Stung by Western sanctions, Russia is starting to devolve into a secondhand economy dependent on poor substitutes, where shortages are stirring memories of the consumer wasteland that was the Soviet Union.
Already, Moscow is facing serious challenges.
Unable to secure spare parts from Western airplane manufacturers, for instance, the Russian aviation sector is facing a crisis. About 80 percent of Russia’s commercial fleet consists of foreign-made planes, predominantly from Airbus and Boeing, both of which have stopped doing business with Moscow.
Ural Airlines, which has over 50 Airbus planes, has projected that it can safely fly them for only a few months before it will need to start “cannibalizing” from other aircraft — permanently grounding some planes to strip them for parts. The low-cost airline Pobeda, part of the state-run Aeroflot group, has already reduced its fleet from 41 to 25 planes, using its grounded aircraft for “cannibalized” parts.
The decision by Ericsson and Nokia to freeze business with Russia, meantime, has left cellular providers there suddenly scouring the world for used towers and parts to maintain and expand a network that had more or less kept pace with the United States and Europe. Even China’s Huawei appears reluctant to fill the gap, indefinitely delaying a Russian rollout of next-generation 5G technology, a service that providers had been testing before the Ukraine invasion.
“Within five years, there will be a huge gap between Russia and in the rest of the world” on cellular service, said Grigory Bakunov, an expert on Russian technology.
Following the recent exit of French automaker Renault, Russia is moving to restart production of the Moskvich — a Soviet-era make that went bankrupt two decades ago after failing to achieve foreign quality standards. Its resurrection, potentially with Chinese assistance, could either jump-start the production of domestic alternatives or see a new generation of clunkers clogging Russian roads.
Supply disruptions, however, have hit not only assembly lines that rely on advanced technology but also those using imported materials. Sanctions “on the Russian Federation have practically broken all the logistics in our country,” Russian Transport Minister Vitaly Savelyev, conceded to journalists last weekend during a visit to Russia’s Astrakhan region.
Under the hood of the Russian economy
The ruble has rebounded since its initial swoon after sanctions were imposed in the winter, and Russian government coffers are flush from a bonanza of oil revenue. European countries have taken halting steps toward their pledge to curb reliance on Russia’s oil and gas, by far its largest exports, even as Moscow boosts sales to Asia.
JPMorgan this month projected that the recession triggered by sanctions would be less sharp, if more drawn out, than had been predicted earlier. Some economic indicators, including electricity consumption, point to better-than-expected business activity.
But look under the Russian hood and a grimmer picture comes into focus.
Russia was never a standard-bearer for globalization. On a list of the most globalized economies published by the KOF Swiss Economic Institute, Russia ranked 57th out of 64 countries — behind Albania, Mauritius and Georgia. Following an initial wave of Western sanctions in 2014, after Moscow annexed Ukraine’s Crimea region, Russia turned inward, seeking to rely even more on domestic production.
But that shift never really worked. Russia found some success in food production, reducing reliance on imports and satisfying more of its domestic demand. But a 2021 report from the Russian Central Bank found that 65 percent of domestic companies still required imports for manufacturing.
Sanctions have now shut the door on a wide range of those crucial inputs. Though many have not been explicitly banned, their availability has vanished as foreign companies avoid the taint of doing business in Russia. For Russians, the prospect of diminished consumer choice and poorer quality harks back to a tragicomic era famously lampooned in a 1980s Wendy’s commercial that depicted a Soviet fashion show in which Russian “daywear,” “evening wear” and “swimwear” were all the same dull gray smock.
“Especially for anything more sophisticated, they will have to rely on what they can produce, and they will use designs or templates that are maybe 10 or 20 years old,” said Tomas Malmlöf, a senior scientist at the Swedish Defense Research Agency. “The technological gap [with the West] will become larger, and they will not be able to breach it.”
Those industries requiring microchips and other difficult-to-acquire advanced technology are being hit the hardest. “Automobiles, tanks, hygiene products, even print paper. This is where you need microchips, but also specialized chemicals and other imports that Russia is having problems getting,” said Anders Aslund, an economist who has long studied Russia.
In the aviation sector, even Russian-manufactured planes rely on critical Western-made components. Several Russian airlines operating Russia’s Sukhoi Superjet 100s have informed the government that they can no longer ensure proper maintenance of its French-Russian SaM146 engine. If a solution is not found quickly, the airlines have warned, most of their Russian-made fleets could be grounded by fall, the Russian business daily publication RBC reported.
