McDonald’s Is Back, Moscow Style, as Russian Economy Stumbles On
by Anton Troianovski and Ivan Nechepurenko, June 10, 2022, NY Times
Russia spent much of Putin’s 22 years in power integrating into
the world economy. Unraveling business ties so large and so
interwoven, it turns out, is not easy. To be sure, the effects of
the sanctions will be deep and broad, with the consequences only
beginning to play out. Living standards in Russia are already
declining, economists and businesspeople say, and the situation is
likely to get worse as stocks of imports run low and more companies
announce layoffs. Some do-it-yourself efforts by Russia may fall
short of Western standards. When the first post-sanctions model of
the Lada Granta — a Russian sedan co-produced by Renault before the
French automaker pulled out this spring — rolled off an assembly line
at a plant near the Volga on Wednesday, it lacked airbags, modern
pollution controls or anti-lock brakes. But the economic decline
is not as precipitous as some experts had expected it would be after
the Feb. 24 invasion. Inflation is still high, around 17 percent on
an annual basis, but it has come down from a 20-year peak in April.
A closely watched measure of factory activity, the S&P Global
Purchasing Managers’ Index, showed that Russian manufacturing expanded
in May for the first time since the war began. Behind the positive news
is a combination of factors playing to Putin’s advantage. Chief among
them: high energy prices, which are allowing the Kremlin to keep funding
the war while raising pensions and wages to placate ordinary Russians.
The country’s oil revenues are up 50% this year.
In addition, deft work by the Central Bank prevented a panic in the
financial markets after the invasion and helped the ruble recover
from its initial crash. Store shelves, for the most part, remain
stocked, thanks to ample inventories and alternative import routes
being established through countries like Turkey and Kazakhstan — and
the fact that Russian consumers are buying less. Even the new Lada
Granta is less of a clunker than observers predicted: Despite shortages
of foreign components, it will still come with power steering and
power windows. “Everything is not as bad as expected,” a Russian
car website proclaimed.
The Russian economy’s survival is strengthening Putin’s hand by
bolstering his narrative that Russia will stand tall in the face of
the West’s determination to destroy it. He met with young entrepreneurs
on Thursday in a town-hall-style event, his latest effort to show that
even as he waged war, he was keen to keep the economy functioning and
foreign trade moving. Even if the West won't do business with Russia,
he insisted, the rest of the world will. “We aren't going to have a
closed economy,” Putin told a woman asking about the effects of
sanctions. “If someone tries to limit us in something, they are
limiting themselves.”
For the rich, luxury goods and iPhones are still widely available,
but more expensive, ferried into Russia from the Middle East and
Central Asia. The poor have been affected by rising prices, but they
will benefit from a 10% increase in pensions and the minimum wage
that Putin announced last month.
Those most affected by the economic upheaval are in the urban middle
class. Foreign goods and services are now harder to come by, Western
employers are pulling out and travel abroad is becoming difficult and prohibitively expensive. But Natalya Zubarevich, an expert in social
& political geography at Moscow State U., notes that many middle-class Russians have no choice but to adapt to a lower standard of living:
At least half of the Russian middle class, she estimates, works for
the state or for state-owned enterprises. “Sanctions are not going to
stop the war,” Zubarevich said in a phone interview. “The Russian public will bear it and adapt because it understands that it has no way to
influence the state.”
Chris Weafer, a macroeconomic consultant who has long focused on
Russia, published a note to his clients last week, saying that “some
of our previous assumptions were wrong.” Inflation, and the economy’s contraction, turned out to be less severe than expected, the note said.
His firm, Macro-Advisory Eurasia Strategic Consulting, revised its
forecast to show a smaller decline in gross domestic product this year
— 5.8% rather than 7% — while also forecasting a recession lasting
into next year.
In a phone interview, Weafer described Russia’s economic future as
“more dull, more debilitating,” with lower incomes, but with basic
goods & services still available. A major juice company, for instance,
warned customers that its boxes would soon all be white because of
a shortage of imported ink. “The economy is now moving into almost
a stagnant phase where it can avoid a collapse,” he said. “It’s a
more basic level of economic existence, which Russia can continue
for quite some time.” On Friday, with inflation stabilizing, Russia’s Central Bank reduced its key interest rate to 9.5% — the level before
the invasion. On Feb. 28, the bank had raised it to 20% to try to head
off a financial crisis. The ruble, after plummeting in value in the
days after the invasion, is now trading at 4-year highs.
One reason for the ruble’s unexpected strength is that global energy
demand surged coming out of the pandemic. In June alone, the Russian government is expecting a windfall of more than $6 billion because
of higher-than-expected energy prices, the Finance Ministry said
last week. At the same time, Russian consumers have been spending less
— further propping up the ruble and giving Russian companies time to
set up new import routes.
Russian officials acknowledge, however, that the most difficult times
for the economy may still be to come. Elvira Nabiullina, the central
bank head, said on Friday that while “the effect of sanctions has not
been as acute as we feared at the beginning,” it would be “premature
to say that the full effect of sanctions has manifested itself.”
For example, it remains unclear how Russian companies will be able
to obtain microchips used in a wide variety of goods. At Putin’s meeting with entrepreneurs, one developer said he was “very concerned about
our microelectronics.” Putin cut in: “Me too. Honest.”
The ties binding Russia’s economy to the West, now coming undone, go
back decades — sometimes more than a century. Aeroflot, the national carrier, acquired scores of new Boeing and Airbus jets and styled
itself as a convenient transit airline for people traveling between
Europe and Asia. In the Ural Mountains, a factory worked with Siemens,
the German manufacturing giant, to produce modern trains to replace
rusting Soviet stock. Banned from using European airspace, Aeroflot
is now focusing on domestic routes and working to switch to Russian
planes — a process that will take years. Siemens, which built telegraph lines across the Russian Empire in the 1850s and helped bring the
country into the industrial era, announced last month it was pulling
out of Russia. “Sanctions suffocate the economy, which doesn’t happen
all at once,” said Ivan Fedyakov, who runs Infoline, a Russian market consultancy that advises companies on how to survive under the current restrictions. “We have felt only 10-15% of their effect.”
But when it comes to food, at least, Russia is more prepared. When McDonald’s opened in the Soviet Union in 1990, the Americans had to
bring in everything. Soviet potatoes were too small to make fries,
so they had to acquire their own russet potato seeds; Soviet apples
did not work for the pie, so the company imported them from Bulgaria.
But by the time McDonald’s pulled out this year, its Russian stores
were getting almost all of their ingredients from Russian suppliers.
So when McDonald’s, which employed 62,000 workers in Russia, announced
in March that it was suspending operations because it could not “ignore
the needless human suffering unfolding in Ukraine,” one of its Siberian franchisees, Aleksandr Govor, was able to keep his 25 restaurants open.
Last month, he bought the entire Russian business of McDonald’s for an undisclosed sum.
On Sunday — Russia Day, a patriotic holiday — he will reopen 15 stores, including the former flagship McDonald’s on Pushkin Square in Moscow,
the place where, in 1990, thousands of Soviets famously lined up for a
taste of the West. The chain will operate under a still-to-be-disclosed
new brand, though the new logo has been unveiled, said to represent a hamburger and French fries. The hash browns will go by a Russian name, according to a menu leaked to a Russian tabloid. And, since the secret
sauce is proprietary, there will be no Big Mac on offer.
https://www.nytimes.com/2022/06/10/world/europe/russia-economy-mcdonalds.html
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