4 ways Russia is trying to prove it can live with sanctions

“No one expected the kinds of sanctions the West could impose,” admitted Foreign Minister Sergei Lavrov last March, referring to the freezing of half of Russia’s $600 billion reserves.

Russia says it will challenge the sanctions on its foreign reserves in court and has also threatened to sue if deemed so She failed to pay her debts due to asset freeze.

In the meantime, here are some of the ways companies, industries and officials are scrambling to live with the new normal in Russia.

1. Lada redesign

The famous Russian domestic car brand of the Soviet era relies heavily on imported parts. Avtovaz, which produces Lada, is owned by the French automaker Renault, and according to Evgeny Eskov, editor-in-chief Russian auto industry Auto Business Review, companies share a single parts purchasing system.
On March 24 in response to the news that Renault was exiting the Russian marketAvtovaz revealed that it has had to quickly re-engineer many models so that they are less dependent on imported components.

The company did not say which models would be affected, but said they would become available gradually in the coming months. Eskov said the redesigned models will be simpler versions of existing cars, without additional features like ABS. “Just brutal cars from the past,” he wrote in an email to CNN Business.

2. Invite Instagrammers to VKontakte

Instagram was – until recently – the top social network in Russia based on monthly users, according to social media analysis firm Brand Analytics. Vkontakte, the local Russian version of Facebook, came in second.

Since the invasion, and especially since the Russian communications regulator cut access to Facebook and Instagram In the past month, VKontakte has been doing its best to attract content creators to its platform.

The company forgoes its commission on any monetized content through the end of April and offers free promotion on the platform to any creator who has moved from another platform or reactivated their Page since March 1. I also published a step-by-step guide to starting a business on VKontakte.

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Own VKontakte data shows that this may be successful. Monthly users hit a record high of over 100 million in March. According to Brand Analytics, Instagram lost nearly half of its active users in Russian between February 24 and April 6.

This is not the whole story, of course. Many Russian Instagrammers are still active on the platform because they can Bypass the ban with a VPN. Olga Levakova, who runs a business selling handmade fabrics in the style of Tsarist Russia, said that after the initial “shock” and “panic” when Instagram was blocked, she continued to use the platform via VPN to reach mostly foreign customers.

Levakova contemplated closing after being inundated with anti-war comments and messages in the first few weeks after the invasion. Those have since faded, but she removed a line in her page description that mentioned Tsarist Russia. Now it simply says “historic tapestry”.

“I could not stand the flood of aggression,” admits Levakova. Requests are still coming in, but she says it’s too early to say if her business will be affected.

3. Domestic credit cards

Russia was preparing for financial isolation Since some of its largest banks were subjected to sanctions after the annexation of Crimea. In some ways, it paid off. The national payment card system in Russia and the bank card system based on it, known as “Mir”, has grown significantly.

According to the Central Bank of Russia, more than 113 million Mir cards were issued in 2021, up from a total of 1.76 million at the end of 2016. Last year, about a quarter of all card payments in Russia were made using Mir cards.

Experts say this growth was partly designed by Russia. “They didn’t make it very attractive to ordinary Russians before the invasion,” says Maria Shagina, a visiting scholar at the Finnish Institute of International Affairs. Instead, the government has mandated public sector employees, retirees, and anyone receiving benefits to use the Mir card.

The branch of Sberbank of Russia PJSC in Moscow, Russia, on Monday, February 28.

This meant that when Visa and Mastercard in early March announced the suspension of transactions and operations in Russia, an alternative was already in place.

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But Mir is not a direct alternative. It works only in Russia and a few other countries, in particular, the countries of the former Soviet Union.

The lack of global reach has also hampered Russia’s attempt to build an alternative to it SwiftInternational Payments System. In its own version, known as SPFS, 400 participated last year, compared to 11,000 in SWIFT.

“The influence of the network does not exist because foreign participants are not keen to join it,” Shagina said. “If you do not trust Russia in other ways, why do you trust this system?”

4. Jobs in public works

According to Elena Rybakova, deputy chief economist at the Institute of International Finance in Washington, mass unemployment has yet to emerge in Russia, but it is one of the things the Kremlin fears most because of its potential to stoke dissent.

“The more they suppress the demonstrations, the more I understand that they are worried about unemployment,” she said. More than 15,000 people were arrested in Russia in the first weeks of the conflict for participating in anti-war protests, and the Kremlin has effectively silenced independent media by criminalizing what it considers “false information” about a so-called “military operation.”

The city of Moscow is trying to pre-empt the potential unemployment problem with a program to retrain and employ people who used to work in Western companies, many of which have suspended or halted business operations in Russia. The mayor of Moscow, Sergei Sobyanin, thinks so 200,000 jobs at risk.

The solution, according to a recent post on his blog, is to give workers who are left behind something “helpful” to do. The options he outlines include managing official documents such as passports and birth certificates, and working in a city park or at temporary health centers that the city has recently started setting up. $41 million is going to create these jobs and retrain workers.

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For Russians who built a career at McKinsey or Goldman Sachs before the war, this would be a surprising change. But Rybakova said it probably won’t come true. She believes that the majority of CEOs from foreign companies would leave the country, if they had not already done so.

What’s Next?

Russia has so far been able to withstand the initial force of Western sanctions without its financial system collapsing. This is largely thanks to the central bank, which immediately Raising interest rates to 20%. It has since reduced it to 17% and imposed severe capital controls.
But this does not mean that Russia is going through its worst case. The economy could contract 8.5% this year, according to the International Monetary Fund. The breakdown could be bigger if Europe bans imports of Russian oil. Inflation was 17.5%, something that even Putin admits hurts Russian citizens.

Another major danger, experts say, is Russia’s dependence on imported products – many of which are now subject to sanctions. It may be more difficult for the Kremlin to counteract it than measures targeting the overall economy.

“There is a feeling, especially in the government, that they are going to turn the corner and then there will be a monster,” Rybakova says. “And they don’t know when exactly this monster will devour them.”

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