War, sanctions threaten to thrust Russia’s economy back in time

Valery Volodin, a welder at a sprawling Volkswagen plant in western Russia, relaxed for most of the summer at his dacha, or weekend house, planting his garden and looking after his children. Volodin, 41, had little choice: The car factory closed down in March, joining more than 1,000 multinational companies that had curtailed operations in Russia because of its invasion of Ukraine.

Since then, he has been sitting at home while Volkswagen looks for a buyer. He goes into the plant, in Kaluga’s industrial zone, once a month to collect 50,000 rubles, about $800, a payment required by Russian labour law, that is the equivalent of two-thirds of his previous salary.

“We go into work, but the plant stands empty,” Volodin said in an interview. “We live day to day, for now.”

His experience is playing out across Russia for hundreds of thousands of workers after the West imposed sweeping economic sanctions that were intended to hobble Moscow’s ability to wage war and to undercut public support for President Vladimir Putin.

More than nine months after the invasion, neither the war effort nor the economy has collapsed, and the economic pain is still limited for many Russians. Putin has avoided any substantive domestic pressure that would threaten his leadership. But the impact of what some have described as the most coordinated and deepest economic sanctions in modern history is evident in communities across Russia — and the worst may be yet to come.

The sanctions have stymied Russia’s faltering attempts to modernise its economy along Western lines and to catch up to European living standards after the fall of the Soviet Union, said Vladislav Inozemtsev, the Washington-based director of the Centre for Post-Industrial Studies, a Russian research group. That has dimmed the hope that the country could become a modern, prosperous nation in the near term.

“The slogan now is ‘Keep things from getting worse,’ and that’s an important shift,” Inozemtsev said. “Even the government has stopped betting on national development.” Beneath the veneer of normalcy, he said, key drivers of growth, like technology transfer and investment, are eroding.

The most visible and dramatic impact has been on manufacturing, a sector that employs 10 million Russians and that has been the centrepiece of Putin’s ambitious programme to diversify the economy away from reliance on oil and gas exports. The auto industry accounts for a large percentage of those workers: Carmakers employ 300,000 Russians, according to the country’s statistics agency, and the association representing their interests say that up to 3.5 million more work in related industries.

By September, output in the auto industry was down 77 per cent year over year, while car sales have plummeted 60 per cent compared with the same period in 2021. A primary reason is that Russian industries are highly dependent on Western components. Even Putin has acknowledged the problem, admitting last week that, in some sectors, dependence on imported parts is as high as 90 per cent.

Russia’s government was better prepared to withstand the sanctions than many in the West expected. A combination of high oil revenues, large currency reserves and an expert team of economic officials has allowed Putin to soften the blow — much to the frustration of some Western leaders who had hoped the sanctions would have more bite by now. But the loss of investment, technology and skills caused by the sanctions is likely to echo across generations, depriving many Russians of a chance at a better economic future, experts said.

In 2009, when Volkswagen launched full production cycles in Kaluga, Volodin not only got a job, but also unexpected support. Those were boom times for Kaluga, an industrial region about 120 miles south of Moscow. The former governor actively courted Western investors, learning English and building a modern airport with several flights a week to Germany. He transformed a regional economy that had been 80 per cent oriented toward the Soviet military industrial complex into one connected with the West. Pharmaceutical companies flocked to the Kaluga region, which has a population of 1 million, and so did auto manufacturers.

Volkswagen hired about 4,200 workers. Volvo and Stellantis, which produced and sold the Peugeot, Citroën, Opel, Jeep and Fiat brands in Russia, also established operations in the region. An ecosystem of suppliers and related industries sprang up to serve them, employing at least 25,000 people, according to Dmitry Trudovoy, chair of the Independent Workers’ Association trade union. Courses in German and other foreign languages at the local university were a pipeline to an office job with the companies.

It seemed as if a new, modern business model was being constructed step by step in the region, a hint of how Russia’s economy might evolve. By 2020, Volkswagen’s output alone represented about 13 per cent of the Kaluga region’s entire industrial production.

Now, most of the carmakers in the region have halted operations, and Trudovoy said the workers had no idea who might take over the Western factories and whether they would keep their jobs. “They are nervous and scared for their future,” he said.

Russian state firms and the government have vowed to replace the lost output with local brands. But there have been multiple signs of regression. In June, AvtoVAZ, which makes Russia’s best-known domestic car brand, the Lada, announced that its new cars would meet only 1996 emissions standards and have no passenger-side air bags.