May 23, 2022

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Russia is trying to show four ways to live with sanctions

London (CNN Business) – Russian President Vladimir Putin has spent more time in the air in recent weeks, confirming Russian public opinion that sanctions affect the West more than Russia.

Putin has been preparing his country for a long time. “The Joint West is not going to back down from its policy of economic pressure on Russia,” he told aviation officials recently. Every sector of the Russian economy “needs to develop a long-term plan based on internal opportunities.”

Putin’s policy of self-sufficiency was predictable. Since Russia annexed Crimea from Ukraine in 2014, the country has been preparing for increased Western sanctions with a strategy known as “Fortress Russia.”

Nevertheless, the sheer scale of the economic counter-offensive launched by the West in the aftermath of the February 24 invasion of Ukraine came as a shock, combined with the growing tide of companies cutting off trade with Russia to protect themselves from reputation risk or future sanctions.

In March, Foreign Minister Sergei Lavrov acknowledged that “no one could have foreseen the sanctions imposed by the West,” citing Russia’s halving of $ 600 billion in reserves.

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Russia says it will challenge sanctions on its foreign reserves in court and threaten to sue if it fails to pay its debt due to the freeze.

Meanwhile, here are some ways in which businesses, businesses and authorities are struggling to keep pace with Russia’s new nature.

1. Lada Restoration

The iconic domestic car brand of the Soviet era relied heavily on imported parts. Autovas, which produces Lada, It is owned by French carmaker Renault.According to Evgeny Eskov, editor-in-chief of the Russian automotive industry magazine Auto Business Review, companies share a common parts purchase system.

On March 24, in response to the news that Renault was leaving the Russian market, Autovas revealed that many models need to be redesigned quickly to make the imported components less reliable.

The company did not specify which models would be affected, but said it would be available gradually in the coming months. Escove said the refurbished models will be simpler versions of current cars, without additional features like ABS. “Cruel cars from the past,” he wrote in an email to CNN Business.

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2. Attract Instagramers to Vkontakte

According to Brand Analytics, a social media analytics firm, Instagram is – until recently – Russia’s best social network in terms of monthly users. The Russian version of Facebook, Vkontakte, was in second place.

Vkontakte has done everything it can to attract content creators to its site, especially since the Russian communications regulator cut off access to Facebook and Instagram last month, especially after the invasion.

The company waives commissions for monetized content until the end of April and offers free advertising on the platform to any content creator who switches to another site or reactivates their page from March 1st. He has also posted a step-by-step guide to starting a business on Vkontakte.

Vkontakte’s own data shows that this may work. Monthly users reached a record high of over 100 million in March. According to Brand Analytics, Instagram lost almost half of its active Russian-language users between February 24 and April 6.

This is not the whole story, of course. Many Russian Instagram users are still active on the operating system because they can use VPN to bypass the ban. Olga Levakova, who runs a business selling high-quality charismatic Russian-style handmade clothes, said she would continue to use the site via VPN to reach her customers after the initial “shock” and “panic” when Instagram was banned. Foreigners.

Levakova considered closing it after being overwhelmed by anti-war comments and news in the first weeks after the invasion. Then they calmed down, but he deleted a line in his page description referring to Tsarist Russia. Now it says “historical cloth”.

“I could not withstand the onslaught of aggression,” Levakova admits. Orders are continuing, but he says it will be too soon to say whether his business will be affected.

3. Home Credit Cards

Russia has been preparing for financial isolation since some of its major banks were hit by sanctions following the annexation of Crimea. In a way it has paid off. Russia’s National Payment Card System and its built-in “Mir” bank card system have grown exponentially.

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According to the Central Bank of Russia, more than 113 million Mir cards were issued in 2021, up from a total of 1.76 million at the end of 2016. Last year, a quarter of all card payments in Russia were made with MIR cards.

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Experts say the development was partly designed by Russia. “Before the invasion they did not make ordinary Russians very attractive,” says Maria Shakina, a scholar who visits the Finnish Institute of International Affairs. Instead, the government mandated that all public sector employees, pensioners and beneficiaries receive the Mir card.

That is, when Visa and MasterCard announced in early March that they would suspend transactions and operations in Russia, there was already an alternative.

But Mir is not a direct alternative. It works only in Russia and a few other countries, mainly in the former Soviet Union.

This lack of global access has also hampered Russia’s attempt to create an alternative to the international tariff system SWIFT. Its own version, known as SPFS, had 400 participants last year, up from 11,000 for SWIFT.

“There is no network effect because foreign participants do not want to join it,” Shakina said. “If they do not trust Russia in any other way, why would they trust this system?”

4. Public works

According to Elena Ripakova, deputy chief economist at the Washington Institute of International Finance, mass unemployment has not yet appeared in Russia.

“I understand that the more they suppress protests, the more they care about unemployment,” he said. More than 15,000 people were arrested in Russia in the first weeks of the conflict for taking part in the struggle against the war, and the Kremlin has effectively silenced the independent media by accusing it of “misinformation” about its so-called “military”. Function “. Special”.

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The city of Moscow is trying to advance the problem of unemployment with a plan to re-train and hire people working in Western companies, many of whom have suspended or suspended business operations in Russia. Moscow Mayor Sergey Sobyanin believes 200,000 jobs are at risk.

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The solution, according to a recent blog post, is to give the rest of the workforce something “useful”. The options he raises include managing official documents such as passports and birth certificates, or working in one of the city’s parks or temporary health centers that the city has recently begun to build. $ 41 million is earmarked for creating these jobs and retraining workers.

For Russians who worked in McKinsey or Goldman Sachs before the war, it would be a game changer. But that probably won’t come, says Ripakova. He believes most executives of foreign companies will leave the country if they have not already done so.

Is it now?

So far, Russia has withstood the initial force of Western sanctions without collapsing its financial system. This was largely due to the central bank, which immediately raised interest rates to 20% and then lowered them to 17%, imposing severe capital restrictions.

But this does not mean that Russia has passed the worst. According to the International Monetary Fund, the economy is likely to shrink by 8.5% this year. If Europe bans Russia’s oil imports, the decline will be even bigger. Inflation stands at 17.5%, and Putin acknowledges that it hurts Russian citizens.

Another major risk, experts say, is Russia’s reliance on imported goods, many of which are now subject to sanctions. The Kremlin may find it more difficult to confront measures aimed at the macro economy.

“There’s a feeling especially in the government, they’re going to turn the corner, and then there’s going to be a monster,” Ripakova says. “They don’t know when that monster is going to eat them.”