FORBES: Shortly after the start of the "special military operation," you spoke about a first shock, about the impact that industry felt from Western sanctions. What is the economic situation currently? Is it true that people and the economy have gotten used to it?
In the spring, we all were mistaken: we assumed that the recession would be deeper and faster. It turned out that the Russian economy is very adaptive. Business churned as best it could. The state took several measures that have helped, including “parallel imports” – when you import goods without the consent of the manufacturer.
After the March-April shock, the economy began to recover. By August, the extractive industries were up 1%versus August 2021. Meanwhile, manufacturing industries slid, but only slightly, and in August the decline was less than a 1%.
Nothing we predicted – production stoppages, unemployment – materialized. Because Russian business – bruised, battered, having weathered many crises – is always looking for opportunities for alternative supplies and alternative markets, and often discovers them.
Sanctions were imposed by one group of countries, while others were happy to buy Russian exports at a big discount. Sellers enthusiastically sold everything not sanctioned, because they could make money.
For the Russian consumer, whether it be business or households, everything has become more expensive, asimports come by roundabout routes – that is, what can be imported. But everything cannot be, though they try.
In reality, the impact of sanctions began in July; in August, timber processing plunged 17%, followed by a 20% drop in October. Metallurgy and steel saw an 8-9% drop, rolled products were off 10% in August and 16% in October. In other words, the sanctions that came online in the summer, judging by the August statistics, already squeezed industrial production.
In addition, there are sectors where there were no sanctions, but rather a bunch of logistics issues amid resistance to deliver Russian products. As a result, the decline in the production of mineral fertilizers came in at 14% in August and 17% for ammonia. Coal also began to fall in August due to sanctions; by October, coal production had dropped 7%. Most coal exports have been diverted to India and China, but that does not fully compensate for the halt in exports to Europe due to sanctions.
Life turned out more complicated than the textbooks and expectations. The world is much bigger, and there are a lot of possibilities out there. If businesses are really churning – and they were – it is possible in this big and complex world to find alternatives. Does this mean they churned their way out of it though? No, it does not.
The pressure from sanctions, along with the departure of global companies from the Russian market, is slower than expected. We will see the effects in 2023. Then it will be clear that with oil and oil products, it will not be possible to redirect everything to other markets, or they will have to be sold at a big discount. It is already clear that gas exports are collapsing, and it is impossible to redirect them – they mostly go through pipes.
Plus: All the equipment that we purchased is still working, but someday it will need to be repaired. And what will we be able to replace? It should be acknowledged that parallel imports work, but not always. Specialists who monitor imports to Russia believe that the country has managed to cover consumer imports. Sure, they have become more expensive, but they have not become super scarce. As for imports of intermediate goods – components – things are much more challenging. It is not easy to import hydraulics for KAMAZ – we will have to come up with something ourselves. The biggest issues are with so-called investment imports – finished machinery and equipment. Moreover, a large part of these imports are under sanctions – for power engineering, for oil and gas – not to mention dual-use products. Recall that having taken so many blows, Russian business has already cut its teeth. It is incredibly resilient.
Yes, it’s painful and hard, but Russian business is trying to make do.
And one more thing: the crisis-period decline has not ended and will continue in 2023 – that is the official forecast of the Economy Ministry and the Central Bank.FORBES: How will this affect people?
There will be no widespread unemployment. The decline in industrial production is still small. In September, manufacturing was down 4% and the extractive industries were off almost 2%. In October, the drop was approximately 2.5% in extraction and processing. In August, it had been better, near zero, meaning the decline intensified in the autumn.
The Russian labor market has its own specifics. People do not lose their jobs right away; it all starts with moving workers to part-time. This is the Russian labor market’s way of adapting to crises (see an interview with Vladimir Gimpelson
about the labor market on RP).
Underemployment leads to lower wages because the employed people work only part-time. This has become the most common mechanism for business to reduce costs and the Russian labor market to adapt to the current crisis.
In the spring, I believed that there would be a significant rise in part-time employment throughout the manufacturing sector. This was the case during the COVID lockdowns – in the second quarter of 2021, more than 2.1 million people were working part-time. After the pandemic-driven crisis passed, there were only 1.1 million people working part-time as of the fourth quarter of 2021. In the second quarter of 2022 (the latest data), it was less than 1.4 million people. The total growth of part-time employment throughout the country was less than 300,000 people!
In what regions did it go up? Kaluga, Samara, Nizhny Novgorod – this is the automobile industry, that's who collapsed; there has been a big rise in part-time employment. These workers were not fired until August.