Russians fight with sanctions

Russian families are having to buy more expensive groceries while wages aren’t rising, and businesses are struggling to find an increasingly scarce source of goods.

Western sanctions deal a blow to Russian families as grocery store food prices soar amid rising inflation, while wages fail to improve as the economy slows.

High sugar prices are up more than 65% year-on-year, while vegetables and fruits are 30% more expensive, according to the Russian government. Overall food prices rose 20%, double the US rate in April. Statistical data shows that pasta prices are up almost 30% year-on-year, while grain and bean prices are up 35% .

The impact of the sanctions has become even more severe for Russian families, as the bulk of their household budget is spent on food. According to the US Department of Agriculture, food accounted for nearly 29% of average Russian household spending in 2020, compared to 7.1% in the US and 9.4% in the UK.

Inflation dynamics of Russia, Brazil and the USA from May 2021 to the present.  Graphic: WSJ.

Inflation dynamics of Russia, Brazil and the USA from May 2021 to the present. Graphic: WSJ.

To deal with this situation, many Russians are constantly monitoring Telegram channels for information about discounted items, from cosmetics to pizza. They also filed a complaint with the Federal Cartel Office, demanding a review of price increases for many essential items.

They are also employing traditional tactics to deal with price hikes and economic uncertainty. One is to spend cash quickly before it loses value.

“Everyone is afraid of owning cash,” Alla Shinkevich, a real estate agent in St. Petersburg, said. But this shopping spree can make goods scarcer and drive up prices.

Meanwhile, Russian wages have not kept pace with inflation, with real disposable income in the first three months of this year down 1.2 percent year-on-year. With Russia’s economy expected to contract by about 10% this year, workers are unlikely to get a pay rise.

Gregory Shevchenko, co-founder of digital marketing company Shevchenko.bz in Moscow, believes employees will start asking for a raise because of inflation, which he’s struggling to respond to.

“I pay based on the company’s expected growth. But customers have tightened their budgets, stopped signing new contracts or shortened contracts,” Shevchenko said. “The scariest thing in business right now is the delay in project development.”

Almost three months after the West imposed an unprecedented series of sanctions on Russia over the military campaign in Ukraine, Russia’s economy has not collapsed as many had predicted. Most stores are still full and the job loss rate is very low.

However, observers believe the situation could worsen if stocks in companies’ warehouses are depleted, prices of components and spare parts increase due to shortages and high transport costs, worse still, a worsening inflation, which in the West is already more than is twice as high.

“Many Russian companies still have spare parts, Western goods, in stock that can last for several months, even a year,” commented Janis Kluge, an expert on the Russian economy at the Institute for International Affairs and Security Issues at Sicherheit Deutschland. “But that supply will eventually run out and shortages will drive up prices.”

Recently, in order to cope with this scenario, Anna Varzhitskaya regularly traveled to Kazakhstan to negotiate with the local branches of European suppliers and increase the procurement of equipment from Asia to fill the public glue store.The industrial, storage and filter systems from TekhnoVita are disappearing quickly.

TekhnoVita, a manufacturing equipment distributor based in the Russian city of Samara, is struggling to survive. Varzhitskaya’s next destination is Kyrgyzstan.

“No one gave up or gave up,” said the 32-year-old. “Maybe the quality of our products will deteriorate and prices will go up, but the jobs will still be there.”

Russian companies are scrambling to find new suppliers, changing products and processes to accommodate Western sanctions. Shippers need to find new ways to ship, importers have headaches from slow delivery.

“Conflicts are a bad thing, they kill a lot of people, but how can we change that?” Varzhitskaya said. “We have to work, we have to support our families and everyone is trying to find a way to solve the problem to make everyone happy.”

The sanctions are expected to have a major impact on the Russian economy and add to the burden on Russian companies. According to the International Monetary Fund (IMF), Russia’s GDP is expected to contract by 8.5% this year, the biggest drop since the early 1990s.

Data released last week showed that new car sales, a key indicator of consumer sentiment, fell by more than 78% year-on-year, according to the European Chamber of Commerce in Moscow.

