Russian invasion of Ukraine: dwell updates

Yevgeny Shumilkin will return to work on Sunday. In preparation, he stripped the familiar “M” from his former McDonald’s shirt and covered the “M” on his McDonald’s jacket with a patch of the Russian flag.

“It will be the same buns,” promised Mr. Shumilkin, who maintains the equipment at a restaurant in Moscow. “Just under a different name.”

McDonald’s restaurants will reopen in Russia this weekend but without the Golden Arches. After the American fast-food giant withdrew to protest President Vladimir V Putin’s invasion of Ukraine this spring, a Siberian oil mogul bought its 840 Russian stores. Since almost all of the ingredients were locally sourced, restaurants could continue to offer much of the same food, he said.

The move could just work – underscoring the surprising resilience of Russia’s economy in the face of one of the most intense sanctions spate ever imposed by the West. Three and a half months into the war, it has become clear that the sanctions — and the spate of Western companies voluntarily leaving Russia — have failed to completely dismantle the economy or spark a public backlash against Mr Putin.

Russia spent much of Putin’s 22 years in power integrating into the world economy. Turns out it’s not easy to unravel such large and intertwined business relationships.

Certainly the impact of the sanctions will be deep and far-reaching, and the consequences will only be felt gradually. Living standards in Russia are already falling, economists and businesspeople say, and the situation is likely to get worse as import inventories run low and more companies announce layoffs.

Some of Russia’s do-it-yourself efforts fail to meet Western standards. When the first post-sanctions model of the Lada Granta – a Russian sedan co-produced by Renault before the French automaker pulled out this spring – rolled off the line at a plant near the Volga River on Wednesday, it was missing airbags and modern pollution controls or anti-lock braking system.

Recognition…Maxim Shipenkov/EPA, via Shutterstock

But the economic decline has not been as steep as some pundits had expected after the February 24 invasion. Inflation is still high, about 17 percent on an annualized basis, but it has eased from a 20-year peak in April. A closely watched measure of factory activity, the S&P Global Purchasing Managers’ Index, showed that Russian production expanded in May for the first time since the war began.

Behind the positive news is a combination of factors that work in Mr Putin’s favour. Chief among them: high energy prices, allowing the Kremlin to continue funding the war, while increasing pensions and wages to placate ordinary Russians. The country’s oil revenues are up 50 percent this year.

Moreover, the skillful work of the central bank prevented panic in the financial markets after the invasion and helped the ruble recover from its initial plunge. Store shelves remain mostly stocked, thanks to plentiful stocks and alternative import routes set up by countries like Turkey and Kazakhstan – and Russian consumers buying less.

The new Lada Granta is also less bulky than observers predicted: despite the lack of third-party components, it will continue to come with power steering and electric windows.

“Everything is not as bad as expected,” announced a Russian auto website.

The survival of Russia’s economy plays into Mr Putin’s hands by reinforcing his narrative that Russia will stand tall in the face of the West’s determination to destroy it. He met with young entrepreneurs at a town hall-style event on Thursday, his latest attempt to show that despite his war he was keen on keeping the economy afloat and foreign trade afloat. Even if the West doesn’t do business with Russia, he stressed, the rest of the world will.

Recognition…Pool photo by Mikhail Metzel

“We will not have a closed economy,” Mr Putin told a woman who asked him about the impact of sanctions. “If someone tries to limit us in something, they limit themselves.”

For the rich, luxury goods and iPhones are still widely available, but more expensive when brought to Russia from the Middle East and Central Asia. The poor are hit by rising prices, but they will benefit from a 10 percent increase in pensions and the minimum wage that Mr Putin announced last month.

The urban middle class is hardest hit by the economic upheaval. Foreign goods and services are now harder to come by, Western employers are retreating, and travel abroad is becoming difficult and prohibitively expensive.

However, Natalya V. Zubarevich, an expert in social and political geography at Moscow State University, notes that many middle-class Russians have no choice but to adjust to a lower standard of living: at least half of Russia’s middle class, she estimates, works for the state or for state-owned companies.

“Sanctions will not stop the war,” Ms. Zubarevich said in a telephone interview. “The Russian public will put up with it and adapt because they understand that they have no way of influencing the state.”

