“The russian man does not beat his head against the state – that is a useless exercise”

Interview with Natalia Zubarevich
January 4, 2023
  • Natalia Zubarevich
    Professor at the Moscow State University,  economic geographer, specialist on socio-economic development of the Russian regions.
  • Anton Zhelnov
An interview with Natalya Zubarevich in which she explains why the decline of the Russian economy has turned out smaller than expected, why unemployment has not risen, and who the state is supporting and who it has left on their own.
The original text in Russian appeared in Forbes. A shortened version is republished here with their permission and the collaboration of the author.
The GAZ car plant in Nizhny Novgorod. The automobile industry has collapsed in Russia since the war started. Source: Wiki Commons
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.
"A completely different problem has been metastasizing since autumn: many industrial enterprises do not have enough labor, with the shortage of qualified workers driven more by the mobilization than the economic crisis."
FORBES: I will ask you later about the mobilization, of course. Political expert Gleb Pavlovsky told us that everything will end quickly anyway, as the system cannot exist amid strain. That was in the summer when it was palpable. What word would you describe what is happening now?

Adapting for the worse. And efforts to fix things with available means. It's time to stop using the word “strain.” The human body and psyche are such that it gets used to things getting worse. And the same is true in the economy.

Managers are clearly operating in emergency mode, but that's not the point. Yes, they are trying to do something, and sometimes reasonable things. But the main thing is what business does. It is plugging away. Let me repeat: Russian business has insane experience with crises. They have seen everything.

FORBES: But this crisis, according to what you have said, will not pass.

There will be a drop in production volumes, of course. But, it has not been seen in aluminum, for example – volumes have continued rising. And it is still selling well. Measures to curb sales of Russian aluminum and other non-ferrous metals could greatly increase prices in the global market, so such sanctions have not been put in place.

A business can keep going by producing smaller volumes. The main issue is not volumes, but profits. And the situation varies. Ferrous metal producers sold almost at a loss in the global market during the summer as the cost of logistics soared – they had to sell to distant countries, plus the discount demanded by buyers, plus a strong ruble versus the dollar. Because of this, they sometimes sold at a loss.

‘There is no need to get worked up: we are all going to die, everything is crashing, everything is falling apart. ’This is not true. There is no need to get worked up the other way either: ‘we will overcome everything, everything will be fine, we will import-substitute everything.’ Not everything. A lot of things we cannot.

The economy is slowly adapting and the quality of the country’s technology declining – this is perhaps the most accurate and concise description. It's not about production volumes. The point is the extent of the technological lag and the decline in the profitability of business.

FORBES: You said in March that for a person who does not work a blue-collar job, does not live in a single-industry town, but say in Moscow, the first encounter with the crisis was ruble depreciation and rising prices. What is happening now [in November]?

At big companies, the spike in prices was partially offset by bonuses and wage indexation. The dynamics of personal income tax receipts show this. Personal income taxes are paid out of earnings at work, and in March receipts were up 21%!

Against the backdrop of rising inflation and the broader shock, almost all big businesses indexed salaries and paid out bonuses and dividends. In Moscow and St Petersburg, company headquarters were very generous. So, the pill was really sweetened for employees of big companies, especially those working at headquarters. But not for state employees. Indexation was not carried out in the public sector. Pensioners saw pensions indexed by 10% starting in June. And the minimum wage, according to which many benefits are calculated, was raised by 10%, i.e. low-income groups were helped.

FORBES: What about small and medium-sized businesses?

The state policy was ‘Guys, figure it out yourselves,’ though subsidized loans were still expanded. The state did two things: first, it helped the poor and people with very low incomes. A 10% increase in pensions. A 10% raise in the minimum wage, and a 10% increase in the living wage. What does it all mean? If the living wage was raised by a little over RUB 1,000, then more people would qualify for benefits, including benefits for families with children. This is very important – these benefits are paid out each month.

The second thing the state did: by allowing parallel imports, it gave up control over how issues with imports are resolved. And it is small and medium-sized businesses that are the main players in this arena, as big business is afraid to venture into the “gray zone.” The calloused hands of small and medium-sized businesses can supply everything possible to supply to their beloved Motherland. Through Turkish channels, first and foremost. Things that are not sanctioned go through Kazakhstan, as Kazakhstan monitors this. Through Chinese channels. But the biggest winner is Turkey, whence imports to Russia have risen almost three times!

But things vary at urban small and medium-sized service businesses. Food services had recovered by August, while in October the monthly growth had accelerated. I thought for a long time, what is with our people? The problems are getting harder, but the bars, cafes and restaurants are full... If you walked around Moscow in the summer, you saw tons of people. And there are many out still.

