lines that rely on advanced technology but also those using imported materials. Russian Transport Minister Vitaly Saveliev admitted to reporters last weekend during a visit to the Russian Astrakhan region that the sanctions “imposed on the Russian Federation have broken practically all logistics in our country.”
Under the cover of the Russian economy
The ruble has rebounded since it quickly began to emerge after winter sanctions, and the Russian government’s fortunes poured into the coffers of oil revenue. European countries have taken pathetic steps toward their pledge to reduce dependence on Russian oil and gas, by far their biggest exports, even as Moscow boosts sales to Asia.
JPMorgan predicted this month that the recession caused by the sanctions will be less severe, if prolonged, than previously expected. Some economic indicators, including electricity consumption, indicate better-than-expected business activity.
But look under the Russian cover and a darker picture will come into focus.
Russia has never been the standard bearer of globalization. In the list of the most globalized economies published by the Swiss Economic Institute KOF, Russia ranked 57th out of 64 countries – behind Albania, Mauritius and Georgia. After an initial wave of Western sanctions in 2014, after Moscow annexed Ukraine’s Crimea region, Russia turned inland, seeking to rely more on domestic production.
But this transformation never worked. Russia has had some success in food production, reducing dependence on imports and meeting more of its domestic demand. But a report from Russia’s central bank in 2021 found that 65 percent of domestic firms still needed imports for manufacturing.
Sanctions have now closed the door to a wide range of those critical inputs. Although many are not explicitly banned, their availability has faded as foreign companies avoid the stigma of doing business in Russia. For Russians, the prospect of dwindling consumer choices and lower quality harks back to a tragic era famously parodied in an ’80s Wendy’s commercial that depicted a Soviet fashion show where Russian “daywear,” “evening wear,” and “swimwear” all looked like a dress. pale grey;
“Especially for anything more complex, they will have to rely on what they can produce, and they will use designs or molds that are probably 10 or 20 years old,” said Thomas Malmlov, a senior scientist at the Swedish Defense Research Agency. ‘Technological Gap’ [with the West] They will get bigger, and they won’t be able to breach it.”
Those industries that require microchips and other hard-to-obtain advanced technologies are the hardest hit. “Automobiles, cabinets, hygiene products and even printing paper. This is where you need microchips, but also specialty chemicals and other imports that Russia has trouble getting,” said Anders Aslund, an economist who has long studied Russia.
In the aviation sector, even Russian-made aircraft rely on important Western components. Several Russian airlines operating Russia’s Sukhoi Superjet 100s have informed the government that they can no longer guarantee proper maintenance of their Franco-Russian SaM146 engine. If a solution is not found quickly, airlines have warned that most of their Russian-made fleets could be disrupted by the fall, Russian business daily RBC reported.
Even the most optimistic analysts say it could take at least two years for Russia to develop assembly lines for commercial aircraft made almost exclusively from domestic components. Other analysts predict that it could take much longer, if at all.
“We don’t think on a commercial level it is particularly feasible for them, in the near or medium term, to maintain or begin manufacturing competitive domestic civil aviation aircraft,” said a senior Biden administration official, speaking of this requirement. Anonymity to discuss internal evaluations.
Before the invasion, most of the Russian merchant fleet was leased from foreign companies: the planes seized by Moscow in the wake of the sanctions. Most of the aircraft were registered in Bermuda and Ireland, where local inspectors confirmed their airworthiness. European aviation authorities have expressed concern that Russian Airlines has limited engineering and technical support for aircraft maintenance and that Russian inspectors lack the necessary expertise.
Some Russians are particularly concerned that Rosaviatsiya, Russia’s aviation regulator, has relaxed rules on who can conduct aircraft maintenance now that Western companies are no longer able or willing to do so. The task will fall to local firms whose ability and training critics have questioned. Russia began issuing its own airworthiness certificates, which were largely determined by foreign inspectors.
“The Russian safety record has not been so excellent before, perhaps at the level of Indonesia,” said aviation analyst Volodymyr Belotchach. “But now, driving a Russian aircraft carrier has turned into a game of Russian roulette.”
American alcohol deficiency and Italian fabric
In Moscow, trade remains active in restaurants that only months ago feared sanctions would force them to close. It’s a sign, at least in the capital, that money from oil exports, and government steps to lower interest rates and raise wages and pensions, have mitigated the impact. Many establishments have sought to adapt by sticking to locally sourced foods. But the biggest problem is drinking wine.
Russian distributors have estimated that the United States exports about 7 million liters of whiskey, rum, gin, and bourbon to Russia each year. To make up for the shortfall, they are turning to smaller, less well-known brands.
“Even if all other cities in Russia are suffering and hardly have bread to eat tomorrow, there will still be money in Moscow,” said the owner of a cocktail bar in Moscow, speaking on condition of anonymity because he was not authorized by his investors. To discuss business matters. “Plus, people seem to have gotten used to the situation… My main problem now is [the lack of] American alcohol”.
Where the commodity is still available, it is often more expensive – helping to inflate the fuel at higher rates than in the West – or of poorer quality.
said the owner of a textile factory in the Moscow region, who spoke on condition of anonymity for fear of government retaliation. She said the company is still working with its existing stock of high-end fabrics, but is now considering whether it should switch to making cheaper clothing, or shut down after it runs out of stock. “The quality of what is available in Russia is not up to par,” she said.
Natalia, the owner of a logistics company in Moscow who declined to give her last name out of fear of the government, described how the sanctions had driven up prices. The ban on EU trucks entering Russia or Belarus means that goods traveling overland must now be offloaded at the border, and then loaded into new trucks that can travel to and through Russia. Meanwhile, the ban on flights led to the closure of a large number of airlines.
What do you think is happening? “The price goes up and up and up,” she said.
Where possible, Russian manufacturers have tried to make up for the shortfall by heading to Turkey and markets in Asia. But supply chain disruptions linked to the pandemic have hampered those efforts.
In addition, many Russian assembly lines are designed using other European or Western technologies or materials. “Assembling lines sometimes rely on French conveyor belts or bearings from the United States and Germany,” Natalia said. “It’s not as easy to change as you think.”
Moreover, it said, parts essential even for a business, including furniture and coffins, have also been affected because its foreign suppliers are reluctant or unwilling to provide export statements certifying that these parts will not be used for military purposes. purposes.
In the best cases, this means delays; What used to be shipped in two weeks now takes six weeks, she said. But some parts, such as industrial propeller fans and rubber seals used by Russian furniture makers as well as Russia’s defense industries, have been postponed indefinitely.
“We will not stop producing shoes, clothes, sausages, these kinds of things, but we will go back to what Russia was in the 60s, 70s, 80s, where the quality is worse and the price is higher, when you can actually get the product.”
“I remember how, if you wanted a kitchen, you’d have to go to the store, get a number, and stay in line,” she continued. “But not for hours or days. Sometimes I’d wait half a year for the kitchen. I’m afraid those days will come back.”
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