In Russia, the outlook for its economy grows `especially gloomy'

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 1 kilogram of bananas had shot up to 100 rubles from 60, while in Irkutsk, an industrial city in Siberia, the price of tampons at a store 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 a staggering inflation rate between 18% and 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 deep and 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 on a downhill slide, and that “businesses are experiencing considerable difficulties in production and logistics.”

Ivan Khokhlov, who cofounded 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.

“We face delays, disruptions and price increases,” he said. “As logistics with Europe gets destroyed, we rely more on China, which has its own difficulties too.”

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.”

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.