As Russia Diverges From the Global Economy, Soviet-Style Scarcity Looms
Gripped by heavy economic sanctions and increasingly isolated from Western suppliers, Russia worked on Thursday to keep its factories and businesses running and stave off a return to Soviet-era scarcity.
As the central bank slashed interest rates again in an effort to prop up the economy, its chairwoman, Elvira Nabiullina, warned that the coming months would be “difficult for both companies and citizens” as the fallout on the Russian economy deepens more than three months into the invasion of Ukraine.
The economic toll on Russia, though difficult to quantify, has spread widely, from its largest companies to its small shops and workers.
Basic items, from paper to buttons, are in short supply. Prices of consumer goods have been soaring, with the inflation rate rising to 17.8 percent last month before dipping slightly. Sales in the lucrative energy sector, while still high, are projected to fall as European customers begin to pivot away from Russian oil. Airlines, cut off from Western manufacturers, are searching for spare parts.
The Russian automaker Avtotor even announced a lottery for free 10-acre plots of land — and the chance to buy seed potatoes — so workers could grow their own food amid “the difficult economic situation.” The company announced the vegetable-farm giveaway after Western sanctions hobbled production at its assembly plant in Kaliningrad.
“I call what is happening now a horrible experiment,” Ivan Fedyakov, who runs Infoline, a market research firm in Russia, said in a telephone interview. “It has never happened in modern history when such a big and deeply integrated country would be so quickly and abruptly fenced off from the global economy.”
The shortages and supply chain issues will only worsen, economists predict, as the West moves to turn Russia into an economic pariah. It is unclear what might reverse that tectonic shift, short of major changes in Moscow, analysts say, including the end of President Vladimir V. Putin’s rule.
The central bank has been cutting interest rates faster than expected as the ruble has rapidly appreciated, reaching its strongest level in four years against the U.S. dollar this week. A strong ruble hurts exports and lowers government revenues from dollar-denominated energy sales.
Yet even that rebound in the ruble is a sign of weakness, economists say, reflecting a sanctions-induced collapse in imports that, combined with a continued gusher of energy revenues, has sent the country’s current account soaring.
“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.”
Mr. Putin, in a tacit acknowledgment of the economic toll of the war, promised this week to increase the minimum wage, pensions and military benefits, even as he shrugged off the mass exodus of foreign firms since the invasion on Feb. 24.
“Sometimes you look at those leaving and think, ‘Maybe thank God that they are,’” Mr. Putin said in a televised meeting on Thursday. “Our businesses and our manufacturers have grown up and will successfully find a place on ground prepared by our partners. Nothing will change.”
Mr. Putin also lashed out at Western governments that are freezing Russian assets, including yachts and bank accounts linked to his inner circle. “Stealing others’ assets never ends well, primarily for those doing such wicked things,” he said in the meeting, according to the Interfax news agency.
He dismissed as a trivial inconvenience a lack of luxury goods from European firms. Such items will be “a little more expensive,” he said, using the example of high-end Mercedes-Benz cars, but said that those who drove them previously would continue to drive them. They can be imported from anywhere, he said. “It doesn’t matter to us.”
Despite the devil-may-care official attitude, nearly 1,000 companies have left Russia, including Nike, Reebok, Starbucks and McDonalds, citing an untenable situation, as well as logistical and payment issues, among other reasons.
Delivery paths that Russia relies on to import materials for products as diverse as cars, tampons and ceramic plates have been blocked by European countries. DHL, UPS and FedEx have refused to make deliveries in Russia for months.
Companies such as Adobe and Oracle have suspended operations there, and there are concerns that Russia could soon run out of data storage space.
Nino, a jewelry designer in Moscow who declined to give her full name for fear of reprisals, said that the clay she relied on had disappeared from the market because it is produced in Germany and in Ukraine’s embattled eastern Donbas region. The cost of the clay, she said, has shot up by 30 to 60 percent.
