The New Post-Sanctions Reality in Russia

Stanislav Krapivnik is a USSR-born and American-raised former U.S. Army officer. An alumni of North Carolina State University, Stanislav moved with his family to Russia several years ago, prior to the start of Moscow's Special Military Operation. Stanislav previously worked in supply chain management for a leading Houston-based oil and gas services firm in the Russian Federation and more recently, as a contributor of military affairs commentary and interviews to RT.com.

Today Stanislav lives with his family and runs a small business in the Moscow suburbs. He streams a video interviewing show called In the Eyes of Truth on YouTube and other platforms, and also publishes short video analyses of geopolitics--many of these clips, like the one posted above, recorded from his car.

After being introduced via our mutual American expat in Russia friend Tim Kirby and being impressed with Stanislav's video commentary and articles, we invited Stanislav to become an contributor to the ESW Patreon and a guest on the ESW webcast. You can find him on YouTube (uncensored--for now) under the handle @MrSlavikman. You can view his advertorial for ExitStrategy.World's sister company Amparo and Co's offshore gold vaulting services here.

The piece below has been lightly edited with additional subhead lines written by us. The views expressed are Stanislav's. As you will see from below, while understandably contemptuous of the Western effort to economically strangle Russia, Stanislav does not pull punches when it comes to some systemic failures in RF industrial competiveness.

-- James Smith

Editor-in-Chief and Publisher, ExitStrategy.World

May 17, 2024

ESW Eurasia section Moscow City complex photo credit: Max Ozerov, uploaded to iStock in 2016

It has come to many as a shock and even an “unfair” turn of events for Russophobes the world over. But Russia has opted out of the super sanction driven Recession and has entered an economic growth phase.

Of course, the aim of those sanctions was not a Recession, but a full and devastating Depression leading to a total economic and then political and integral collapse of the Russian state. Instead, what NATO leaders got was Russia rebounding, adopting new strategies, expanding on older ones and adapting to the new Washington-led reality. Many of these frustrated pundits and politicians even went on to screech, that Russia was “cheating” by not collapsing from the US driven economic nuclear war. You see derangement syndromes are not just reserved for Donald Trump.

What the West, of course, failed to adequately appreciate or even notice, were the steps that the Russian leadership had started to take from those giddy days of 2014 when the first major anti-Russian sanctions started rolling out, post-reunification with Crimea. The decoupling process was by no means complete come Feb 2022, but it was well enough along that the big hits by the West did not endanger the Russian economy fully. Additionally, especially for the later sanctions, so much forewarning and virtue signaling was had, that Russia was able to work out workarounds and solutions.

Russia's Oil Tanker Solution to Being Cut off from British-Dominated Maritime Insurance

The shocked expressions on the faces of Western politicians, especially those of the European Parliament, were nothing more than confirmations of their own shallow intellects and inflated self-opinions, often mixed with racial stereotypes about hopelessly backward Slavs. Nowhere was this more evident than on the attempted ban on oil tankers and oil tanker insurance.

The shock that Russia would dare to use the time between the announcement on this sanction and its actual implementation to build additional oil tankers and buy up older ones, as well as turn off tanker transponders, was breathtaking. The fact that Russia would additionally go and create its own insurance companies, first for the Russian Federation and then for other state and non-state actors and thus crash the previous City of London monopoly on maritime insurance, was a joy to watch.

Russia began decoupling from the Western system in several directions, each of which supported an overall plan to create stability in a worst-case scenario. At each step of the process, the paid-for liberal class and NGOs screamed foul and promised that all of this was nothing more than an attempt at dictatorial power and a North Korean approach of shutting everyone out--Juche, Russian-style. But they were wrong. Russia is as far from 'isolated' in the world economy as she has ever been, it's simply been a drastic shift in the direction of trade alongside greater Russian self-reliance in multiple industries.