Chris Weafer, a macroeconomic advisor who has long focused on Russia, issued a note to clients last week saying that “some of our earlier assumptions were wrong.” Inflation and the contraction of the economy proved less severe than expected, the statement said. His firm, Macro-Advisory Eurasia Strategic Consulting, revised its forecast to show a smaller contraction in gross domestic product this year — 5.8 percent instead of 7 percent — while forecasting a recession that will last into next year.

In a telephone interview, Mr. Weafer described Russia’s economic future as “bleak, debilitating” with lower incomes but basic goods and services still available. A major juice company, for example, warned its customers that its boxes would soon all be white due to a shortage of imported paint.

Recognition…Natalia Kolesnikova/Agence France-Presse – Getty Images

“The economy is now moving into an almost stagnant phase where it can avoid a collapse,” he said. “It’s a more basic level of economic existence that Russia can sustain for quite some time.”

On Friday, as inflation stabilized, Russia’s central bank cut its key interest rate to 9.5 percent – the pre-invasion level. On February 28, the bank raised it to 20 percent to try to stave off a financial crisis. After depreciating sharply in the days following the invasion, the ruble is now trading at a four-year high.

One reason for the ruble’s unexpected strength is the global energy demand triggered by the pandemic. In June alone, the Russian government expects a windfall of more than $6 billion from higher-than-expected energy prices, the Treasury Ministry said last week.

At the same time, Russian consumers are spending less – further supporting the ruble and giving Russian companies time to establish new import routes.

However, Russian officials concede that the hardest times for the economy may yet lie ahead. Elvira Nabiullina, the governor of the central bank, said on Friday that “while the impact of the sanctions has not been as acute as we initially feared,” it “would be premature to say that the full impact of the sanctions has been manifested.” .

For example, it remains unclear how Russian companies will obtain microchips, which are used in a variety of goods. At Putin’s meeting with entrepreneurs, one developer said he was “very concerned about our microelectronics.”

Mr Putin chimed in: “Me too. Honest.”

Recognition…Maxim Shemetov/Reuters

The ties between Russia’s economy and the West that are now breaking go back decades—sometimes more than a century. Aeroflot, the national airline, acquired numerous new Boeing and Airbus jets and presented itself as a comfortable transit airline for travelers between Europe and Asia. In the Ural Mountains, a factory partnered with Siemens, the German manufacturing giant, to produce modern trains to replace rusting Soviet stock.

Aeroflot, banned from using European airspace, is now focusing on domestic flights and is working to switch to Russian planes – a process that will take years. Siemens, which built telegraph lines across the Russian Empire in the 1850s and helped propel the country into the industrial age, last month announced its withdrawal from Russia.

“Sanctions choke the economy, which doesn’t happen immediately,” said Ivan Fedyakov, who runs Infoline, a Russian market consultancy that advises companies on how to survive under the current restrictions. “We only felt 10 to 15 percent of their effect.”

But at least when it comes to food, Russia is better prepared. When McDonald’s opened in the Soviet Union in 1990, Americans had to bring everything in. Soviet potatoes were too small to make fries, so they had to acquire their own russet potato seeds; Soviet apples didn’t work for the pie, so the company imported them from Bulgaria.

Recognition…Via Reuters

But when McDonald’s pulled out this year, its Russian stores sourced almost all of their ingredients from Russian suppliers. When McDonald’s, which employs 62,000 workers in Russia, announced in March it would shut down operations because it “could not ignore the needless human suffering unfolding in Ukraine,” one of its Siberian franchisees, Aleksandr Govor, was able to close its 25 restaurants keep open. Last month, he bought McDonald’s entire Russian business for an undisclosed sum.

On Sunday – Russia Day, a patriotic holiday – he will reopen 15 stores, including the former flagship McDonald’s in Moscow’s Pushkin Square, the place where thousands of Soviets queued up in 1990 to get a taste of the West. The chain will operate under a new brand to be released, although the new logo, which is said to depict a hamburger and fries, has been unveiled.

According to a menu leaked to a Russian tabloid, the hash browns will have a Russian name. And since the secret sauce is proprietary, there won’t be a Big Mac on offer.

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