Russia dodges economic collapse but the decline has started
“I’m driving through Moscow and the same traffic jams are there as before,” says Andrey Nechaev, who was Russia’s economy minister in the early 1990s.
The readiness of China and India to snap up cheap Russian oil has helped, but Nechaev and other analysts say Russia’s economy has started to decline and is likely facing a prolonged period of stagnation as a consequence of Western sanctions.
The exodus of Western businesses, and wave after wave of punishing Western sanctions targeting Russia’s vital energy exports and its financial system, are having an impact, but not in the way many had expected.
That’s largely the result of aggressive capital controls and rate hikes back in the spring, much of which have now been reversed. Interest rates are now lower than before the war, and the central bank says inflation, which peaked at almost 18% in April, is slowing and will be between 12% and 15% for the full year.
The central bank has also revised up its GDP forecast for the year, and now expects it to shrink by 4% to 6%. In April, the forecast was for an 8% to 10% contraction. The International Monetary Fund also now predicts a 6% contraction.
It helped that the Kremlin had eight years to prepare, spurred by the sanctions the West imposed after Moscow annexed Crimea in 2014.
“The exit of Mastercard, Visa, it barely had an impact on domestic payments because the central bank had its own alternative system of payments,” says Nechaev.
Russia set up the Mir credit card, and its own transaction processing system in 2017.
And there’s a reason Russian fans of McDonalds and Starbucks are still able to get their fast-food fix, says Chris Weafer, founding partner of Macro Advisory Ltd, a consultancy advising multinational businesses in Russia and Eurasia.
Since 2014, many Western brands in Russia caved to government pressure and localized some or all of their supply chains. So when these companies left, it was relatively easy for Russian buyers to buy them and keep running them simply by changing the wrapper and packaging.
“Same people, same products, same supply,” says Weafer.
It’s not an entirely watertight strategy, though.
The re-branded McDonald’s stores reported a shortage of French fries in mid-July, when Russia’s potato harvest fell short, and foreign suppliers wouldn’t fill the gap due to sanctions.
Can Russia’s energy boom continue?
Fast food continuity is one thing. Russia’s longer term stability rests on its energy sector, still by far the biggest source of government revenues.
To say high energy prices have so far insulated Russia would be an understatement.
The International Energy Agency says Russia’s revenues from selling oil and gas to Europe…
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