Rerouting Russian Internet Traffic and Setting Up Domestic Data Centers

A key example of this at an infrastructural level was the reorganization of the Russian Internet ecosphere. Previously three key weaknesses were:

1. Russian internal traffic still had to be routed first through foreign traffic nodes, primarily via Sweden, before being rerouted back into Russia.

2. Russian personal data from various webservices was stored outside of Russia.

3. Russian internal credit card transactions were handled outside of Russia.

4. Setup of a Swift alternative.

All of these were crippling weaknesses. Traffic especially through subsea Baltic cables could be cut off, government officials' and private citizens' information stolen, and transactions blocked.

Mir as the Russian Credit and Debit Payments Alternative to Mastercard and Visa

The final warning came in 2014 when Visa and Mastercard switched off their processing of Russian internal transactions for several days, as a shot across the bow--a warning shot from Washington to fall in line or face dire economic consequences.

Of course, as so often happens, the resulting actions of the Russian state were far from those that the Western elites imagined. This is called blowback, big time:

1. To avert the possibility of a full crash of the Internet, the government with government funding set up major server farms and traffic nodes inside of Russia. This way, traffic no longer had to travel outside of Russia only to return into Russia. This fully disarmed the West’s ability to shut down the Russian internet and is more than likely the main reason such a move has not been made. Additionally, Russia became a major go through place for traffic from Europe to East Asia and not allowing traffic to pass through Russia creates additional strain on the American networks.

Of course the chorus of naysayers and doomers was deafening. Interestingly, two years into the conflict, even as Moscow's ties with Beijing have deepened, Russia has not switched on its own version of the Great Chinese Fire Wall.

2. Likewise, Russia mirrored a US law that forced companies such as Facebook to keep Russian personal data on servers located inside of Russia. The various American Big Tech companies had to be strong-armed into setting up the server farms and following the law, as they had decided that they would do as they pleased. To drive the message home, Linkedin was banned in Russia for refusing to obey the new law. This had the desired effect of achieving compliance from the other companies.

3. The warning shot from Visa and Mastercard spawned two decisive reactions:

A. The need for a Russian credit card had been recognized in the mid 1990s, however, with full saturation of Visa and Mastercard with easy access to the Russian upper class, the effort to set this up was often viewed as to create and wasteful to bother.

After the warning shot, political will sprouted quickly and the Duma pushed through legislation that created, with government backing, the Mir Card that went on to compete directly with Visa and MasterCard, including in various countries friendly to Russia. This, however, has been somewhat curtailed recently due to massive US pressure and blackmail on the non-Russian banks accepting Mir.

B. The second action was to pass a law that forced all internal Russian transactions to be processed through data centers physically located inside of Russia.

Because of these two actions, when the main sanction packages hit, internal Russian economic activity saw almost no consequences. The biggest discomfort was Apple cancelling ApplePay inside of Russia and of course the inability to utilize Russian cards outside of Russia, the latter of which only affected less than 20% of the Russian population.

4. The final nuclear option of the West was to disengage Russian banks from the Swift ecosphere, to crush internal and external banking transactions. With all the warnings of this most dire of actions to be taken, warnings that last the better part of a decade, Russia developed and launched SPFC. The system bypasses Swift while providing the same services for cheaper. As of Q1 2024, 25 countries have setup their banking system to also accept and work with the SPFC alternative system. As it happens, all of these are Russian trading partners. The results of the nuclear option being deployed is the destruction of SWIFT’s global monopoly.

Import substitution and RF State tenders favoring domestic corporations

Of course, the key actions taken were in the realm of import substitution. This was again government-driven and equally criticized as heavy handed statism. The public as a whole did not receive this well, as it was poorly marketed and unlike the IT related actions, proved to be a much slower process. Many homegrown industries had to be recreated, restarted or grown from scratch, and there was a wide range of sectors that had to be filled.

