For many young Russians, the barrage of sanctions that severed their country’s ties with large swaths of the global economy was a good reason to leave. For Viktoriya Shelanova, a 37-year-old social media manager in Moscow, it was an opportunity to start a business selling water sports apparel.
An exodus of foreign brands following Russia’s invasion of Ukraine has resulted in shortages of goods in practically every sector. When Viktoriya’s sister Julia, an avid wakeboarder, struggled to find a neoprene vest, the two set out to find a manufacturer in China, a country that has maintained friendlier relations with the Kremlin.
They identified a factory in Guangdong province that produces sports gear for several big US companies and sent a request for samples via WeChat, the Chinese messaging service. Less than two months later they received a delivery of 20 vests. Once they’ve chosen the ones they like best, they plan to start ordering them in batches of 100 to sell in Moscow, and to the water sports parks that have sprung up in recent years as wakeboarding gained in popularity. “We think there will be huge demand, and there’s no competition at the moment,” Viktoriya says by phone from Moscow.
Many commentators have compared Russia’s current economic isolation with that of the Soviet era. Yet it’s more reminiscent of the 1990s, when the collapse of communism left gaping holes in supply chains, forcing consumers and entrepreneurs to find creative ways to fill them.
Avito, the Russian equivalent of Craigslist, is full of people offering to import foreign-brand apparel from abroad: Search for Gucci and you’ll pull up 173,000 listings. New supply chains have sprung up to bring in iPhones and other Western tech gear via former Soviet countries.
Franchise owners are coping with the exit of multinationals by selling products with similar packaging and logos but slightly different names. Krispy Kreme doughnuts are now called Krunchy Dream, Starbucks is Stars Coffee, and Pizza Hut is now Pizza N (a play on the fact that the Russian N looks like an English H).
One enterprising Russian national, who asked not to be identified, has set up a company in Dubai that has a license to import gold. Russian companies buy bullion and ship it to him, and he sells it to jewelry makers in the United Arab Emirates. After pocketing 40% of the profit, he uses the proceeds to buy car parts, or whatever else is needed, which are then transported to Russia.
It’s all part of what Kremlin officials call the “mobilization economy.” Speaking in March, shortly after an initial round of sanctions took effect, Russian President Vladimir Putin said: “There’s only one way out of the conditions that we currently find ourselves in, and that’s to give maximum freedom to people who are conducting business.”
Regulations that banned so-called parallel imports, a term that applies to branded goods brought in without the trademark owner’s consent, have been dropped. The Ministry of Economic Development’s website advertises low-interest-rate loans for entrepreneurs in certain lines of work as well as moratoriums on inspections.
That isn’t to say sanctions aren’t causing pain. Used Toyotas and BMWs fetch higher prices than they did when they were new. (Good luck tracking down a replacement transmission if your foreign-made car breaks down.) More than a quarter of Aeroflot’s planes have been grounded because they’ve been cannibalized for parts for aircraft that are still flying.
A Bloomberg Economics study that compared Russia with South Africa in the 1960s through the ’90s, when the latter faced sanctions over apartheid, concluded the economy faces “a significant slow-burning drag as barriers to trade and capital flows choke competition and add inefficiency.” The Russian economy contracted 2.7% last year, according to Bloomberg Economics estimates, and is set to shrink an additional 2.5% in 2023.
Russia’s statistical agency stopped publishing detailed trade data after the invasion of Ukraine, but imports are estimated to have fallen by as much as 23.5% last year, from $380 billion in 2021, according to the central bank. Deputy Prime Minister Denis Manturov predicted in September that the value of parallel imports would reach at least $20 billion by the end of 2022.
As many as 1 million Russians fled the country in 2022, to escape economic hardship and the threat of men being called up to the front. For those who remain, daily life is slowly changing as many of the big global brands wind down operations. So far only about 5% of international companies that were in Russia before the war have completely pulled up stakes, according to a database created by Kyiv School of Economics. But more than half have curtailed operations or halted new investment.
Some multinationals, like Apple Inc. and Inditex, the parent of Zara, made a swift exit following the invasion. Others, like Reckitt Benckiser Group Plc, whose portfolio includes products that are household names the world over, including Enfamil baby formula and Durex condoms, along with British American Tobacco Plc, maker of Dunhill and Pall Mall cigarettes, announced plans to exit but haven’t yet followed through.
Danone SA, the biggest dairy producer in Russia, announced it would be exiting the market in October. It’s still unclear whether the new Russian owner of its production plants will have the right to sell Activia yogurt or other Danone brands.
Consumer-product giants Unilever Plc and Mondelez International Inc., both of which have plants in Russia, say they’re only supplying Russian consumers with essential products, though those include Cornetto ice cream and Milka chocolate.
For some categories of goods, Chinese brands have rushed in to fill the vacuum. Xiaomi Corp. was Russia’s bestselling smartphone maker in 2022, dethroning Samsung, and three of the top five brands were Chinese, according to M.Video-Eldorado Group, Russia’s biggest consumer electronics retailer.
The market for designer clothes and accessories is thriving despite sanctions. After the European Union banned exports of luxury items costing more than €300 ($324) each to Russia in March, sales surged at stores in Dubai and Turkey, two countries that have maintained direct flights to Russia, according to Claudia D’Arpizio, a partner at Bain. The consultancy estimates that Russians purchased about €7 billion of personal luxury goods in 2021, both at home and during travels abroad, representing up to 3% of the global luxury market.
While European luxury conglomerates have shut down their stores in Russia, they’ve yet to decide whether to permanently exit the country. In October, Jean-Marc Duplaix, chief financial officer of Kering SA, owner of Gucci and Saint Yves Laurent, said maintaining a presence in Russia helped the group “protect” its trademarks there.
As for the Shelanova sisters, the two aren’t planning to stop at neoprene vests. They’re thinking of expanding into wetsuits and have started investigating which Chinese factories produce for the big US brands. “We’ve already found the one that makes wetsuits for Roxy, but we’re looking for other companies as well,” says Julia. “We’d like to create our own brand.” Read more: Russia and Iran Are Building a Trade Route That Defies Sanctions
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