Europe

The Russian economy is threatened by war and sanctions

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KALUGA, Russia— Valery Volodin, a welder at a sprawling Volkswagen factory in western Russia, has been relaxing for most of the summer at his dacha, or weekend house, planting his garden and s caring for her children. Mr Volodin, 41, had little choice: the car plant closed in March, joining more than 1,000 multinationals that had scaled back operations in Russia due to its invasion of Ukraine.

Since then, he has been sitting at home while Volkswagen searches for a buyer. He goes to the factory in the industrial area of ​​Kaluga once a month to collect 50,000 rubles, or about $800, a payment required by Russian labor laws that is equivalent to two-thirds of his previous salary.

“We get to work, but the factory is empty,” Mr. Volodin said in an interview. He doesn’t mind a temporary break from physically demanding work, but he doesn’t know how to plan for the future.

“We are living hand to mouth, for now,” he said.

His experience is playing out across Russia for hundreds of thousands of workers after the West imposed sweeping economic sanctions that were meant to hamper Moscow’s ability to wage war and undermine public support for President Vladimir V. Putin .

More than nine months after the invasion, neither the war effort nor the economy has collapsed, and the economic pain is still limited for many Russians. Mr. Putin has avoided any substantial domestic pressure that would threaten his leadership. But the impact of what some have described as the most coordinated and sweeping economic sanctions in modern history is evident in communities across Russia – and the worst may yet be to come.

The sanctions have thwarted Russia’s hesitant attempts to modernize its economy along Western lines and catch up with European living standards after the fall of the Soviet Union, said Vladislav Inozemtsev, director of the Center for Post-Industrial Studies based in Washington, a Russian research group. This has dimmed the hope that the country can become a modern and prosperous nation in the short term.

“The slogan now is ‘Keep it from getting worse’, and that’s a big change,” Mr Inozemtsev said. “Even the government has stopped betting on national development.”

Beneath the veneer of normality, he said, key drivers of growth, such as technology transfer and investment, are eroding. “It’s like a cake that fell on the table and it looks more or less good, but inside everything exploded,” Mr Inozemtsev said.

The most visible and dramatic impact has been on manufacturing, a sector that employs 10 million Russians and has been the centerpiece of Mr Putin’s ambitious program to diversify the economy away from dependency oil and gas exports. The automotive industry accounts for a large percentage of these workers: automakers employ 300,000 Russians, according to the country’s statistics agency, and the association representing their interests says up to 3.5 million more people work in related industries.

In September, production in the auto industry was down 77% year-on-year, while car sales fell 60% from the same period in 2021. One of the main reasons is that Russian industries are heavily dependent on Western components. Even Mr Putin has acknowledged the problem, admitting last week that in some sectors dependence on imported parts was as high as 90%.

To adapt, Russia is turning inward, cutting its ties with the rest of the world and moving towards an economic model similar to that adopted by Iran, where political legitimacy is based on providing citizens with the essential rather than about stimulating transformative growth, Mr. Inozemtsev said.

The Russian government was better prepared to resist sanctions than many Westerners expected.

Since the start of the war, the International Monetary Fund has upgraded its economic outlook for Russia twice and predicts a 3.5% decline in gross domestic product this year, similar to government projections. The drop, though a major reversal of pre-war growth expectations, contrasts sharply with Venezuela’s double-digit collapse in economic output after a wave of US sanctions in 2019.

“The sanctions have not destroyed the resilience of the Russian financial system, nor have they had an impact on macroeconomic stability,” Prime Minister Mikhail Mishustin said last week at a government meeting.

A combination of high oil revenues, large currency reserves and an expert team of economic officials enabled Mr Putin to soften the blow – much to the frustration of some Western leaders who had hoped the sanctions would have more effect. biting now.

But the loss of investment, technology and skills caused by the sanctions will likely reverberate through generations, robbing many Russians of a chance for a better economic future, experts said.

In 2009, when Volkswagen launched full production runs in Kaluga, Mr. Volodin not only got a job, but also unexpected support.

“I was paid to be trained in my job,” he said, still impressed. When a robot replaced it, it was recycled.