From 2017, the state's emphasis on government sponsored construction and production projects has been on the utilization of local manufacturing in lieu of imports. The share of foreign manufactured parts and equipment has been sharply declining since then.

The system works as follows: whenever a tender is launched, and everything now requires a full tender, and a foreign company is competing against a Russian company, the Russian company’s bid is automatically counted as 15% cheaper. In the event that the foreign company still wins the tender, they are then forced to automatically lower their last bid offer by a further 15% or be disqualified.

Since 2014, Western oil-gas and oil-gas services majors have been removed from the Russian market by their governments. This failed attempt at crippling Russia has lost the Western companies almost a trillion dollars over the past decade.

In just one example, Exxon lost their place in the joint venture with Rosneft in the offshore Kara Sea project. Just in one light sweet crude oil patch in the Kara Sea, Exxon, who had a 10% stake, has lost an estimated $100 billion over a 10 year period.

Two Major Russian Setbacks or Failures Amid the Western Sanctions War

Equally, there were failures, of which we will review the two main ones.

A Lost Decade for the Russian Automobile sector

Automobile manufacturing. While Russia is a world leader in the manufacturing of tractors, combines, helicopters, rockets, tanks, heavy aircraft and so on, the domestic automobile manufacturing sector has lagged far behind. The drive to localize key component manufacture proved to be more glitter then grit.

When sanctions struck and foreign companies stopped working, their manufacturing facilities were nationalized and resold to Russian and friendly country companies. However, restarting production has proven slow and difficult, as many subcomponents were never fully or at all localized. This has led to efforts to reverse engineer key components, but this of course, along with setting up mass manufacturing of those reverse engineered parts, takes time.

Even brands like Lada, under foreign management until the start of the SMO in 2022, had shifted away from local subcomponent systems to imported ones. This had already led to many local manufacturers in the sector disappearing, as well as the Lada economy and comfort brand cars becoming very expensive in ruble terms due to FX issues. Now Lada is forced to reorganize its lineup and to freeze manufacturing of its more popular makes while subcomponent issues are solved.

This in turn has allowed the Chinese manufacturers to flood in and dominate the Russian car market. Almost every second car now sold is a Chinese car, even including for parallel imports. Additionally, even storied brands like Moskvich, which started putting out the Moskvich 3, was nothing more than a kit car bought from China’s Havel, for local assembly and some local component manufacturing.

The Russian automobile manufacturing market has been a failure, not a total failure but a failure non-the-less as it is a strategic market sector that has had a decade to react and is now forced in short order to revamp and reorganize.

The long term forecasts are steadily positive, but no one can retrieve a lost decade for this industry.

Russian Consumer Electronics aka Gadgets sector continues to be totally reliant on China

Here, localization has faced total failure.

While manufacturing of televisions, washing machines, refrigerators and other such appliances has been setup and Russian brands are a large segment of the market, computers and gadgets have been a total failure.

Several “Russian” phones did appear at first, but these turned out to still be manufactured in China and were no competition to the various American and Chinese brands. Localization was promised but failed to materialize. Computers, except for military or government specific systems have not even been bothered with.

Russia does manufacture processors and semi-conductors, from low-level credit card chip models to high-end military purposed chips that are 'good enough' to be found in the remnants of high subsonic and supersonic missiles striking their targets across Ukraine with precision accuracy. Russian-made customer electronics market chips, however, are at best two generations behind the market.

The one bright spot in this saga has been the Aurora operating system, but then IT has been a Russian strength for years and is a success story noted below. This OS for mobile phones was created for government phones and is considered very difficult to hack. The system includes a full app ecosystem. Since its deployment for government phones, the system has started to appear in the public sphere.

Russia's Economic Success Stories of the Past Decade

The good news for Russia is, the success stories over the past decade massively outweigh the failures.

