Western sanctions did not kill the Russian economy and did not stop the war: is there any effect from them

Hundreds of thousands of workers across Russia have lost their jobs after the West imposed wide-ranging economic sanctions designed to limit Moscow's ability to wage war and undermine public support for President Vladimir Putin. The New York Times.

Photo: IStock

Valery Volodin, a welder at a huge Volkswagen plant in western Russia, spent most of the summer relaxing in his dacha or country house, cultivating a vegetable garden and looking after the children. Volodin, 41, had no choice: the car factory closed in March, joining more than 1000 multinational companies that have wound up operating in Russia because of its invasion of Ukraine.

Since then, he has been sitting at home while Volkswagen is looking for a buyer. He goes to a factory in Kaluga's industrial zone once a month to receive about $800, a payment required by Russian labor law that is equivalent to two-thirds of his previous salary.

“We are starting to work, but the plant is empty,” Volodin said in an interview. He doesn't mind taking a break from physically demanding work, but doesn't know how to make plans for the future.

“We live for the day, for now,” he said.

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More than nine months after the invasion, neither the war effort nor the economy has stopped, and the economic consequences for many Russians are still not very tangible. Putin avoided any significant internal pressure that could threaten his leadership.

But the effects of what some are calling the most coordinated and deepest economic sanctions in modern history are evident in communities across Russia — and the worst could be yet to come.

The sanctions have thwarted Russia's faltering attempts to modernize its economy along Western lines and catch up with European living standards after the collapse of the Soviet Union, said Vladislav Inozemtsev, director of the Washington-based Center for Post-Industrial Studies. This clouded the hope that the country could become modern and prosperous in the near future.

“The slogan now is ‘Prevent the situation from getting worse,’ and this is an important change,” Inozemtsev said. “Even the government has stopped focusing on national development.”

Key growth drivers such as technology transfer and investment are hiding behind the appearance of normal development, he said. "It's like a cake that's been dropped on a table, and it looks more or less good, but inside it's all mixed up," Inozemtsev said.

The most visible and powerful impact has been in manufacturing, a sector that employs 10 million Russians and has been the centerpiece of Putin's ambitious program to diversify the economy and move away from dependence on oil and gas exports. The automotive industry accounts for a significant proportion of these workers: according to the country's statistics agency, 300 Russians work in automakers. The association that represents them says that up to 000 million more work in related industries.

By September, automotive output was down 77 percent year-over-year, and car sales were down 60 percent year-over-year. The main reason is that Russian industry is heavily dependent on Western components. Even Putin acknowledged the problem last week. He said that in some sectors, dependence on imported components reaches 2021 percent.

To adapt, Inozemtsev said, Russia is closing in on itself, cutting ties with the rest of the world and moving towards an economic model similar to that of Iran, where political legitimacy is based on providing citizens with basic necessities rather than stimulating transformative growth.

Although the Russian government was better prepared to resist the sanctions than many in the West expected.

Since the start of the war, the International Monetary Fund has revised up its economic forecasts for Russia twice and forecasts a 3,5% decline in gross domestic product this year, in line with government forecasts. This decline, while a major departure from pre-war growth expectations, contrasts sharply with the double-digit collapse in Venezuela's economic output following a wave of U.S. sanctions in 2019.

“Sanctions have not undermined the stability of the Russian financial system and have not affected macroeconomic stability,” Prime Minister Mikhail Mishustin said at a government meeting last week.

A combination of high oil revenues, large foreign exchange reserves, and a seasoned team of economic officials allowed Putin to cushion the blow, much to the dismay of some Western leaders who had hoped sanctions would be more effective by now.

But the loss of investment, technology and skills caused by sanctions is likely to reverberate for generations, depriving many Russians of a chance for a better economic future, experts say.

In 2009, when Volkswagen launched a full production cycle in Kaluga, Mr. Volodin received not only a job, but also unexpected support.