“My jewelry is produced by a Russian company,” she said. “They are also suffering from a lack of materials. There are big difficulties with logistics. Either we don’t have what we need or it’s significantly more expensive.”
Russia has avoided some economic pain, at least temporarily, because the European Union has not been able to overcome Hungary’s objections to a proposed oil embargo, which would be one of the toughest measures imposed by the West so far. But oil revenues are still expected to decline over time as individual countries reduce their dependence on Russian energy.
On the battlefield, Russia’s ambitions are narrowing to three cities in the Donbas region, where it has made significant gains and could soon gain complete control. Yet, with the unexpectedly rapid depletion of its troops and equipment, some analysts expect the battle to be Russia’s last major offensive of the war.
On Thursday, Russian forces shelled Kharkiv, Ukraine’s second-largest city, 25 miles from the Russian border, resuming attacks weeks after Ukrainian forces pushed Russian troops away from the city, giving it a brief respite.
Russia-Ukraine War: Key Developments
Debating the war’s end. As the conflict rages on in Ukraine’s east, the global conversation is increasingly focusing on how the fighting could end and how to define victory — and for whom. Some Western leaders are suggesting a territorial compromise, which Ukraine opposes.
The war’s economic toll in Russia. Gripped by heavy sanctions and increasingly isolated from Western suppliers, Russia is working to keep its factories and businesses running and stave off a return to Soviet-era scarcity. Meanwhile, Russia’s central bank slashed interest rates again in an effort to prop up the economy.
Russian oil ban. The European Union has stalled on its proposed ban on Russian oil. The measure is being held up by Hungary’s refusal to back the embargo, claiming it would devastate the country’s economy.
On the ground. Moscow’s military has narrowed its focus to a 75-mile-wide sliver of land in the heart of the eastern Donbas region, which has allowed Russian forces to make incremental gains. Russia’s main immediate target remains Sievierodonetsk, the easternmost city still under Ukrainian control.
Seven people were killed and 17 more were injured as five neighborhoods came under fire from rocket-propelled grenade launchers and artillery, the head of the Kharkiv regional military administration, Oleh Synyehubov, said.
“Many people returned to Kharkiv thinking they were safe,” said a 28-year-old man in a bulletproof vest who gave his name only as Ilya. “But now they don’t feel that way anymore. I saw four families in my apartment building packing up their cars to leave.”
One person was also killed and another injured in a nearby town. In the Donetsk region, Russian shelling killed at least four civilians and wounded 12 others in the last 24 hours, Ukraine’s Defense Ministry said on Thursday.
As Ukraine seeks to hold Russia accountable for atrocities, two Russian soldiers on Thursday pleaded guilty to firing on a town in the Kharkiv region from a position across the border in Russia. It was the second war crimes trial held in Ukraine since the invasion began.
The soldiers, Aleksandr Bobikin and Aleksandr Ivanov, acknowledged serving in an artillery unit that had shelled the village of Derhachi, destroying a school, from a position near the Russian border city of Belgorod. The soldiers then continued their attack as they crossed into Ukraine, where they were captured and charged with violating the laws and customs of war.
The charge is laid out by the Geneva Conventions, to which Ukraine is a party. Prosecutors said the men should serve 12 years in prison.
Mr. Ivanov asked for leniency. “I repent and ask for a reduction in the sentence,” he said. Sentencing is expected on May 31.
Russia’s Supreme Court delayed until June 29 a hearing to determine whether the Azov battalion, a regiment of the Ukrainian National Guard that made up the bulk of the fighters at the Azovstal steel plant in Mariupol, should be designated a terrorist organization.
The Azov brigade has origins as a far-right group, giving a veneer of credibility in Russia to Mr. Putin’s claims that Russia is purging Ukraine of Nazis.
Reporting was contributed by Valerie Hopkins, Anton Troianovski, Neil MacFarquhar, Ivan Nechepurenko and Matthew Mpoke Bigg.