It was a good time for Kaluga, an industrial region about 200 km south of Moscow. The former governor actively courted Western investors, learning English and building a modern airport with several weekly flights to Germany. He transformed a regional economy that had been 80% oriented towards the Soviet military-industrial complex into one tied to the West. Pharmaceutical companies have flocked to the Kaluga region, which has a population of one million, as have car manufacturers.

Volkswagen has hired around 4,200 workers. Volvo and Stellantis, which produced and sold the Peugeot, Citroën, Opel, Jeep and Fiat brands in Russia, have also established operations in the region. An ecosystem of suppliers and related industries has sprung up to serve them, employing at least 25,000 people, according to Dmitri Trudovoy, president of the independent trade union of the Workers’ Association. German and other foreign language courses at the local university were a route to office employment in companies.

It seemed that a new modern business model was being built step by step in the region, a hint of how the Russian economy might evolve.

In 2020, Volkswagen’s production alone accounted for around 13% of all industrial production in the Kaluga region.

Now most automakers in the region have gone out of business, and Mr Trudovoy said workers had no idea who might take over western factories and whether they would keep their jobs.

“They are nervous and afraid for their future,” he said.

Industrial production in Kaluga fell 30% between February and July this year compared to the same period the year before, according to Rosstat, Russia’s statistics agency, becoming one of the hardest hit regions.

Russian state enterprises and the government have pledged to replace lost production with local brands. But there have been multiple signs of regression. In June, AvtoVAZ, which makes Russia’s best-known car brand, the Lada, announced that its new cars would only meet 1996 emissions standards and would not have passenger-side airbags.

In a symbolic move, an AvtoVAZ subsidiary, Kamaz, announced that it would use a Moscow plant vacated by Renault after the invasion to restart production of a Soviet-era car brand, Moskvich, or Muscovite. , which had long been an almost comedic synonym. for the deficiencies of communist consumer goods.

The slowdown in car manufacturing also means that even Russian police will struggle to acquire new patrol cars. The Interior Ministry was unable to find a supplier for the 2,800 new vehicles needed by the traffic police, according to Russian newspaper Kommersant.

Kamaz says it will produce 50,000 “modern, comfortable, high-quality and safe” cars at the plant next year, many with electric motors. To support these efforts, the Russian government plans to channel around $500 million to domestic automakers.

But modern history offers few examples of successful attempts to replace imported Western technology with local substitutes, said Mr. Inozemtsev, the economist. Russian companies lack the know-how and skilled workers to replace Western capital in technology-intensive sectors. Relying on local substitutes will lead to “primitivization”, Mr Inozemtsev said

Production will not disappear, he said, but it will gradually deteriorate, leading to a decline in the quality and quantity of products which will gradually reduce the standard of living of Russians.

In Kaluga, the collapse of the automobile IThe industry has far-reaching collateral effects. The real estate market came to a standstill after the start of the war, said Kirill Gusev, editor of online real estate site Kaluga House. It started to improve over the summer as people got used to a new normal, but then fell apart after Mr Putin announced a military call-up of hundreds of thousands in September .

“Real estate is basically long-term planning, but right now we’re in a place where you can’t do that at all,” Gusev said. “We’ve all seen how easy it is for normalcy to crumble.”

“After the mobilisation, the banks stopped lending because customers could be called,” he added.

Natalia Zubarevich, a geography professor who tracks socio-economic data at Moscow State University, said: “What we see is a drop in income, a general depression, a drop in consumption. All this will have a negative impact on the country’s economy.

Kirill Mikulin, owner of a popular bar in Kaluga, is feeling the blow. He had already adapted by finding substitutes for half the beers in his pub, which he had imported. Buoyed by the summer’s apparent return to normal, he opened Hops & Hopes, which sells 13 craft beers on tap and another 250 in bottles.

On a recent evening, his downtown store attracted no paying customers.

“We believe in the New Year,” he said, hoping sales would pick up ahead of the holidays.

“But after that, we could be screwed.”

Valerie Hopkins reported from Kaluga, Russia, and Anatoly Kurmanayev from Berlin.

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