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In the year “I’m driving in Moscow and there’s traffic jams like before,” said Andrey Nechayev, Russia’s economy minister in the early 1990s.
It has helped that China and India are ready to take on cheap Russian oil, but Nechav and other analysts say Russia’s economy has begun to slow down and is likely to face a prolonged period of slowdown due to Western sanctions.
An exodus of Western businesses and a wave of Western sanctions are taking a toll on Russia’s vital energy exports and its financial system, but not in the way many expected.
That’s largely the result of tighter capital controls and rate hikes in the spring, most of which have now been reversed. Interest rates are lower than they were before the war, and the central bank said inflation was falling to around 18% in April and will be between 12% and 15% for the rest of the year.
The central bank revised its forecast for the year’s gross domestic product and now expects it to decline by 4% to 6%. In April, the forecast was for an 8% to 10% decline. The International Monetary Fund now predicts a 6 percent decline.
Moscow Western sanctions have given the Kremlin eight years to prepare after it annexed Crimea in 2014.
“The withdrawal of MasterCard Visa had no impact on domestic payments because the central bank had its own alternative payment system,” says Nechav.
Russia launched the Mir credit card and its own transaction process in 2017.
And there’s a reason Russian fans of McDonald’s and Starbucks still have access to fast food, says Chris Weffer, founding partner of Macro Consulting Ltd., which advises multinational businesses in Russia and Eurasia.
Since 2014, many Western brands in Russia have localized some or all of their supply chains in defiance of government pressure. So when these companies left, it was easy for Russian buyers to buy them and keep running simply by changing the wrapper and packaging.
“Same people, same products, same delivery,” Weffer says.
It’s not a completely waterproof strategy, though.
The rebranded McDonald’s stores reported a shortage of French fries in mid-July, when Russian potato production was short, and foreign suppliers would not fill the gap due to the ban.
Can Russia’s Power Rise Continue?
Fast food continuity is one thing. Russia’s long-term stability depends on the energy sector, which is still the largest source of government revenue.
It is an understatement to say that high energy prices have so far engulfed Russia.
According to the International Energy Agency, Russia’s revenue from oil and gas sales doubled between March and July this year, compared to the average in recent years. That’s despite the reduced size. Gas deliveries to Europe have fallen by 75 percent in the past 12 months, according to IEA data.
Oil is another matter. The IEA’s March forecast that 3 million barrels of Russian oil will be withdrawn from the market starting in April has not materialized due to the sanctions or their concerns. Exports remained stagnant, although analysts at Rystad Energy predicted a modest reduction in summer.
The main reason is Russia’s access to new markets in Asia.
Humayun Falakshali of commodities consultancy Kepler said that most of Russia’s offshore oil has gone to Asia since the war began. In July, the share was only 56%, compared to 37% in July 2021.
What happens in December when the European embargo on 90% of Russian oil goes into effect, will be crucial. An estimated 2 million barrels per day of Russian oil will be in limbo, and while some is expected to go to Asia, experts doubt the demand is strong enough to absorb it all.
Unfortunately, China cannot afford to buy more Russian oil than it already does, because domestic demand is slowing and simply because Russia does not need as much of a different type of oil than it exports.
Price also plays an important role in Russia’s ability to cut prices to secure new markets.
“A 30% drop from $120 a barrel is one thing,” Nechav pointed out. “It’s a different matter than the $70 discount.”
‘slow burn’
Global inflation is helping Russia’s energy sector but hurting its people. Like the rest of Europe, Russians are suffering from a high cost of living, exacerbated by the war in Ukraine.
In the year Nechav, who helped Russia through a devastating economic recession in the 1990s, is worried.
“When you measure living standards in real income, we’re about 10 years behind,” he says.
The Russian government is spending money to fight this. In May, he announced a 10 percent increase in pensions and the minimum wage.
A system has been developed where companies that have “stopped their work” can temporarily transfer to another employer without violating the employment contract. And 17 billion rubles ($280 million) is being spent on buying bonds of Russian airlines, which have been damaged by airspace bans and sanctions, and the supply of parts to foreign manufacturers.
A major impact on Russia’s long-term economic prospects is the technology sanctions affecting the airline industry. In June, US Commerce Secretary Gina Raimondo said shipments of semiconductors to Russia had fallen by 90% since the start of the war. That’s slowing down products from cars to computers, and experts say it’s putting it further behind in the global technology race.
“The effect of the sanctions will be a slow burn rather than a quick hit,” Weffer says. “Russia is now looking at a long delay.”
Nechaev is more clear. “Currently, the economic downturn has begun.”
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