Russia’s economy in for a bumpy ride as sanctions bite

“It is the cheapest new vehicle in Russia. They call it… the anti-sanctions car!”

That was Russian state television giving a positive spin to the new, not-so-improved Lada rolling off the assembly line in the city of Togliatti.

“Cheapest” is perhaps its only selling point. Due to Western sanctions, the Russian carmaker cannot import all the components it used to use. So the “anti-sanctions” Lada Granta has no airbag, no anti-lock braking system, no electronic stability control and no belt tensioners.

Almost four months after invading Ukraine, the new Lada sums up the Russian economy: it still works, although it’s missing some parts.

“Still Working” is an achievement. Russia is now the most heavily sanctioned country in the world. According to data service Statista, more than 10,500 restrictions have been imposed on Russian individuals and companies. More than 7,500 of these have been implemented in the last four months.

No wonder some pundits had predicted that the wheels of Russia’s economy would be completely gone by now.

“The scale of international sanctions would have caused an economic collapse if they had come out of nowhere,” says Chris Weafer of Macro Advisory in Moscow.

“But Russia has experienced gradual sanctions since 2014. There has been tremendous upside, but there is also an element that they have already addressed.

“Furthermore, fear of supply disruptions means Russia is making even more money from exporting energy and raw materials. In the first five months of the year, its current account surplus was a record $110 billion (£94 billion). this money to not only fund the military but also to subsidize state industries to ensure unemployment doesn’t rise or incomes don’t fall too much.

Capital controls have helped the ruble strengthen and inflation has started to ease. But a deep recession is looming. In 2022, the Russian economy is expected to shrink by up to 10%.

Russian consumers are yet to feel the full impact. Supermarket shelves in Moscow are still quite full, although some imported items are no longer available.

But the change is most evident in Moscow’s shopping malls. Once busy malls are now much quieter: fewer customers, less choice. In protest against the invasion of Ukraine, many foreign brands have suspended or withdrawn from operations in Russia altogether. Many shops are closed.

Out on the street I meet a taxi driver named Nikita. He predicts a bumpy road ahead for the minicab company he works for.

“Taxis age very quickly, so a taxi company has to change them very often,” explains Nikita. “But after the war started, car prices in rubles got ridiculously high. So our taxi company won’t see any new cars in the near future. We have to fall back on old ones.”

Could the “anti-sanctions car” be a solution? Well, Nikita does not rush to buy one.

“Even with the airbag, the Lada Granta is very small and uncomfortable,” he explains.

Could economic difficulties at home give the Kremlin food for thought? Could they hasten an end to the Russian offensive in Ukraine? Do sanctions work?

“If the goal is to force behavior change by triggering an economic and financial crisis, the answer is no,” believes Chris Weafer.

“Russia has not yet experienced a crisis. But it’s moving into a period of economic attrition. In autumn and winter, you face a harsher reality. Especially when Europe’s import ban on Russian oil and oil products goes into effect and the government has cut spending. Russia will inevitably have two to three years of a stagnant economy, the question is whether that will last 10 years.

“Russia is cut off from many Western technology imports that it simply cannot replace. China has made it clear that it will not supply sanctioned technology to Russia because it could face secondary sanctions itself.

“There is no reason to assume that Russia’s economy will not work. But it will do so at a much lower level of technology and efficiency. The distance to the rest of the world is increasing. Russia’s economy will be left behind.”