“I was paid tuition for my job,” he said. When he was replaced by a robot, he was retrained.

These were the heydays for Kaluga, an industrial region about 200 kilometers south of Moscow. The former governor actively courted Western investors by learning English and building a modern airport with several flights a week to Germany. He transformed the regional economy, which was 80 percent oriented toward the Soviet military-industrial complex, into an economy linked to the West. Pharmaceutical companies rushed to the Kaluga region with a million people, automakers too.

Volkswagen employed about 4200 workers. Volvo and Stellantis, which produced and sold the Peugeot, Citroën, Opel, Jeep and Fiat brands in Russia, also opened operations in the region. According to Dmitry Trudovoy, chairman of the independent trade union Association of Workers, an ecosystem of suppliers and related industries has emerged to serve them, employing at least 25 people. German and other foreign language courses at the local university were a guiding thread to office work in companies.

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It seemed that a new, modern business model was being built step by step in the region, a hint of how the Russian economy could develop.

By 2020, only Volkswagen products accounted for about 13 percent of the total industrial production of the Kaluga region.

Now, most automakers in the region have gone out of business, and Trudovoy said workers have no idea who could take over Western factories and whether they will keep their jobs.

“They are nervous and afraid for their future,” he said.

According to Rosstat, industrial production in Kaluga fell by 30 percent between February and July this year compared to the same period last year. The region has become one of the most affected regions.

Russian state-owned companies and the government have promised to replace lost products with local brands. But there were several signs of regression. In June, AvtoVAZ, which makes Russia's best-known car brand, Lada, announced that its new cars would only meet 1996 emission standards and would not have passenger-side airbags.

In a symbolic move, Kamaz, a subsidiary of AvtoVAZ, announced that it would use the Moscow plant vacated by Renault after the invasion to restart production of the Soviet-era Moskvich car brand, which has long been an almost comical proverb.

The slowdown in car production also means that even the Russian police will find it difficult to acquire new patrol cars. According to the Russian newspaper Kommersant, the interior ministry was unable to find a supplier for the 2800 new cars needed by the traffic police.

KamAZ claims that next year the plant will produce 50 "modern, comfortable, high-quality and safe" vehicles, including many with electric motors. To support these efforts, the Russian government plans to send about $000 million to domestic automakers.

But there are few examples in modern history of successful attempts to replace imported Western technology with local ones, economist Inozemtsev says. Russian companies lack the know-how and skilled workers to replace Western capital in knowledge-intensive sectors. According to Inozemtsev, reliance on homemade substitutes will lead to "primitivization."

Production will not disappear, as he said, but it will gradually degrade, leading to a decrease in the quality and quantity of products, which will quickly reduce the standard of living of Russians.

In Kaluga, the collapse of the automotive industry has a wide range of side effects. The real estate market ground to a halt after the war broke out, according to Kirill Gusev, editor of the Kaluga House real estate website. The situation began to improve in the summer, when people got used to the new norms, but then collapsed after Putin announced mobilization in September.

“Real estate is essentially long-term planning, but now we are in a situation where this is not possible at all,” Gusev said. “We all saw how easily normal life collapsed.”

“After the mobilization, the banks stopped issuing loans, because they could call on customers,” he added.

Natalya Zubarevich, a professor of geography who tracks socioeconomic data at Moscow State University, said: “We are seeing falling incomes, a broad depression, a decline in consumption. All this will have a negative impact on the economy of the country.”

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Kirill Mikulin, owner of a popular bar in Kaluga, is feeling the blow. He has already adapted, finding a replacement for half of the imported beer in his pub. Encouraged by a seeming return to normal in the summer, he opened Hops & Hopes, which sells 13 craft beers on tap and 250 more in bottles.

On a recent evening, his downtown store didn't attract a single paying customer.

“We believe in the New Year,” he said, hoping sales will pick up ahead of the holiday. “But after that, everything may stall again.”

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