Russian Agriculture Surges to Feed Russians and the Planet with Non-GMO Meat and Grain

Russia’s agriculture sector has seen a multi-year boom that is hard to believe. Russia in the 1990s could not feed its people; the Russia of the 2020s is one of the biggest exporters of food products, both raw grains and processed foods, in the world. Russian brands have replaced most of the European foodstuffs with products no worse and often better than the previously imported items. Standards are up, soy in meat products is almost gone, GMOs are illegal and vegetable oils in milk products are difficult to find.

Compared to the modern US grocery store, the Russian consumer has 4 to 5 times more choices in dairy and meat products. Overall agricultural sector growth since 2013 has trebled over 27%.

This has allowed Russia to become an agricultural superpower. Exports have doubled in the past ten years, with meat products accounting for 4% of exported foods. Meanwhile meat consumption in Russia has reached all-time record highs. By all indications, this sector is set to continue its rapid growth into the future. To facilitate this, the government has created many incentives to attract new farmers, including immigrant farmers from Western countries (more on that in a future post). As an added bonus, the Ag bureaucracy is tame compared to the USDA or in other Western nations' and the cost of land in Tver, Tula, Kaluga and other oblasts just three hours by truck from Moscow's vast farmers markets remains very low.

Russia's IT Sector is Strong

IT has been another huge success. Driven by high-quality engineers, low operating costs, low taxes with major tax holidays and top-of-the-line Internet speeds and other IT infrastructure, this sector has grown from 750 billion rubles in 2013 to 12,184 billion rubles in 2022.

The mass exodus of various Western companies like Microsoft and SAP has also been a boon to Russian SaaS. Russian competitors already existed but struggled to win market share in a crowded market. This was akin to tiny mouse-like mammals trying to compete during the Cretaceous with the dinosaurs. And just like with the dinosaurs, in one blinding flash all those dinosaurs went extinct, leaving a giant playing field for those small mammals to grow into Siberian woolly mammoths. From 2022 to present, the Russian companies are in a major talent crunch, unable to recruit the quantity of talented employees that are needed to fill all the gaping market holes left behind.

It would not be unfair to say, that in five to ten years, when these American and European superstars attempt to recolonize the Russian market space, they will find that not only is there no room for them, but that behind the Russian flag hide several massive competitors ripping out on to the global stage and the market space presently still owned by the Western corps.

The Renaissance of Russian Commercial Aviation

The US has for a long time been trying to put brakes on the reestablishment of the Russian commercial aviation sector. Long before the SMO, the US put a ban on carbon-fiber exports for the construction of modern airplane wings. This was a major hit to the development of the Sukhoi Superjet and set this plane's delivery date back by at least three years. During those three years, a Russian manufactory was setup to produce that same carbon-fiber. The new plant not only supplied the internal market but proved to be cheaper and better quality then the US manufactory, thus creating competition where once there was previously a loyal client.

The onset of the big sanctions package proved another hit to the already flying Superjets. Many of the subcomponents, including the avionics, were imported. With imports cut off in 2022, production of this civilian narrow-body regional aircraft was stopped. Note as the Biden Administration rolls out 100% tariffs on Chinese EVs, that China's own effort to develop a homegrown replacement for Boeing and Airbus planes, the CAC919, remains highly vulnerable to Western supply chain sanctions.

By the end of 2023, however, the first fully localized Superjet rolled off of the assembly. By Q1 2024, the quantity of passengers flying grew by 11% over Q4 2023, equaling out to 42 million passengers, due mainly to the production of Russian airframes replacing the Boings and Airbuses which have been sanctioned. Given the ongoing safety mishaps and disasters for Boeing around the world, this may be a blessing for Russia.

Besides the Superjet, other new airframes are in the works. The MC-21 is awaiting the beginning of production of new internal avionics, scheduled for 2024. This is a long distance carrier with a range of 5000km.

The TY-214 is a third airframe coming into production, with a range of over 7000km. While these planes are already being produced, due to previous competition from established Boeing and Airbus models, only two TY-214s were produced each year. New assembly lines are being setup and in 2025 10 will be assembled, with the aim to raise production further to 20 per year.

