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.

The second reason is that incomes have not fallen that much. Throughout the country, real incomes had bounced back in 2021, growing 3.4% after a decline of 2.0% in 2020, while in Moscow and St Petersburg they were up 8.5% and 7.0% in Moscow region. The growth in incomes stimulated consumption in Russia’s biggest agglomerations.

In January-September 2022, real incomes declined a slight 1.7%, with the drop even smaller in Moscow and St Petersburg. The slow decline in incomes so far has allowed people in the biggest agglomerations to maintain their consumer habits.

FORBES: Still, Azbuka Vkusa [a chain of expensive supermarkets] wrote to its shareholders that after the start of mobilization, after September, customer numbers began to decline sharply. Many restaurants are closing, with restaurateurs pointing to a decline of up to 30% in business, especially expensive restaurants...

In retail, hypermarkets are hurting; convenience stores are somehow getting by, as they are often discounters. Do you know who is growing? So-called hard discounters. Where prices are cut through the floor. There is a shift in consumer demand toward the low-cost niche. How business senses the economy! Only two years ago, that format began to be developed... Now they say that its sales are growing 30% a year.

The same is true in the restaurant segment. There are people at Vkusno i Tochka [the new name of the McDonald's chain that left Russia]. There are people at Shokoladnitsa [an inexpensive restaurant chain]. Restaurants with middle-level prices are retreating, however. The shift toward the lower price zone is seen across all service sectors. This is a normal response to the crisis.

I can sympathize with the restaurateurs and Azbuka Vkusa too. But, guys, the good times are over, your clientele has partially evaporated.

FORBES: I would like to ask you about the impact of mobilization on the economy: how much was it a shock for you in a human sense, not only in economic terms, that the authorities actually took that measure?

Yes, it was a shock. Political experts said that this is a break in the social contract: ‘do not touch us, but you can do what you want in politics.’ But I saw almost immediately that there would be no big protests. I'll explain why.

Most of the men who were mobilized are from the periphery, small and medium-sized towns. Overall, the potential for protests there is low. They came and said ‘go’ and people went, and they even buy themselves bulletproof vests with their own money. That is loyalty.

The family does not resist either, as they are promised big money. And in the provinces, wages are low. In addition, these families are heavily indebted, many have three, four, five outstanding loans, and they don’t have much money to pay them down. And for many, the war is a way out, even if not a joyful one; however, there is an element of economic rationality: you can make money and solve your problems. The price of human life is not taken into account. But it’s not only that the family needs to be fed. A peripheral Russian man often hits the bottle hard, and you will not often spot a reverent attitude toward the family from him. Those who know such areas will understand me perfectly.

In big cities, the efforts to mobilize of course were met with resistance, albeit passive. The Russian man is a great and powerful opportunist. He does not beat his head against the state – that is a useless exercise. You will walk away empty-handed and with a bump on your head. The Russian man avoids the state in every way possible.

That’s how the urban, educated population, which has some kind of income, began to be called "emigrants.”

They made their choice with their feet, realizing that protesting and crushing this state is harder... Estimates of how many people left vary significantly. According to some estimates, nearly every 20th man in Russia from 20 to 35 years old took off. In your circle of friends, you will see this too...

FORBES: Well, for me it’s every other...

Exactly! It’s Moscow, a big city. But we are considering every Russian man that age. Let's just say: in the spring it was 150,000. That is the estimates of my colleagues – I emphasize estimates – there are no exact statistics, though the data was evaluated by migration specialists.

But in the autumn, preliminary estimates of how many people left ranged from 250,000 to 350,000-400,000. More exact figures – from host countries – will be available only in early 2023.

It is mostly people who you would call blue-collar workers that have been mobilized. People who work with their hands. They took away a lot of machine operators in the agricultural sector and construction site workers. Some from the extractive industries; there have been many miners taken, including quite a few from Kemerovo region. The people who work in these industries are predominantly male. They already face a labor shortage, which will get worse going forward.

We are now putting moral things aside, because the most important thing is human lives and not labor shortages. But with all the terrible consequences of the “special operation,” at the moment we are discussing the economy.

As the economy becomes simpler, there will be fewer modern and more obsolete technologies. That means more workers are needed.

Thus, the mobilization is a big blow to the economy. Most people who left make money, are educated, understand the impact and make responsible decisions, think human life is important and their own life too.

Some of them will come back, as they do not have enough resources to stay abroad for a long time. Some will not come back. Again, I am putting everything moral aside, just economics. The first thing that their departure has meant is a decrease in consumer demand, because they make good money and are advanced consumers of services. There’s your Azbuka Vkusa and the like. And good barbershops will have to shut their doors...

FORBES: So the premium segment will decline?

