No Shirt Buttons, No Airbags, Buggy Smartphones: Russia’s Economy Enters The ‘Twilight Zone’

By Mike Eckel, Alum of The Fletcher School of Law and Diplomacy at Tufts University

The newest car model unveiled by Russia’s biggest auto manufacturer earlier this month is generating buzz, but not necessarily for the right reasons.

The buzz about AvtoVAZ’s Lada Granta Classic — priced to sell at 678,300 rubles ($12,500) — is about what it doesn’t have: No airbags. No antilock brakes. No electronic stability system. No pretensioners to make the seat belts work properly. No GPS. An engine that complies with emissions standards from 26 years ago.

The reason for all this?

Smartphones aren’t working properly. Food packaging has to be printed without labels. Clothing factories can’t find buttons to sew on shirts.

The Kremlin is betting that fiscal and industrial policies will help the economy withstand the shocks and substitute missing imports with homegrown Russian versions.

President Vladimir Putin alluded to this wager last week during what used to be Russia’s marquee annual investors’ event, though he asserted that his government has already had considerable success in softening the blow.

“The economic blitzkrieg launched against Russia has failed,” Putin told an audience at the St. Petersburg International Economic Forum that was substantially smaller than previous years.

The company that took over the McDonald's franchise in Russia reopened its flagship restaurant in Moscow, but hamburgers and french fry wrappers were blank.
The company that took over the McDonald’s franchise in Russia reopened its flagship restaurant in Moscow, but hamburgers and french fry wrappers were blank.

Russian policy makers are hoping that appeals to nationalism have girded the populace for hardship and that consumers will be willing to tighten their belts without losing patience with the war, about to enter its fifth month following the February invasion.

But some pragmatic voices have spoken up publicly, warning that those who are hoping that Russia will replicate some of the success it had after a first set of Western sanctions was imposed as punishment for the 2014 seizure of Ukraine’s Crimean Peninsula are unrealistic.

“Replacing everything is senseless, economically impractical, and simply impossible,” said Sergei Chemezov, a longtime confidant of Putin and now head of the state-owned defense conglomerate Rostec.

“Not a single developed country in the world does this. Isolation, including technological isolation, and attempting to do everything on your own is a road to nowhere,” he wrote in a June 15 opinion column.

Chemezov also dinged Russian policy makers, saying that more should have been done to diversify and deepen the country’s economy.

“Russia was expecting something like this and to a large extent had time to prepare,” he wrote. “Of course, there can be no illusions here. We did not manage to do everything — there was too little time, because the same path took decades for Western countries.”

Longtime Russia analysts said the economy is not on the verge of outright collapse, like what happened after the 1991 Soviet breakup.

“But we’re talking about a return to the Brezhnev era, where modernization stops and it’s this stasis-type of situation with lifestyles [and] people have few choices,” said Chris Weafer, founder of the consultancy group Macro-Advisory, referring to the period under Soviet leader Leonid Brezhnev in the 1970s when the Soviet economy stagnated.

“The economy’s now going into a twilight zone,” he said.

Guns And Butter

After Russia occupied Crimea in 2014, Western nations sought to punish Moscow by imposing a raft of sanctions, targeting key companies and also influential individuals in and close to the government.

In response, Putin imposed bans on Western foods like apples, dairy, and more, and the government sought to reengineer the economy wholesale, to make it less dependent on imports. He also continued backing fiscal policies that turned the country’s sovereign wealth fund into one of the world’s largest.

Lada Granta cars for sale in Khimki in May 2021. The latest model comes without airbags or antilock brakes.
Lada Granta cars for sale in Khimki in May 2021. The latest model comes without airbags or antilock brakes.

For things like some food items, it arguably worked. Artisanal cheese makers, for example, not only managed to replace imports of Italian Parmesan, but drew powerful praise from some food critics.

For things like military and defense technology, not much changed. Russia’s military industrial complex, heir to Soviet-era planning, continued to produce planes and tanks, many of which are being deployed — and destroyed — in the Ukraine war. Russian defense plants lost access to some of Ukraine’s military manufacturers, but it wasn’t a sea-change loss.

For many other sectors of the economy, not much changed either: Imports continued as before, along with trade and integration with the global economy.

That included computer chips, for which Russia has no domestic manufacturing capacity. And it included the IT and high-tech sectors, which rely heavily on the coding, programmers, and software prowess of the West to stay current.

The Russian government ordered state agencies to stop using foreign software — Microsoft Office, for example — in 2015, the year after the seizure of Crimea. Four years later, 90 percent of the software use by state firms was still foreign-sourced.

“They can make basic food items, and they can send rockets to space, but they really haven’t created the middle industries — for making cars, for example. That middle bit of the economy is still missing,” Weafer said.

New cars are seen parked at a plant of Volkswagen Group Rus in Kaluga. Volkswagen announced in March that it was suspending production at two Russian assembly plants.
New cars are seen parked at a plant of Volkswagen Group Rus in Kaluga. Volkswagen announced in March that it was suspending production at two Russian assembly plants.

