Russia’s economic outlook ‘especially gloomy’
Experts say nation’s inflation rate likely to balloon up to 23%
LONDON — After sanctions hobbled production at its assembly plant in Kaliningrad, Russian automaker Avtotor announced a lottery for free 10-acre plots of land — and the chance to buy seed potatoes — so employees could grow their own food in the westernmost fringe of the Russian empire during “the difficult economic situation.”
In Moscow, shoppers complained that the price of bananas had shot up nearly 67%, to $1.60 for 2 pounds, while in Irkutsk, an industrial city in Siberia, the price of tampons doubled to $7.
Banks have shortened receipts in response to a paper shortage. Clothing manufacturers said they were running out of buttons.
“The economic prospects for Russia are especially gloomy,” the Bank of Finland said in an analysis this month. “By initiating a brutal war against Ukraine, Russia has chosen to become much poorer and less influential in economic terms.”
Even the Central Bank of Russia has predicted an inflation rate of 18% to 23% this year and a falloff in total output of as much as 10%.
It is not easy to figure out the impact of the war and sanctions on the Russian economy at a time when even using the words “war” and “invasion” are illegal. President Vladimir Putin has insisted that the economy is weathering the measures imposed by the United States, Europe and others.
Financial maneuvers taken by Moscow helped blunt the economic damage initially. At the start of the conflict, the central bank doubled interest rates to 19% to stabilize the currency, and
recently was able to lower rates to 14%. The ruble is trading at its highest level in more than two years.
And even though Russia has had to sell oil at a discount, dizzying increases in global prices are causing tax revenues from oil to surge past $180 billion this year despite production cuts, according to Rystad Energy.
Natural gas deliveries will add another $80 billion to Moscow’s treasury.
In any case, Putin has shown few signs that pressure from abroad will push him to scale back military strikes against Ukraine.
Still, Avtotor’s vegetable-patch lottery and what it says about the vulnerabilities facing the Russian people, along with shortages and price increases, are signs of the economic distress that is gripping some Russian businesses and workers since the war started nearly three months ago.
Analysts say that the rift with many of the world’s largest trading partners and technological powerhouses will inflict lasting damage on the Russian economy.
“The really hard times for the Russian economy are still in front of us,” said Laura Solanko, a senior adviser at the Bank of Finland Institute for Emerging Economies.
The stock of supplies and spare parts that are keeping businesses humming will run out in a few months, Solanko said. At the same time, a lack of sophisticated technology and investment from abroad will hamper Russia’s productive capacity going forward.
The Russian Central Bank has already acknowledged that consumer demand and lending are sliding, and that “businesses are experiencing considerable difficulties in production and logistics.”
Ivan Khokhlov, who co-founded 12Storeez, a clothing brand that evolved
from a showroom in his apartment in Yekaterinburg to a major company with 1,000 employees and 46 stores, is contending with the problem firsthand.
“With every new wave of sanctions, it becomes harder to produce our product on time,” Khokhlov said. The company’s bank account in Europe was still blocked because of sanctions shortly after the invasion, while logistical disruptions had forced him to raise prices.
More profound damage to the structure of the Russian economy is likely to mount in the coming years even in the moneymaking energy sector.
Europe’s vow to eventually turn its back on Russian oil and gas will compel Moscow to search farther afield for customers, particularly in China and India. But the pivot to Asia, said Daria Melnik, a senior analyst at Rystad Energy, “will take time and massive
infrastructure investments that in the medium term will see Russia’s production and revenues drop precipitously.”
Without sufficient storage capacity, Russia may have to cut its overall oil and gas production.
Anton Siluanov, the Russian finance minister, said that sanctions could cause as much as a 17% drop in oil output this year.
Bigger slides are apparent in other sectors. Passenger car production was down 72% in March compared with the previous year.
In the industrial sector, which includes chemicals, oil, gas and manufacturing, the four-week average for the volume of imports is down 88% compared with early February, before the invasion, according to FourKites, which tracks supply chains.
The volume of consumer-related imports is down 76%, making it difficult for
Russians to buy tampons and cellphones, and for hospitals to get replacement parts and supplies for dialysis machines and ventilators.
In a survey of health care professionals in April, 60% of respondents said they had experienced shortages already.
For consumers, price jumps on basic goods have been so noticeable that a Twitter account has sprung up mocking social media posts in which Russians lament price increases on everything from Palmolive shampoo to nectarines.
A 26-year-old Moscow resident, who asked that her name not be used because of fear of reprisals, said the cost of imported fruit, like the bananas she puts in her oatmeal every morning, had skyrocketed.
“It’s the product I buy every single time I go to the store, so I noticed immediately,” she said. Her total grocery bill has shot up by about one-third, she said.
In Irkutsk, the price of a box of tampons doubled from $3.50 within weeks of the war’s start, said a 23-year-old designer who earns $450 a month and asked that she not be named.
“For the same amount of money, I could buy a basket of good groceries, or a new T-shirt,” she said, comparing prices before the war.
Outside the country, Russia’s economic prospects are also shrinking.
Earlier this month, Fennovoima, a Finnish company that operates nuclear power plants, abruptly announced that it was terminating its contract to build a plant in the northern city of Hanhikivi with Rosatom, the Russian State Nuclear Energy Corp., which lists Putin as its founder.
“We are extremely disappointed,” Rosatom, which owns one-third of the project through a Finnish subsidiary, said in a statement: “The reasons behind this decision are completely inexplicable to us.”