Russian small and medium-sized enterprises (SMEs) have been hit by a tsunami of problems in just the first weeks of the Kremlin’s invasion of Ukraine, and entrepreneurs who have spent years building their businesses are already to collapse thanks to the multiple shocks hitting the markets.
Anecdotal evidence of conversations between bne IntelliNews and businessmen in the Russian capital are flocking to widespread hardship as the war in Ukraine enters its fourth week.
It is too early to be able to measure the impact of the sanctions on the economy, but some figures are already emerging. The withdrawal of hundreds of Western companies working in Russia, particularly from the retail sector, has already led to around 100,000 Russians losing their jobs almost overnight. The Ministry of Social Affairs is drawing up a support package to deal with the sudden spike in unemployment and the anticipated deep economic contraction that will result, and is expected to publish it soon.
Unemployment is set to rise sharply from here. During the 2020 coronavirus crisis, unemployment peaked at 6.4% of the population in August of the same year, compared to a post-Soviet low of residual unemployment of 4.3%. There is always unemployment in a society (pregnant women, long-term patients, students, etc.) and there is a lower level below which unemployment does not fall. Russia was at this level before the start of the war with Ukraine.
However, during the 2020 crisis, a mostly functioning economy was simply put on pause during the lockdown, but thanks in part to swift government action, little real damage was done to Russia’s economy and it quickly rebounded once the lock is lifted. By September 2021, unemployment was back to a post-Soviet low of 4.3%.
This crisis is very different. Massive economic damage has already been done to the economy, from which it will not recover for years. Unemployment will also certainly rise to the peak of 2020 and likely beyond, and remain high for an extended period, as the Russian economy is expected to stagnate from here.
The economy is expected to fall from the 2.4% growth in 2022 predicted earlier this year to a contraction of between 8% and 15%, with some analysts predicting the fall will be even deeper. Inflation has already climbed to 20% annualized and the ruble has lost about a third of its value since the start of the year.
But far more damaging is the widespread disruption of supply shifts as the rest of the world simply shuts down trade relations with Russia, which has become thoroughly toxic. Fearing further sanctions, Western companies have stopped trading with Russia even if their activities or products are not on a sanctions list. Imports are set to slump as it has already become nearly impossible to import goods from the EU due to problems caused by SWIFT sanctions which make it extremely difficult to transfer money or use dollars and coins. euros. Most international banks have simply stopped making transfers to Russia, even if their customers are not on a sanctions list or work in a sanctioned industry.
Another problem is the fluid state of restrictions imposed by the Russian government in an attempt to stem the exodus of foreign companies and their assets.
“A friend of mine who imports chemicals from Germany and then processes them here before exporting them back to Europe, he packed up one of his factories and put the equipment on trucks that he wanted to send to Moldova “says a well-known expatriate entrepreneur. who did not want to be named. “But when they got to the border, the border guards wouldn’t let the trucks through, because the day before the rules had been changed to prevent the export of material.”
One of the most tragic casualties of the current crisis is likely to be the nascent light manufacturing sector. Russia skipped the typical early emerging market step of attracting foreign investment in light industry that tries to take advantage of cheap labor, but laid the foundation for a domestic manufacturing enterprise. because the ruble was overvalued in the 1990s.
However, following sharp devaluations in 1998, 2008 and 2014, the cost of labor fell below the Chinese level. Light manufacturing began to flourish and the sector was catalyzed by the e-commerce boom. Local traders increasingly sourced cheaper and better products from the multiple producers that had sprung up to meet the growing demand. These SMEs are currently in the firing line and under pressure, as consumer demand will inevitably be reduced by high inflation, rising unemployment and falling real incomes.
The entrepreneur was in the process of selling his popular online publishing platform to one of Russia’s internet giants. “The deal was already in place before the war started and three weeks ago we were talking about $18 million,” he said. “Now we’re talking about $2 million and I think that’s a good deal.”
Another story is of a Russian entrepreneur who has a corporate catering service, which delivers around 5,000 meals to companies per day. However, supply chain disruptions mean he is already struggling to find enough produce to make these pre-packaged lunches, and the entrepreneur spends most of his day scouring the city for the fresh produce. which he needs.
And supply chain disruptions have already become so severe that businessmen are reporting a shortage of paper for printers in Moscow, which is mostly imported from Finland, so they don’t even have enough to print invoices and receipts.
The breakdown of food supply chains has also affected the general public. Social media is full of videos of crowds forming long queues outside supermarkets, which are running out of essentials. The shelves of a branch of the main supermarket chain Magnit in Moscow were stripped of their goods on Friday (March 18) and other images show a group of babushki in a scrum to grab hard-to-find bags of sugar as soon as a salesman pushed a cart full of sugar through the stores.
The sharp devaluation of the currency only aggravates the caterer’s problems. Prices are already skyrocketing and food prices are rising even faster. The caterer charges 350 RUB (about $3.5) for each lunch.
“But I can’t raise the prices because people won’t buy it anymore. Margins are getting tighter and tighter. I do not know what to do. I’m going to have to hang in there and hope something changes,” he said. bne IntelliNews.
An acquaintance of a bne IntelliNews correspondent in Moscow was a successful oil trader, but gave up the business for a quieter life and started a successful business of making bespoke eyewear to order. As this business relies heavily on high quality imported inputs, he has already had to close it and at the same time see his savings, held in rubles, reduced in value.
Other entrepreneurs have been caught up in the crisis in other ways. A successful businesswoman who started a thriving tourism business and sold it for about $1 million about three years ago followed a general trend of investing the proceeds in a Russian mutual fund (known as the PIF name in Russia) as many small investors moved into Russian equities. market in recent years, after a series of seven-year rate cuts, the real return on deposits in banks had fallen to almost nothing. It was a wise investment, as the stock market had returned more than 30% last year until reports of Russian military buildups on Ukraine’s command began to appear in late October.
Now it has lost it all, as the RTS has imploded from its peak of just over 1,900 to 934 now when trading was halted at the start of the war. The market should open on March 21 and the RTS should fall again; GDR shares of state-owned gas giant Gazprom crashed at the opening of trading on the London Stock Exchange (LSE) the day after the war began, losing 97% of their value in just hours.
She left the country with her family and, in her mid-50s, now faces the prospect of completely rebuilding her life from scratch in a foreign land.