Major Russian industries are collapsing under the weight of sanctions
Key sectors of Russian industry are collapsing under the weight of import and export bans, shortages of spare parts and materials, the closure of foreign markets and the freezing of financial transactions. Reports point to problems in everything from trucking to producing milk cartons, as companies struggle to maintain operations.
On Tuesday, Russian lead producers announced they were at risk of closing factories due to a lack of foreign buyers and a drop in domestic demand fueled in large part by a sharp contraction in the auto industry. Even though some companies have already cut production by 30% in the past few months, warehouses are full of unsold lead.
European consumers previously accounted for almost 50% of all Russian lead sales, and they have been effectively absent from the market since March due to logistical and financial problems caused by Western sanctions. From July 10, purchases of Russian lead in the EU will be completely banned. Big companies also say they face major hurdles in obtaining the government licenses needed to divert production to Asian countries.
At an industry-wide conference on June 7, Russian freight companies said they were at risk of bankruptcy due to a sharp drop in prices, high costs of spare parts and the impossibility of buying new vehicles from foreign suppliers. In April, the EU banned trucks from the country from entering its soil.
Domestic demand is also down. Between March and June 1, companies saw freight prices fall by an average of 13.2% for the top 100 destinations, with some major routes seeing a drop two to three times greater. Freight transport costs between Moscow and St. Petersburg, Russia’s two largest cities, fell by 34.4% in those three months. Whereas before, 1 million Russian trucks made 300,000 daily shipments, today 1.1 million trucks make only 180,000. Air freight is also falling.
The government is aware of the problem, with the transport minister acknowledging in May that the sanctions “have practically broken all the logistics of the country”. It has made grants and low-cost loans available, but businesses say that is not enough. They need help paying for fuel and they are burdened with taxes. Furthermore, while the Ministry of Industry and Trade has approved “parallel imports” – branded products that are brought into the country without the authorization of the brand owner – of Scania and Volvo products, they have not done so for Mercedes, MAN, Iveco, DAF and Isuzu. As a result, the rubber needed for truck repairs is, for example, scarce, reports RBK media.
Russian ports are also in crisis. In March, cargo turnover at St. Petersburg, one of the country’s largest ports, fell 41% in absolute volume. The government has responded by reducing the rental rates shippers have to pay for using port facilities, but experts say without an increase in demand the problem cannot be solved.
Discussions are underway on the creation of new maritime links between national and international ports, including some in Iran. But implementing such plans requires significant investment, as well as time, because in many cases the infrastructure to send or receive the types of goods that would be transported by Russian ships does not currently exist. An impending EU and UK ban on Russian shipping will further complicate the situation.
The automotive industry also continues to suffer from the withdrawal of foreign car manufacturers and a major shortage of materials, especially electronic components. Rosstat, Russia’s central statistics agency, said on Wednesday that car production fell by nearly half between January and April. This is the largest decline recorded in any sector. In April this year, Russian automakers produced 85.4% fewer cars than in the same period of 2021. Izvestiia June 6.
In an interview with Ridus.ru, industry expert Sergei Aslanyan explained the depth of the crisis. “We don’t have electronics factories, we don’t have anything to make an engine. We have ‘Niva’, which is 45 years old, 20% are imports,” he said, referring to a model produced by Russian manufacturer Lada. But, he added, “it has pistons and piston rings from the American company Federal Mogul. And now we won’t even have anything left to assemble the Niva. What are we going to make airbag systems from? Who will introduce us to an airbag? Nobody. We don’t even have benchmarks.
The prospect that a national import substitution program, which the Kremlin is pushing, will fill the gaps is a pipe dream, experts say. “Even the archaic Soviet Moskvich [car model] cannot be reactivated today. Where can I receive it? He disappeared a long time ago. I’m afraid even the documentation can only be found in the museum. It is impossible to breathe life into the dead,” Yang Heitzeer, vice-president of the National Automobile Union, told Ridus.ru.
The data, computing and telecommunications industries, which support all sectors of the economy, now lack the semiconductors, microchips and servers they need to function and grow. Local companies have not been able to match the memory, processing and bandwidth capabilities of foreign producers. These are in high demand as foreign companies no longer provide cloud services to Russian companies.
In Tatarstan, with a population of over 3.8 million, the Ministry of Digital Development had to abandon plans to expand 4G/LTE to 61 cities and was able to provide service to only 30 new places. They simply lacked the necessary materials. A similar problem occurred in Saratov Oblast, which is home to 2.4 million people.
In late May, the Russian Steel Association told the government it was facing difficulties due to a sharp drop in domestic demand and the strength of the rouble. Additionally, with the EU banning imports, producers have been forced to “sell goods at a discount, and in some cases even below cost” to China and other Asian countries, the director explained. of Russian Steel, Alexei Sentyurin.
Its members will suffer significant losses and will have to cut production, the organization said, unless the government reduces its tax burden and works to devalue the rouble. “Ferrous metallurgy companies face serious downsizing risks,” RBK news outlet adds based on its discussion with Sentyurin.
Russian agriculture also faces problems due to its heavy reliance on imported seeds, which in some cases make up the majority or even all of the product it uses, for example sunflower ( 70-77%) and sugar beet (100%). . While experts say an immediate crisis has been averted because the industry has stockpiled seeds, what will happen next year is unclear.
Yevgenii Ivanov of the Institute for Agricultural Market Studies told Zol.ru: “As a rule, all the companies in the world that deal with sugar beet seeds grow them in northern Italy and southern France. In Russia, only certain areas near Sochi and in the Crimea are suitable for these purposes. Crimea, however, is at the center of the war in Ukraine, and kyiv began cutting off water supplies to the region, which lacks its own resources, even before the Russian invasion. But, as Ivanov noted, “it is impossible to grow sugar beets there without irrigation.”
The forestry industry is also experiencing difficulties. The head of the Khanty-Mansi Autonomous Region has received a large number of complaints from logging companies that due to export bans they have nowhere to sell their goods. Former major markets, such as Uzbekistan, are now closed.
The supply of bacteria for fermenting products like yogurt and kefir is causing concern, as Russian dairy producers import 80% of what they need. For a time, there was a shortage of milk in stores in some parts of the country because the Finnish carton maker that Russian producers relied on pulled out. The elevator industry is also experiencing manufacturing issues.
Even Russia’s oil and gas industry, which is posting record profits despite EU and US import bans due to soaring energy prices and increased demand from China, India and elsewhere, is limited by the fact that it has lost access to the technology, software, and human capital it needs to develop new wells and gas fields in previously untapped places , such as, for example, the Barents Sea. Without a solution to this, along with building new pipelines to Asian markets, it will struggle to sustain itself and grow.
The Russian government is trying to conceal the depth of the crisis, saying unemployment, allegedly at just 4%, is the lowest on record, that its programs will reduce poverty in 2022 and that its economic policies will guarantee people’s real incomes . President Putin said on Tuesday that inflation was under control.
The Kremlin is deeply concerned that popular anger over the collapsing economy will not only be directed at the West for its punitive sanctions, but at the state for its disastrous invasion of Ukraine and the miserable consequences of 30 years of capitalist restoration. But the manipulation of the number of unemployed, the increases for government employees that amount to a few hundred dollars a year and the false declarations on the prices of essential goods and services cannot change the reality to which the Russian working class is confronted.
For its part, the United States and its NATO allies celebrate the destruction of Russia. Media accounts in the Western press generally note with barely suppressed glee the deepening crisis.