While this is still a small figure in the overall scheme but a large increase for this particular model. This and other airframe production growth will have knock on effects, forcing the expansion of subcomponent production and job growth. Eventually, this will translate into export market growth.

Russia Pharmaceuticals and Medical Equipment

The Russian pharmaceutical and bio-chemistry market has been one of the shining stars of the past decade and continues to grow at great speed. Several years before COVID-19, Russia developed the world’s first vaccine for Ebola. Unfortunately due to the short nature of that mini-plague and the Western media totally ignoring the story, this success is little known.

However, with the onset of COVID-19, the truth about Russian pharma and speed of development showed itself. Not only did Russia manufacture 12 of the 14 key medicines used in treating the virus, but it was the first and only one to develop a safe vaccine from COVID-19, Sputnik. Western vaccines, or rather gene-therapies, that came after Sputnik, proved ineffective and possibly cancer-causing for millions, as has been seen by massive leaked data and removal of Astra Zeneca’s and Moderna’s vaccines from the market.

Furthermore, Russia was able to provide critical assistance to Italy’s collapsing medical infrastructure, providing AVLs and aerosol sanitization equipment, both of which Italy lacked. Italy, of course thanked Russia by obeying its EU/NATO overlords and leveling sanctions against Russia. At one point Russia was producing up to 3000 modern AVLs per month, while most European countries had less than that in stock in their entire medical systems. Russia also mass produced ultraviolet decontamination systems and various other medical equipment and has continued doing so to replace banned Western machines, such as MRIs.

Additionally, the government showed how it could muster its strength, when it built from scratch 14 new infectious disease hospitals between 2020 and 2021. These were not the prefab containerized medical facilities of the Chinese, but permanent structures that continue to serve the public.

The Massively Resurgent Military Industrial Sector

The ongoing Special Military Operation has seen a huge investment in war-related and dual-use industries, from tank manufacturing to drones to cutting edge scientific developments. All of this is paying immediate dividends at the front and for the economy, transforming drone technology in particular into products and services for the private sector. To drive this wartime retooling home, President Vladimir Putin has now appointed a new Defense Minister, Andrey Belousov, an economist from the industrial production school of thinking. Further massive investments are sure to follow.

Far Eastern Regions and Other Zones of Growth

The devastated areas from the fighting in the SMO have also become a major driver in the economy, instead of the drag Russia's enemies were hoping to achieve. Gargantuan efforts to restore and rebuild have been launched with giant convoys of materials and workers pouring into places like Mariupol. Much of the city of 250,000 was destroyed and almost half has been restored in record time of less than two years.

Regionally, the Russian government has focused on developing central and eastern Siberia and the Pacific Rim. To that end, a series of megaprojects were launched and completed to economically expand the Far East and create the needed energy infrastructure to develop the Asian markets far from Europe. Four greenfield projects, in the $4 to $15 Billion range were launched and in their completion stages for the Amur River area alone, specifically in the Amurskaya Oblast that borders northeastern China. The US-Chinese trade wars and the closure of the European markets to Russia energy, steel, agriculture and manufactured goods has only accelerated this Eastern integration and expansion.

The Russian government has also undergone a large wave of key reforms to enable business to establish quickly and work efficiently. From a streamlined taxation system coupled with low actual tax rates, to flattened and transparent systems of permitting. From the last World Bank Ease of Doing Business index, discontinued in 2020, Russia ranked 28th, moving up over 92 positions in 7 years. To put this in perspective, Japan is 29, China 31, France 32, Netherlands 42, Belgium 46, Italy 58, India 63 and Brazil 124.

In the end, Russia has four of four key ingredients for true economic growth: raw resources, highly educated workforce, a large manufacturing base and a government bent on supporting and accelerating the growth of industry and the economy.