The first reason is that it’s a way to forget, to return to normal life.
"The illusion of normality, an attempt to restore normality, is a very important psychological defense mechanism."
Vkusno i Tochka, the new name of McDonald's restaurants in Russia, has seen customer numbers remain steady. Source: VK
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.
"And in Russia, the workforce is shrinking because of our population pyramid. People of working age, 20-29 years old, now represent only a tiny generation, a quarter smaller than the 30-year-olds."
Russia claims it will produce 300 Sukhoi Superjets per year by 2030. However, given the current rate of about 4-5 planes made per year, it is unlikely to meet that target. Source: Wiki Commons
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.
"Educated people in big cities do not want to understand that to a large extent, Russia is a poor country and behaves like a poor country. They worry about themselves and their inner circle, and the rest does not concern them."
People include themselves in the wider world when they have opportunities – and opportunities are the result of having money and then of education. If you do not have one or the other, you are just surviving. Compared to the 1990s, things are better – you now have a color TV. And even a very used car. Of course, it is not the 1990s, but what has fundamentally changed in terms of consumption patterns? People have started eating better, you can buy shoes for your kid more often. What else? Do you travel somewhere? No, you stay at home. You just do not have the resources to take a good vacation. If you can afford a trip to Turkey or Hurghada, it is already a big accomplishment, economic and social. These people have taken a hit and are heading toward living in survival mode, along with the rest of the middle class – slowly but surely.

The government has made its priorities clear. First, pensioners, its core electorate, have had their pensions indexed 10%. Second, support for vulnerable groups of the population, meaning people who live at the subsistence minimum or near it, was increased. These groups are grateful to the authorities, and expanding poverty would be costlier for the government. The authorities are not at all concerned about the middle class...they seem to be saying: ‘you’re competent, have some skills? Figure it out! Or get out of the way!’

A backward and flawed model of human capital is being intensively reproduced in the country. This begins with education at school, where archaic ideas about the world are presented… But here I have an analogy –monstrous, but positive. Remember the early 1920s – the philosophers’ ships? Together with the White emigration, 2-3 million left, the best of the nation. And then the madness of the Great Terror, and then the war cut them down…

And suddenly, in the 1960s, this urban educated class began to take shape. Where did it come from? Through which cracks in the asphalt? It is recovering, since there is no way to stop the progress of civilization. We are on our back foot now, but that time will end.

FORBES: How long do you think that will take? Because I want all this to happen in our lifetime, and not in 100 years.

You are not the first person to ask that question. My answer is I may not live to see it. But you will for sure... Some say that when a pendulum swings in both directions. I do not know, as the degree of social degradation is very high. But the educated and good-earning urban population will recover. These are the laws of urbanism. Big cities will still attract more energetic and motivated people from all over Russia. A city is a place where the air of freedom is replenished. It cannot be different.

FORBES: Do you feel that air in Moscow now?

No. But a shift in that direction is objectively inevitable. In big cities, the human and social capital will be restored. Meanwhile, in the periphery, there are no guarantees. There could be further degradation due to demographic reasons – the population gets older and older. They will keep their ideas about the country and the world, even in big cities. Please, do not argue with the elderly – their generation is such. Let them live out their lives in peace. It’s useless to try to convince them.

FORBES: What is the mood in Moscow now?

Of course, the city has gotten gloomier. It is palpable. But as soon as I get to Moscow State University – the cheerfulness of young people cannot be crushed. It is unnatural for young people not to be cheerful. I am a happy person, because I teach young people, and I have my own folk way, like every teacher – I put in the plug, and they are the socket, I get energy from them. That's why I'm here...

FORBES: Suppose a person has a choice to leave or stay. To what extent can a person, if he is educated, if he is a creative person, be successful here again?

My question is: when? As long as the risks are high, people who can leave are better off leaving. It always comes down to weighing your personal and family risks. The risks to physical survival are very important for people who value their own lives and those of their loved ones. We do not yet understand what will happen next, but many will come back when they sense that the risks have lessened. In the worst case, you can leave again if another mobilization is announced.

Most likely, all the people who left will look around and see what is happening here and how, and a considerable amount of them will come back. Those who have the opportunity to earn money will settle abroad for a year or two, which is also sensible.

The questions you are asking me now are kind of whiner’s questions, and I'm not a whiner. So, I’m evading them... You cannot keep us down! We will endure anyway, and we will develop our country, sooner or later.
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