Three-wheeler motorcycle manufacturer IMZ-Ural closed its plant in Russia shortly after the outbreak of hostilities. “We’re under pressure from both sides,” said Ilya Khait, the company’s chief executive officer. “We can’t input or output anything.”

Ural exports 95% of its goods and imports about 80% of its components, including shock absorbers from Italy, injectors from Japan and brakes from Spain.

The company is relocating production lines and about 150 employees from the town of Irbit in the Sverdlovsk region of Russia to a new facility in Kazakhstan, about 580 kilometers southeast.

“We hope to resume production in August,” said Khait. “We have to adapt, there is no other way.”

For companies that can still buy inputs, transporting them home is a major challenge.

Moscow-based logistics company Major Cargo Service, which works with more than 2,000 customers in Russia, saw a 50-70% drop in import volume, depending on origin.

Recently, embargoed items cannot be shipped to Russia, but other products such as clothing or household appliances are gradually increasing as the ruble has stabilized and logistics companies are looking for ways to deal with it, said Mihail Markin, division manager of Major Cargo Development .

Mihail Markin, head of business development at the logistics company Major Cargo Service based in Moscow.  Photo: WSJ.

Mihail Markin, head of business development at the logistics company Major Cargo Service based in Moscow. Picture: WSJ.

Russian companies that rely on sanctioned equipment have also started ordering new supplies after finding suppliers in Russia-friendly countries.

However, the shipping route is now more complicated, longer, more expensive and has less capacity than before. Instead of being transported across the border by truck as before, the goods will now be loaded onto ships in Turkey in Italy or other southern European countries, said Markin. Here the goods are transshipped onto a Turkish ship, crossed the Bosphorus to the port of Novorossiysk, Russia, and then unloaded onto a truck.

Another solution is to load the goods onto trucks in Europe, load them onto trains that can cross borders to major Russian cities, and then deliver them by truck to the companies’ warehouses. This detour has meant that the cost of importing goods from Europe has almost doubled and fluctuated from week to week.

The Russians also use the Asian shipping routes to compensate for supply bottlenecks, Markin explained. The port of Vladivostok in the Far East is getting busier and the volume of freight on the Trans-Siberian Railway is steadily increasing.

Russian freight forwarders tend to orient themselves towards China and other Asian countries. Overall shipping costs from China have decreased since February, but delivery times are harder to predict.

Demand for Alta Roma coffee has skyrocketed in Russia as other suppliers such as Lavazza exit the market. But according to Francesco Capobianco, co-owner of the Alta Roma brand’s parent company, the process of bringing coffee to Russia was slow and expensive.

Capobianco said Alta Roma imported only 2-3 containers of coffee in March and April, less than the normal rate of 10 containers per month. A container was stuck in Istanbul for 20 days in March. Meanwhile, truckloads of shipments from Europe cost the company more than $12,600 per container in April, up from more than $4,200 before the outbreak of war in Ukraine, he said.

At the current rate, the company’s stocks will be depleted by June. Unless supplies improve, Russians will have to drink “tea or chicory, barley or vodka” instead of coffee. Coffee, Capobianco said.

In early April in a supermarket in Moscow Photo: AFP.

In early April in a supermarket in Moscow Photo: AFP.

When the ruble depreciated after the conflict, clean food producer Fit oclock had to raise prices. According to Elena Tihonova, co-founder of the company, the cost of selling each zucchini has increased almost nine times, and thermal paper for packaging has increased almost seven times.

The company has replaced some cardboard packaging with wrapping paper at a 40% lower cost. They also cut out many middlemen and work directly with suppliers from India or Turkey.

The company’s greater challenge lies in the production machines, most of which come from Germany, Italy or Japan. The machines needed maintenance and Tihonova didn’t know what would happen if they failed. The Chinese substitutes are of lower quality, she said.

“It’s like going from a comfortable BMW to a Chinese Chery,” she said.

Vu Hoang (Corresponding WSJ)