Even the most optimistic analysts say it could take at least a couple of years for Russia to develop assembly lines for commercial planes made almost exclusively with local components. Other analysts project it could take far longer, if it happens at all.
“We don’t think on the commercial front it is particularly viable for them to, in the near or medium term, maintain or start the manufacture of competitive domestic civil aviation aircraft,” said a senior Biden administration official, who spoke on the condition of anonymity to discuss internal assessments.
Before the invasion, most of Russia’s commercial fleet was leased from foreign companies: planes that Moscow seized in the aftermath of sanctions. Most of the planes had been registered in Bermuda and Ireland, where local inspectors certified their airworthiness. European aviation authorities have expressed alarm that Russian airlines have limited engineering and technical support to maintain the planes and that Russian inspectors lack necessary expertise.
Some Russians are particularly concerned that Rosaviatsiya, Russia’s aviation regulator, has loosened rules on who can conduct aircraft maintenance now that Western companies are no longer able or willing to do it. The task will fall to local firms, whose capacity and training have been questioned by critics. Russia is beginning to issue its own certificates of airworthiness for planes, which had been largely determined by foreign inspectors.
“Russia’s safety record was not stellar before, maybe at the level of Indonesia,” said aviation analyst Volodymyr Bilotkach. “But now, flying a Russian carrier is turning into a game of Russian roulette.”
Shortages of American alcohol and Italian fabric
In Moscow, business remains brisk at restaurants that feared just months ago that sanctions would force them to close. It is a sign, at least in the capital, that money from oil exports, and government steps to lower interest rates and raise wages and pensions have blunted the impact. Several establishments have sought to adapt by sticking to locally sourced foods. A bigger problem, though, is booze.
Russian distributors estimated that the United States exported about 7 million liters of whisky, rum, gin, and bourbon to Russia each year. To make up the shortfall, they are turning to smaller, lesser-known brands.
“Even if all other cities in Russia are suffering and barely have bread to eat tomorrow, there will still be money in Moscow,” said a cocktail bar owner in Moscow, who spoke on the condition of anonymity because he was not authorized by his investors to discuss business matters. “Plus, people seem to have grown used to the situation … My main problem right now is [the lack of] American alcohol.”
Where good are still available, they are often more expensive — which is helping fuel inflation at higher rates than in the West — or of poorer quality.
“Look, I’ll be honest, if we need to sew a high-quality garment, we normally would go and buy a nice Italian fabric,” said the owner of a textile factory in the Moscow region, who spoke on the condition of anonymity out of fear of government reprisals. The company, she said, was still working with existing inventory of high-end fabric but was now weighing whether to switch to making cheaper clothing, or just shut down after stocks run out. “The quality of what’s available in Russia is just not on par,” she said.
Natalia, the owner of a Moscow logistics firm who declined to give her last name because she fears the government, described how sanctions were spurring price hikes. The ban on E.U. trucks entering Russia or Belarus means that goods traveling by land must now be offloaded at the border, then onloaded to new trucks that can travel into and across Russia. Meanwhile, flight bans had shut down a legion of air routes.
“What happens? What do you think happens? The price goes up and up and up,” she said.
Where possible, Russian manufacturers have tried to make up shortfalls by turning to Turkey and markets in Asia. But pandemic-related supply chain disruptions have hampered those efforts.
In addition, many Russian assembly lines were designed using European or other Western technologies or materials in mind. “The assembly lines are sometimes dependent on French conveyor belts or bearings from the United States and Germany,” Natalia said. “That’s not as easy to change as you think.”
Moreover, she said, essential parts for even run-of-the-mill businesses, including furniture and coffin makers, have also been affected because their foreign suppliers are reluctant or unwilling to provide export declarations certifying that those parts would not be used for military purposes.
In the best cases, that means delays; what used to ship in two weeks now takes six weeks, she said. But some parts, such as industrial fan propellers and rubber seals used by Russian furniture makers as well as Russian defense industries — were being indefinitely held up.
“Production won’t stop for shoes, clothing, sausages, those kinds of things, but we will go back to what Russia was like in the ’60s, ’70s, ’80s, where the quality is worse and the price is higher, when you can actually get the product,” she said.
“I remember how, if you wanted a kitchen, you would have to go to the shop and get a number and stay in a queue,” she continued. “But not for hours or days. You’d sometimes wait half a year for a kitchen. I’m afraid those days are coming back.”