Stop Sugarcoating Russia's Economic Situation

Whitewashing Russia's economic hardships is counter-productive. It would be better if the economic pain so many Russians are experiencing were given due coverage — and promptly addressed. 

Sat, May 30, 2015
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We need to be more honest with ourselves when discussing the condition of Russia's economy
We need to be more honest with ourselves when discussing the condition of Russia's economy

Having just completed a two week stay in St. Petersburg — I visit every 6 weeks or so I would like to share some observations on the political and economic situation in Russia. As I see it, both the Schadenfreude position of American and other Western political commentators who celebrate any signs of suffering from sanctions and the rosy reports of many authors in the “pro-Russia” camp err substantially. The situation on the ground is both better and worse than these diametrically opposed commentators would have us believe.

Firstly, I say assuredly that the mood across the social spectrum of my “sources” is uniformly patriotic and uncomplaining. These sources range from the usually outspoken taxi drivers; through the traditionally critical journalists, academics, artists and other intelligentsia who are family friends going back many years; to former business contacts and other elites. I did not hear a word about corruption, price gouging, inflation or the disappearance from the market of favorite imported items. Instead, there was determination to withstand whatever pressures the United States and the West generally apply against Russia. Support for Vladimir Putin was a minor if persistent motif within the broader melody of Russian patriotism.

There was also a conscious choice among these sources to buy Russian, including to find holiday destinations within Russia rather than abroad. One concrete example: The principal of a music high school who normally vacations in Djerba, Tunisia is taking a two-week river boat cruise down the Volga. Or I think of the widely traveled editor-publisher of an internet magazine who is sunbathing in Sochi right now rather than in Tuscany. Cost-cutting is not the driver. It is just saying ‘no’ to Russia’s detractors abroad.

Secondly, I say with equal conviction that the economy is doing badly and a great many people are being hurt. Small entrepreneurs have been put out of business. The large corporates are struggling, and all the skills of their management are called upon in this challenging environment to stay afloat.

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Yes, the supermarkets are well stocked. Food products which formerly came from the EU are now being sourced elsewhere, but are not wanting. Prices have gone up substantially since my last visit two months ago. Some say they have risen by a third. Others say by less. The abruptness of the change reflects the appearance on store shelves of replacement stocks for the nonperishable food and beverage items which dated from before the ruble devaluation and which finally were exhausted. The new prices match European wide prices translated into the current disadvantageous exchange rate. At the same time, some domestic vegetables have risen in price, as producers take advantage of the market opportunity and move well ahead of any possible rises in their own costs.

But the fall in the value of the ruble and associated inflation is the least of the problems today. They will self-correct when and if oil prices rise. The tougher and more painful problem is generalized contraction of business activity. Partly this is due to people tightening their belts, cutting back on little pleasures in times of uncertainty. One bellwether is the Stockmann’s supermarket at the head of Nevsky Prospekt. Until this latest visit, I would take a number at the deli counter and wait my turn behind six or eight shoppers ahead of me. Now I took a number and was served at once. This isn't so say things are looking desperate. The Ikea Megamarket in the Dybenko residential neighborhood was still doing well when I stopped by, with shoppers queuing up at all cash registers: recession is not yet depression!

Another cause of the fall-off in business activity is without doubt US and EU sanctions, meaning the cut-off of foreign credits, the inability of the Russian majors to roll over hard currency debt. Friends in the finance industry explained that the sell-off of assets to meet credit calls hit the stock market. This, in turn, produced shock waves in the banking and insurance sectors, including weaknesses at such major institutions as Uralsib Bank and at big Russian insurers, whose portfolios were devalued, forcing them to abandon various sectors and let go a great many employees. Weakening banks, the jacked up interest rates to protect the currency against further speculation all have taken a toll on private entrepreneurs, the little guys who were starved of working capital to finance their stocks and meet payrolls. Those in the West who said that they designed the sanctions in such a way as to spare the people and only punish the fat cats around Vladimir Putin should be made aware of the very different reality.

As I discovered on a walking tour of the business and residential blocks in downtown St. Petersburg that I frequent regularly, the past couple of months has seen many offices and shops shuttered. Hairdressers, boutiques selling ladies’ handbags, eateries, all kinds of service outlets closed down, ending the aspirations of many hard-working self-employed folks. Their numbers will likely not appear in unemployment statistics. No flicking of a switch will bring them back.

Another sign of the hard times came when I visited my bank branch specializing in renting safe deposit boxes to the public. Such boxes are widely used by buyers and sellers of apartments, dachas and other real estate, since they take the place of escrow accounts: the purchase funds placed in the boxes are made available to the sellers when they submit the deed of state registration of transfer of ownership. The bank was empty, whereas in the past it has always been a beehive of activity. The much reduced staff confirmed to me that transactions have dried up. This means the secondary market in real estate has shut down.

Meanwhile the Russian government reports an ongoing boom in residential construction, which, in the case of St. Petersburg is confirmed by the high-rise cranes operating in bedroom community suburbs and by the ubiquitous advertisements for new housing projects in the metro and buses. There is no contradiction here: the new construction is supported by government subsidies on mortgage loans, while the secondary market is left to languish at market rates which preclude mortgages.

Finally, I want to share some essential new information on the challenges facing Russian agriculture, which is generally cited as a beneficiary of the sanctions and leading indicator in the emergence from crisis. The information comes not from personal observations but from privileged sources from within the industry’s own newsletters to which I have access. One of the country’s largest importers and distributors of agricultural machinery has just negotiated with its bond holders in Russia and abroad their acceptance of a conversion of their debt instruments into equity. The reason for this exchange, which surely was not wished for by investors, has been the sharp fall-off in the company’s sales volumes, itself a result of reduced access of farming enterprises to bank credits. The government has been slow in reversing course and reinstating subsidies for bank loans to farmers which had been cut following WTO accession.

The same importer has now opened a new side-line selling used agricultural equipment. The opportunity arose for reasons that are not good for the Russian economy: leasing companies have had to take back equipment from farms that have closed voluntarily or under bankruptcy proceedings, and they must dispose of this equipment in fire sale conditions.

Meanwhile, the dairy industry, which is one of those most favored by the government due to excessive levels of imported to native-grown milk, is suffering from surplus spring production and the insufficient processing capacities to absorb the overflow as cheese, powdered milk, etc. Producer prices have fallen below cost, which is hardly an incentive to farmers to add to their dairy herds.

Why are these problems under-reported in Russia media? I will hazard a guess. Old habits die hard: Russian journalists are not very sympathetic to business and are not quick to see the interconnection between profitable businesses and the welfare of the public at large. However, for the government to take timely measures in the ongoing crisis situation and prevent long term negative consequences, it would be better if the pain so many people are experiencing were given due coverage and explained.


Gilbert Doctorow is the European Coordinator of the American Committee for East West Accord

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