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Russians struggle to cope with sanctions

Russian families have to buy more expensive food, while wages have not increased, and businesses are scrambling to find an increasingly scarce source.

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

High sugar prices are up more than 65% from a year ago, while vegetables and fruits are 30% more expensive, according to Russian government data. Overall food prices increased 20%, double the increase recorded in the US in April. Statistical data shows pasta prices up nearly 30% from a year ago, while cereals and beans prices increased 35 %.

The impact of sanctions has become even more severe for Russian families because most 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 with 7.1% in the US and 9.4% in the UK.





Inflation momentum of Russia, Brazil and the US from May 2021 to present.  Graphics: WSJ.

Inflation momentum of Russia, Brazil and the US from May 2021 to present. Graphics: WSJ.

To deal with this situation, many Russians are constantly monitoring Telegram channels to receive information about discounted items, from cosmetics to pizza. They also filed a complaint with the Federal Antitrust Agency, asking for a review of the price hikes of many essential items.

They also adopt a traditional tactic to deal with price increases and economic uncertainty. One of them is to quickly spend cash before they depreciate.

“Everybody is afraid to hold cash,” said Alla Shinkevich, a real estate agent in St. Petersburg, said. But this rush of shopping can make goods more scarce and push prices up.

Meanwhile, Russian wages have not kept pace with price increases, leaving real disposable income in the first three months of this year 1.2 percent lower than last year. As the Russian economy is expected to contract by about 10% this year, it is unlikely that workers will get a raise.

Gregory Shevchenko, co-founder of digital marketing company Shevchenko.bz in Moscow, thinks employees will start asking for a raise due to inflation, which he finds difficult to respond to.

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

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

However, observers believe that the situation may worsen when the inventories in the warehouses of companies are exhausted, the prices of components and spare parts increase due to scarcity and high transportation costs. worse, worsening inflation, already twice the rate in the West.

“Many Russian companies still have spare parts, Western goods in stock, which can last for several months, even a year,” said Janis Kluge, an expert on Russian economics at the Institute of International and Security Affairs. Security Germany, commented. “But this stock will eventually run out and scarcity will drive prices up.”

To deal with this scenario, Anna Varzhitskaya recently traveled regularly to Kazakhstan to negotiate with the local branch of European suppliers, while increasing the procurement of equipment from Asia to fill the public glue warehouse. TekhnoVita’s industrial, bearings and filtration systems are rapidly disappearing.

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

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

Russian businesses are scrambling to find new suppliers, changing products and processes to accommodate Western sanctions. Shippers have to find new shipping routes, while importers have headaches because of slow delivery.

“Conflict is a bad thing, killing a lot of people, but how can we change that?” Varzhitskaya said. “We have to work, we have to feed our families, and everyone is trying to find a way to solve the problem to please everyone.”

The sanctions are expected to have a strong impact on the Russian economy, adding to the strain on Russian businesses. Russia’s GDP is expected to shrink 8.5% this year, the biggest decline since the early 1990s, according to the International Monetary Fund (IMF).

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

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

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

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

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

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

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

Recently, embargoed items cannot be shipped into Russia, but other products such as clothing or home appliances are gradually increasing as the ruble has stabilized and logistics companies are looking for ways to deal with it. problem, said Mihail Markin, Major Cargo’s head of business development.





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

Mihail Markin, head of business development for logistics company Major Cargo Service, based in Moscow. Image: WSJ.

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

However, the shipping route now becomes more complicated, longer, more expensive and lower capacity than before. Markin said that instead of being transported by truck across the border as before, goods are now loaded onto ships in Italy or other southern European countries, to Turkey. Here, the goods are transferred to a Turkish ship, through the Bosporus Strait to the port of Novorossiysk, Russia, and then unloaded on a truck.

Another solution is to load the goods onto trucks in Europe, transfer them to trains, which can cross borders, to major Russian cities, and then use trucks to deliver them to companies’ warehouses. This roundabout route has caused the cost of importing goods from Europe to nearly double and fluctuate from week to week.

The Russians are also taking advantage of Asian shipping routes to make up for supply shortages, Markin explained. The port of Vladivostok in the Far East is getting busier and busier, and freight volumes on the Trans-Siberian Railway are increasing.

Russian trucking companies tend to look to China and other Asian countries. Overall, shipping costs from China have dropped since February, but delivery times are harder to predict.

Demand for Alta Roma coffee has skyrocketed in Russia as other suppliers like Lavazza pull out of the market. But according to Francesco Capobianco, co-owner of the Alta Roma brand’s parent company, the process of moving coffee into Russia has been slow and expensive.

Capobianco said Alta Roma only imported 2-3 containers of coffee in March and April, down from 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 war broke out in Ukraine, he said.

At the current rate, the company’s inventory will run out by June. If supplies don’t improve, Russians “will have to drink tea or chicory, barley or vodka” instead of coffee. coffee, Capobianco said.





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

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

When the ruble fell in value after the conflict, clean food producer Fit o’clock had to raise the price of its goods. Elena Tihonova, the company’s co-founder, says the cost of selling each zucchini has increased by almost nine times and the thermal paper for packages has increased by almost seven times.

The company has replaced some cardboard packaging with wrapping paper at 40% lower cost. They also cut many intermediaries, working directly with suppliers from India or Turkey.

The company’s bigger challenge lies in the production machinery, most of which comes from Germany, Italy or Japan. The machines needed maintenance and Tihonova didn’t know what would happen if they broke down. 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 (According to WSJ)

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