Moscow Many young Russians have fled the country as a result of sanctions that have largely cut the country off from the global economy. For Viktoria Shelanova, a 37-year-old social media executive in Moscow, it was an opportunity to start a business selling watersports clothing.
The exodus of foreign brands following the Russian invasion of Ukraine has led to a shortage of goods in practically every area. When Viktoria’s sister Julia, a keen wakeboarder, had trouble finding a neoprene vest, the two set out to find a manufacturer in China, which has friendlier relations with the Kremlin.
They located a factory in Guangdong province that makes sportswear for several major US companies and asked for samples through the Chinese news service WeChat. Less than two months later, they received a shipment of 20 vests.
The two sisters plan to initially order the neoprene vests in batches of 100 and sell them to water sports parks in Moscow, which have sprung up with wakeboarding’s rise in popularity in recent years. “We believe that there will be a lot of demand, and at the moment there is no competition,” says Viktoria by phone from Moscow.
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Many commentators compare Russia’s current economic isolation to Soviet times. But the situation is more reminiscent of the 1990s, when the collapse of communism left gaping gaps in the supply chains. Consumers and business owners have been forced to find creative ways to shut them down.
New supply chains emerge: Kremlin speaks of “mobilization economy”
The Avito advertising site is full of people offering to import foreign-brand clothes from abroad: if you search for Gucci there, you get 173,000 offers. iPhones and other technical devices are imported into Russia via former Soviet countries.
Franchisees counter the exit of the multinationals by selling products with similar packaging and logos but slightly different names. Krispy Kreme donuts are now Krunchy Dream, Starbucks is Stars Coffee, and Pizza Hut is now Pizza N (a nod to the fact that the Cyrillic N looks like a Latin H).
A Russian citizen, who asked not to be named, has set up a company in Dubai that has a license to import gold. Russian companies buy bullion and deliver it to him. He, in turn, sells them to jewelry manufacturers in the United Arab Emirates. After pocketing 40 percent of the profits, he uses the proceeds to buy auto parts or other needed goods, which are then shipped to Russia.
Maximum freedom for Russian entrepreneurs
It’s all part of what Kremlin officials call the “mobilization economy.” In a speech in March shortly after the first sanctions came into effect, Russian President Vladimir Putin said: “There is only one way out of the situation we are in right now and that is the people, the businesses do to grant maximum freedom.”
Regulations that prohibit so-called parallel imports, ie importing branded goods without the consent of the brand owner, have been repealed. The ministry’s website promotes economic development, soft loans for entrepreneurs in certain industries, and moratoriums on inspections.
>> Read also: All developments on the Ukraine war in our live blog
Nevertheless, the sanctions are having an effect. Used Toyotas and BMWs fetch higher prices than when they were new. More than a quarter of Aeroflot’s planes have been grounded because they were cannibalized as spare parts for planes that are still operational.
A study by Bloomberg Economics comparing Russia to South Africa in the 1960s-90s, when the country was sanctioned for apartheid, concludes that the economy is facing “a significant, creeping strain as Trade and capital movement restrictions stifle competition and lead to inefficiency”. The Russian economy shrank by 2.7 percent last year and will collapse by a further 2.5 percent by 2023.
The Russian statistical office has not published any detailed trade data since the invasion of Ukraine. According to the central bank, imports fell by an estimated 23.5 percent last year from $380 billion in 2021. 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.
Foreign companies cease operations and halt investments
Up to a million Russians fled the country in 2022 to escape economic hardship and the threat of conscription to the front. For the remaining Russians, daily life is slowly changing as many of the big global brands withdraw their businesses from Russia.
So far, only about 5 percent of international companies that operated in Russia before the war have completely dismantled, according to a database compiled by the Kyiv School of Economics. But more than half have scaled back activities or stopped new investments.
Some multinationals such as Apple and Inditex, Zara’s parent company, quickly withdrew after the invasion. Others, such as consumer goods maker Reckitt Benckiser, whose portfolio includes products like Enfamil baby formula and Durex condoms, and British American Tobacco, maker of Dunhill and Pall Mall cigarettes, have announced plans to exit but have not implemented to date.
In some categories of goods, Chinese brands are filling the resulting vacuum. Xiaomi was Russia’s top-selling smartphone maker in 2022, dethroning Samsung. According to M.Video-Eldorado Group, Russia’s largest consumer electronics retailer, three of the top five selling brands were Chinese.
Market for designer clothing and accessories is booming
The market for designer clothing and accessories is thriving despite the sanctions. After the European Union banned the export of luxury items costing more than 300 euros each to Russia in March, sales increased in stores in Dubai and Turkey, two countries that have direct flights to Russia, said Claudia D’Arpizio, one Partner at Bain.
The consultancy estimates that in 2021 Russians bought about €7 billion worth of personal luxuries, both at home and while traveling abroad. This corresponds to up to 3% of the global luxury market.
The Shelanova sisters don’t intend to limit themselves to neoprene vests. They are considering expanding into wetsuits and want to approach Chinese factories that produce for big US brands.
“We have already found the factory that makes wetsuits for Roxy, but we are also looking for other companies,” says Julia. “We would like to create our own brand.”
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