It will decline precipitously. Meanwhile, the mass market, the “economy segment,” will remain – after all, people who stayed have hair cuts, shaves and so on. They will keep buying food, but it will be cheaper.

There’s the shift – it's very powerful. And the 300,000-500,000 people who left are not hard discounter customers. It is about the flourishing variety of services that had developed in Moscow for every taste and budget. That segment will thin out considerably, though again not immediately, because uncertainty is monstrous.

As it was said a long time ago: prepare for the worst, hope for the best and believe in a miracle.

Currently, business partly is hoping for a miracle, as it does not understand when and how all this horror will end. What if a rebound begins? Therefore, they are not firing workers much, as later they might not get them back or they will have to offer them higher wages. Business is doing invisible work that we do not see from the outside, adapting to the changing conditions and trying to gauge the outlook, which is very difficult.

FORBES: Can stopping the hostilities still help the Russian economy now, or has the point of no return been crossed?

Remember how I repented for the mistaken forecasts I made in the spring? Let’s take a step back. First, a considerable share of people who left will come back as soon as the risks of mobilization fade or the hostilities end. Some shriveled up consumer demand will return, sure; their money has been partially spent, but some people work remotely, so thank God, they can earn money. However, that is not everyone, of course. Second, the sanctions will not be lifted. This is about big business, its opportunities to export and the opportunities for industry to modernize with imported equipment.

We are already tired of hearing about our “import substitution.” About 300 Sukhoi Superjets by 2030. We have eight years left, meaning 25 units a year. We make 5-6 a year maximum. Where will you get the qualified workers and equipment to drive a fivefold increase?! They do not tell us about that, they just promise that there will be 300. Believe in a bright future! But I am a skeptic. I understand that we can substitute some imports – combines, for example – though not completely.

Big agricultural holdings and savvier farmers had acquired imported combines, where the cabin is climate-controlled, with electronics. And now they are parallel-importing components through Turkey, through someone else, to continue using these advanced pieces of equipment. And the rest will buy what Rostselmash makes.

FORBES: Right now, there are no direct flights from Russia to Europe. Traveling there now costs twice as much and takes twice as long.

The other day I was talking at an event at Skolkovo with a businessperson whose company organizes business trips. He said that business travel had almost recovered. Do you know why? If you want to survive, you will go; you need to look for suppliers or buyers all over the world, so the layovers do not really matter... When they need to negotiate and get something done in person, they go, negotiate and get it done. It is not a question of price – it is a question of survival. Meanwhile, tourist and private travel has declined a lot, that's clear.

FORBES: You said in the spring that now the most important thing is to explain to people the consequences of what is happening…

Alas, that was a disappointment. The big-city, educated, not-old population understands everything; they do not need to be explained. People in business accept what is happening as a given and are adapting to the current conditions. They prefer not to burden themselves with cause and effect – they do not talk about or think through why this happened.

Something is said on TV, people repeat it, and no economic argument can break through it. The population of the periphery bought cheap goods and are heavily indebted; and now, if you go into the army, your loan will either be forgiven or deferred. Many lived off their garden, so what has changed for them? Nothing. But now there is an opportunity to make money, and you are defending your homeland.

I try to convey to the Moscow crowd: you do not understand the country very well, it is not quite the same as they imagine in Moscow. These are very sad words, but true.

FORBES: Why have Russians forgotten about empathy? They see that people are killing other people.

While there was no mobilization, it was the regular army fighting. ‘This does not concern us’ was the prevalent attitude. All conceivable barriers were put up so as not to think, not to imagine how it might end. ‘I'm not there, I don't know anything and I don't want to know.’

After the first phase of mobilization, it will be harder to maintain this attitude, as people at the front will see a lot of things. And there will be brutality on both sides, because the longer all this goes on, the more terrible the dehumanization. The price of a human life is going down. Only one side has the powerful motivation that they are defending their country, while I don’t know what the motivation for the other is.

The Russian population, especially in the periphery, is consumed by concerns about just getting by. People are generally not empathic, because all their strength is spent on surviving. The maximum empathy, and even then not always, is the close social circle – family and some friends, girlfriends and relatives. That’s it! We should not curse these people, they just live a different life. That is the cost of the monstrous impoverishment of a significant part of the Russian population. Don't forget that 40% of Russians have lower cash incomes than the average RSFSR resident in 1991.

FORBES: But still, the standard of living is not the same as in 1993-94. Why then is the question of survival as acute as it was back then? How much longer will we live in “survival mode?”

As long as we have such an otherworldly divergence in terms of income. As long as people do not have enough money paycheck-to-paycheck or have no paycheck at all, as there is no work – and there are many areas like that, people are degrading and drinking themselves away. Until then, this survival strategy will keep reproducing itself.