Following the February 24 invasion, Western nations bludgeoned the Russian economy with a set of unprecedented sanctions.

The most extreme predictions for how much the Russian economy will contract this year are around 12-15 percent. More modest estimates say it will be between 7-9 percent. But still, even Russian economists say it will be severe.

“The current recession is of a transformational, structural nature and will be bigger in scale and length in all scenarios” than the last one, Russian central bank researchers said in a report released in April, referring to the downturn caused by the COVID-19 pandemic.

In the aftermath, scores of Western companies either paused their operations in Russia or pulled out altogether.

That has exposed major holes in Russian domestic manufacturing capabilities and supply chain disruptions.

The paper industry, for example, was unable to meet demand for bleached paper supplies, and packaging manufacturers said they were unable to obtain inks used in printing packaging. The company that took over the McDonald’s franchise in Russia reopened its flagship restaurant in Moscow, but hamburgers and french fry wrappers were blank.

“All of our wood is Russian, but bleaching chemicals were imported. Now, producers are switching to alternative suppliers, developing their own chemicals, but this also takes time. In the food industry, raw materials are domestic, and the usual foreign packaging urgently needs to be replaced,” Elvira Nabiullina, the head of the central bank, told lawmakers on April 21.

“And all this takes time,” she said.

Putin addressed the question of the domestic packaging industry during a panel discussion at the St. Petersburg forum, downplaying the issue when presented by the moderator with a juice box that was white because of a lack of ink.

“What’s most important for us?” he asked. “To be independent, sovereign, and to ensure our future development now, for coming generations? Or to have packaging today?”

Buttons used in clothing were another example where foreign supply chains had been disrupted, Nabiullina pointed out.

Smartphones, too. Tech giant Apple has pulled out of Russia, meaning fans of the iPhone or similarly popular devices will be hard-pressed to download operating system updates or even buy apps through the Apple store.

Users of Samsung smartphones have also reported major problems, according to the newspaper Izvestia. You can’t activate a new Samsung phone within Russia because you need a SIM card from a country for which the smartphone was released.

Import Substitution, Parallel Imports

Other industries facing major disruptions include car manufacturing, which employs around 600,000 people nationwide, and is one of the country’s biggest private employers.

Avtovaz, which until recently was controlled by France’s Renault Group, has instituted sporadic work stoppages and furloughs in some locations.

A boy walks past a "No War!" sign stuck to the window of a McDonald's with a restaurant closing notice in St. Petersburg on March 15.
A boy walks past a “No War!” sign stuck to the window of a McDonald’s with a restaurant closing notice in St. Petersburg on March 15.

The stripped-down Lada Granta that was announced earlier this month wasn’t a brand-new design: Such a model had been in limited production since 2011. But the removal of standard safety equipment like airbags, as a result of Western sanctions, surprised many observers, and drew mockery online.

“If sanctions remain what they are, the gap between Russia’s economy and the rest of the world will only get wider and wider,” Weafer said. “The Russian people in the future will be driving a Lada, while people in the West will be sitting in driverless cars.”

Volkswagen Group announced in March that it was suspending production at two Russian assembly plants. This week, the company offered buyout packages to employees at a Nizhny Novgorod plant, in an effort to cut labor costs — the first known effort by any automobile manufacturer within Russia as a result of Western sanctions.

‘Besieged Fortress’

Even some defense facilities have stumbled in their production, exposing holes in where military manufacturers source some of their parts.

Two plants specializing in the manufacture and repair of tanks — Uralvagonzavod and the Chelyabinsk Tractor Plant — were forced to suspend work due to the lack of foreign components.

Some economists share Putin’s optimism that Russian ingenuity, and alternative markets like China and India, which have declined to sign on to Western sanctions, will allow the economy to withstand the body blow.

Lawmakers and policy makers, meanwhile, have scrambled to try to erect a parallel framework and rebuild supply chains before shortages become permanent, or lead to wider shutdowns.

Major online marketplaces — Yandex, Wildberries, Ozon — have moved to build new supply chains for so-called parallel imports, essentially replacing retailers and shippers that have opted, or been forced, to withdraw from Russia.

On June 22, Russia’s upper house of parliament passed legislation that aims to protect parallel importers from legal liability for violations of copyright or trademark infringement.

Still, some top business leaders, like German Gref, the CEO of banking giant Sberbank, warned that without a fundamental overhaul, Russia’s economy will require a decade to return to its 2021 levels.

Even if a cease-fire or truce is reached in Ukraine, Russia would still face a “besieged fortress” phenomenon, economist Yevgeny Gontmakher predicted.

“In this scenario, too, the economy would become more primitive and focus only on supporting military production,” he said in a May 31 research note.

“External conditions have changed for a long time indeed, if not forever,” Nabiullina said at the St. Petersburg forum, not long after Putin’s speech. “It’s obvious to everyone that it won’t be as it was before.”

This piece is republished from RadioFreeEurope/RadioLiberty.

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