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Is Russia prepared for an economic crisis? Development expert Natalia Zubarevich on how sanctions will affect ordinary Russians — and what tools the government has to soften the blow

Source: Meduza

There’s no doubt that the sanctions passed against Russia by the U.S., the EU, and others will have an enormous effect on Russia’s economy, while the exodus of international companies from the Russian market will have a significant impact on the country’s employment rate. To get a sense of how these changes will affect people's lives, Meduza spoke to Natalia Zubarevich, an economist and geographer who has spent her career studying economic development and its distribution in Russia.

Just a month ago, despite fairly clear American intelligence reports, very few people expected Vladimir Putin to launch a full-scale invasion of Ukraine — and even fewer expected the Western sanctions response to be so severe. The result is a sudden lack of access to international goods and supplies within Russia, with the Central Bank and Finance Ministry scrambling to soften the blow. In some areas, the fallout has already begun.

“The first problem area is clear: automobile assembly plants,” said economist Natalia Zubarevich. “All of the manufacturers with plants in the Kaluga region are leaving. [...] They used to assemble German cars near Kaliningrad, too, but now they’re stopping. Kaluga and Kaliningrad might well be the two worst-hit places on the auto industry map right now.”

One idea the Russian authorities have floated for coping with the mass withdrawal is taking over the facilities and businesses that foreign businesses leave behind. “They scare us with the word ‘nationalization,’ but it’s more accurate to call it ‘external management,” said Zubarevich. According to her, the authorities are likely to bring back a strategy they used during the COVID-19 pandemic: mitigating unemployment by keeping plant workers on staff and paying them a portion of their former salary — despite the fact that there won't be anything to assemble.

Of course, this won’t just affect workers; consumers will pay as well. “The prices of the remaining cars will skyrocket; China can’t make up for them immediately, and the market will contract dramatically,” Zubarevich told Meduza.

The airline industry is already seeing the effects of sanctions, too: foreign companies are refusing to service Russian aircraft, and many European aviation companies are barred from selling spare parts to Russian companies. The Russian government’s response will likely give some consumers pause: they plan to extend Russian planes’ airworthiness period, which expired on March 1, for another six months. At the same time, traveling by air outside of Russia is virtually impossible; due to sanctions, landing on most foreign soil will lead to a plane’s arrest.

For much of the Russian manufacturing industry, though, it’s still early to tell how bad things will get. “In Russia, there’s no manufacturing industry that doesn’t use imported parts or equipment,” said Zubarevich. “Our petrochemical engineering industry, for example, is fairly modest. The equipment needed to modernize our oil refineries is mostly imported, and it’s European, not Chinese. It’s unclear how these refineries will work going forward. We won’t get a fuller picture of Russian industry for at least another month.”

Not even the pharmaceutical industry is untouched by sanctions — but that's not because the West is targeting medicine. “Medicines, consumer goods, gadgets, household appliances, all of these things are brought to the country in shipping containers,” Zubarevich said. “All of the major container companies have ended their contracts with businesses located in Russia.”

In the meantime, according to her, the price of medicine is skyrocketing. “I’ll give an example to show the scale of the problem,” she said. “About 55% of all medication sales in Russia are for imported medicines. And out of the medications we make ourselves, we import 80-85% of the ingredients. In addition to supply disruptions, we’re having problems paying for the goods that get delivered — the bank transactions aren't working very well. All of this affects the pharmaceutical market.”

Uneven effects

According to Zubarevich, it’s city dwellers, not villagers, who will experience the effects of the coming economic downturn most acutely. That’s because they have more to lose.

“Income per capita in Moscow is twice as high as that of Russia as a whole,” Zubarevich told Meduza. “Consumer demand in Moscow will change as the food and beverage industry shrinks. Housing, utility, and transport costs aren’t going anywhere. It’s too early to talk about anything else, because consumption patterns haven’t changed yet, but I will say that Moscow is skewed towards the service sector, and the risks there are quite high.”

Though there is a certain group of people who have less to worry about: federal employees. “Other than inflation, these people aren’t at risk at all. They’ll keep getting paid no matter what,” said Zubarevich.

Even outside of the cities, where people can grow their own food in a pinch, nobody will be spared completely. “We’re at the beginning of a giant experiment: how will consumption patterns shift? Grocery stores aren’t going away, but everything else is an open question,” said Zubarevich. “But people [in rural areas] have gardens: they’ll plant more potatoes, some will grow cucumbers and tomatoes, some have animals — chickens, pigs. Life in those towns is a lot more closely tied to the land, so their losses will be mainly due to inflation.”

As for Russia’s “monocities,” where almost everybody works in the same industry, sanctions are sure to take a toll — thought it’s too early to predict the scale, according to Zubarevich.

“All industrial plants use imported equipment,” she said. “What will happen to [Severstal steel factory owner Alexey] Mordashov, who was targeted by sanctions, and how will it affect Severstal? I don’t know yet. What will happen to [billionaire Alisher] Usmanov, who was also hit by sanctions, and what effect will that have on [the mining town of] Stary Oskol? I don’t know that either.”

Zubarevich does think these oligarchs will eventually be able to find workarounds to keep their plants from shutting down completely — but even those will come at a cost. “They might try to use dummy corporations to import equipment and export products,” she said. “But that requires time and some serious additional expenses.”

The authorities' rapid crackdown on independent media in the weeks since the war began means that much of the Russian public still doesn’t understand the scale of what’s to come. “Older people and middle-aged people will start to understand gradually, but they’ll endure and adjust,” Zubarevich said. Younger people are more perceptive — and perhaps worse off for it. “Russia’s youth are completely in the doldrums right now — there’s a reason the most-watched content [on social media] right now is conversations with psychiatrists. People understand that there’s nothing they can do, and their lives are falling apart in front of their eyes.”

Meanwhile, according to Zubarevich, the main blow to older people will be medicine. “Other than that, they’ll just survive on buckwheat,” she said. “Lots of them are bragging: ‘we’ve seen worse.’” Only time will tell if they’re right.