War and sanctions threaten to push back the Russian economy

KALUGA, Russia — Valery Volodin, a welder at a sprawling Volkswagen plant in western Russia, relaxed most of the summer at his dacha, or weekend house, planting his garden and caring for his children.

Volodin, 41, had no choice:

the auto plant closed in March, joining more than 1,000 multinationals they had scaled back their operations in Russia due to the invasion of Ukraine.

He has since stayed at home while Volkswagen looks for a buyer.

Goes to the factory in the Kaluga industrial zone once a month to raise 50,000 rubles, approximately 800 dollars, a payment required by Russian labor law equal to two-thirds of his previous salary.

“We went to work, but the plant is empty,” Volodin said in an interview.

You don’t mind taking a temporary break from physically demanding work, but you’re not sure how to plan for the future.

“Let’s live hand to mouth, for now,” he said.

His experience is being repeated across Russia for hundreds of thousands of workers after the West imposed sweeping economic sanctions aimed at undermining Moscow’s ability to wage war and undermine public support for the president. Vladimir Putin.

More than nine months after the invasion, neither the war effort nor the economy has collapsed, and the economic pain remains limited for many Russians.

Putin has avoided any strong internal pressure that could threaten his leadership.

But the impact of what some have described as economic sanctions more coordinated and profound of modern history is evident in communities across Russia, and the worst could yet come.

The sanctions have hampered Russia’s faltering 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, Washington-based director of the Center for Postindustrial Studies, a group of Russian search.

This diminished hope that the country could become a nation modern and prosperous short term.

“The motto now is ‘prevent things from getting worse’, and that’s a big change,” Inozemtsev said.

“Even the government has stopped betting on national development.”

Beneath the veneer of normalcy, he said, key drivers of growth, such as technology transfer and investment, are eroding.

“It’s like a cake that’s been dropped on the table and looks pretty good, but it’s burst inside,” Inozemtsev said.

The most visible and dramatic impact has been in the manufacturing sector, a sector that employs 10 million Russians and has been the centerpiece of Putin’s ambitious program to diversify the economy away from reliance on oil and gas exports.

The automotive industry accounts for a large percentage of those workers:

Car manufacturers employ 300,000 Russians, according to the country’s statistical agency, and the association representing their interests says that too 3.5 million more work in related industries.

In September, the auto industry’s output was down 77% year on year, while auto sales plunged 60% compared to the same period in 2021.

One of the main reasons is that Russian industries are heavily dependent on Western components.

Even Putin has acknowledged the problem, admitting last week that, in some industries, there comes a dependency on imported parts at 90%

To adapt, Russia is withdrawing into itself, cutting ties with the rest of the world and moving towards an economic model similar to that adopted by Iran, in which political legitimacy is based on providing citizens the essential instead of driving transformative growth, Inozemtsev said.

The Russian government was better prepared to resist the sanctions than many in the West expected.

Since the beginning of the war, andthe International Monetary Fund It has revised up its economic outlook for Russia twice and forecasts a 3.5% drop in gross domestic product this year, similar to government forecasts.

This decline, while representing a significant setback from pre-war growth expectations, contrasts with the double-digit collapse in economic output in Venezuela following a wave of US sanctions in 2019.

“The sanctions have not destroyed the resilience of Russia’s financial system, nor have they affected macroeconomic stability,” Prime Minister Mikhail Mishustin told a government meeting last week.

A combination of high oil revenues, large foreign exchange reserves ea team of experts of economic officials allowed Putin to soften the blow, to the frustration of some Western leaders who had hoped the sanctions would now have more effect.

However, the loss of investment, technology and skills caused by the sanctions is likely to repeat itself for several generations, depriving many Russians of a better economic future, experts say.

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

“They paid me to train for my job,” he said, still impressed.

When a robot replaced it, it was remodeled.

Those were good times for Kaluga, an industrial region about 120 kilometers 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 80% oriented towards the Soviet military-industrial complex into one linked to the West.

The companies pharmaceutical they flocked to the Kaluga region, which has a population of one million, and so did the automakers.

Volkswagen has hired about 4,200 workers.

Volvo and Stellantis, which manufacture and sell the Peugeot, Citroën, Opel, Jeep and Fiat brands in Russia, have also established operations in the region.

An ecosystem of vendors and related industries has sprung up to serve them, employing at least 25,000 people, according to Dmitry Trudovoy, president of the Association of Freelancers union.

Courses in German and other foreign languages ​​at the local university were a gateway to a job in companies.

It seemed that a new and modern business model was being built step by step in the region, an indication of how the Russian economy could evolve.

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

Now most of the region’s automakers have shut down operations, and Trudovoy said workers had no idea who would take over the western factories and whether they would keep their jobs.

“They’re nervous and scared for their future“, She said.

Kaluga’s industrial production fell by 30 percent between February and July this year compared to the same period last year, according to Rosstat, Russia’s statistical agency, making it one of the hardest-hit regions.

Russian state companies and the government have promised to replace lost production with local brands.

But there have been several signs of retreat.

In June, AvtoVAZ, which makes Lada, Russia’s best-known domestic car brand, announced that its new cars would only meet 1996 emissions standards and would not have passenger airbags.

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

Slower

The slowdown in car production also means that even the Russian police will have a hard time acquiring new patrol cars.

The Interior Ministry has failed to find a supplier for the 2,800 new vehicles needed by the traffic police, according to the Russian newspaper. Kommersant.

Kamaz says it will produce 50,000 “modern, comfortable, high-quality and safe” cars at the plant next year, including many with electric motors.

To aid these efforts, the Russian government plans to funnel about $500 million to domestic automakers.

But modern history offers few examples of successful attempts to replace imported Western technology with local substitutes, economist Inozemtsev said.

Russian companies lack the technical knowledge and skilled workers needed to replace Western capital in high-tech industries.

Relying on local substitutes will lead to “primitivization“Inozemtsev said.

Manufacturing won’t disappear, he said, but it will it will degrade gradually, giving rise to a lower quality and quantity of products that will gradually reduce the standard of living of Russians.

In Kaluga, the collapse of the auto industry is having widespread knock-on effects.

The real estate market has come to a standstill after the war started, said Kirill Gusev, editor of online property site Kaluga House.

It started to recover over the summer as people got used to the new normal, but then plummeted after Putin announced the recruitment of hundreds of thousands of men in September.

“Real estate is essentially long-term planning, but we’re in a place right now where you can’t do any of that,” Gusev said.

“We all saw how easy it was for normality to collapse.”

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

Natalia Zubarevich, a geography professor who tracks socio-economic data at Moscow State University, said:

“What we are seeing is a drop in income, a widespread depression, less consumption. All of this will have a negative impact on the country’s economy”.

Kirill Mikulin, owner of a popular cafe in Kaluga, hears that blow.

He had already adapted by finding substitutes for half of his bar’s beers, which he had imported.

Encouraged by the apparent return to normalcy over the summer, he opened Hops & Hopes, which sells 13 craft beers on tap and another 250 in bottles.

On a recent afternoon, his downtown store didn’t attract paying customers.

“We believe in the new year,” she said, hoping sales pick up before the holidays.

“But after that, we might be screwed.”

c.2022 The New York Times Society