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What happened on day 108 of the war in Ukraine

Yevgeny Shumilkin returns to work on Sunday. To prepare, he removed the familiar “M” from what had been his McDonald’s shirt and covered the “M” of his McDonald’s jacket with a Russian flag patch.

“It will be the same buns,” promised Mr. Shumilkin, who maintains equipment for a restaurant in Moscow. “Just under a different name.”

McDonald’s restaurants are reopening in Russia this weekend, but without the Golden Arches. After the US fast-food giant pulled out this spring to protest President Vladimir V. Putin’s invasion of Ukraine, a Siberian oil tycoon bought its 840 Russian stores. Because almost all of the ingredients came from inland, he said, restaurants could continue to serve much of the same food.

The bet could work out well – underscoring the surprising resilience of the Russian economy in the face of one of the most intense sanctions barrages ever inflicted by the West. Three and a half months into the war, it has become clear that the sanctions – and the torrent of Western companies voluntarily leaving Russia – have failed to completely dismantle the economy or spark a popular backlash against M . Cheese fries.

Russia has spent much of Mr Putin’s 22 years in power integrating into the global economy. It turns out that it is not easy to disentangle such vast and intertwined trade links.

Certainly, the effects of the sanctions will be deep and wide-ranging, with the consequences only beginning to be felt. Economists and businessmen say the standard of living in Russia is already falling, and the situation is likely to get worse as import stocks run out and more companies announce layoffs.

Some of Russia’s DIY efforts might not live up to Western standards. When the first post-sanctions model of the Lada Granta – a Russian hatchback co-produced by Renault before the French automaker pulled out this spring – rolled off an assembly line at a factory near the Volga on Wednesday, it lacked airbags, modern pollution controls or anti-lock brakes.

Credit…Maxim Shipenkov/EPA, via Shutterstock

But the economic decline is not as precipitous as some experts predicted after the February 24 invasion. Inflation is still high, around 17% on an annual basis, but has come down from a 20-year high in April. A closely watched measure of factory activity, the S&P Global Purchasing Managers’ Index, showed Russia’s manufacturing industry expanded in May for the first time since the start of the war.

Behind the positive news lies a combination of factors working to Mr. Putin’s advantage. Chief among them: high energy prices, which allow the Kremlin to continue funding the war while raising pensions and salaries to appease ordinary Russians. The country’s oil revenues have increased by 50% this year.

Moreover, the skillful work of the Central Bank prevented a panic in the financial markets after the invasion and helped the ruble to recover from its initial crash. Store shelves, for the most part, remain stocked, thanks to large stocks and alternative import routes established via countries such as Turkey and Kazakhstan – and Russian consumers buying less.

Even the new Lada Granta is less clumsy than observers predicted: despite the shortage of foreign components, it will still come with power steering and power windows.

“Not everything is as bad as expected,” proclaimed a Russian automotive website.

The survival of the Russian economy strengthens Mr. Putin’s hand by reinforcing his narrative that Russia will stand tall in the face of the West’s determination to destroy it. He met young entrepreneurs Thursday at a town hall-style event, his latest effort to show that even though he was waging war, he was keen on keeping the economy functioning and foreign trade functioning. Although the West will not do business with Russia, he insisted, the rest of the world will.

Credit…Pool photo by Mikhail Metzel

“We’re not going to have a closed economy,” Putin told a woman wondering about the effects of the sanctions. “If someone tries to limit us in something, he limits himself.”

For the wealthy, luxuries and iPhones are still widely available, but more expensive, transported to Russia from the Middle East and Central Asia. The poor have been hit by rising prices, but they will benefit from a 10% increase in pensions and the minimum wage announced by Mr Putin last month.

Those most affected by the economic upheaval belong to the urban middle class. Foreign goods and services are now harder to find, Western employers are pulling out, and travel abroad is becoming difficult and prohibitively expensive.

But Natalya V. Zubarevich, an expert in social and political geography at Moscow State University, 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 public companies.

“Sanctions are not going to stop the war,” Zubarevich said in a phone interview. “The Russian public will put up with it and adapt because they understand that they have no means of influencing the state.”

Chris Weafer, a macro consultant who has long focused on Russia, issued a note to clients last week, saying “some of our previous assumptions were wrong.” Inflation and the contraction of the economy proved less severe than expected, according to the note. His firm, Macro-Advisory Eurasia Strategic Consulting, has revised its forecast to show a smaller decline in gross domestic product this year – 5.8% instead of 7% – while also predicting a recession that will last until April. next year.

In a phone interview, Weafer described Russia’s economic future as “duller, more debilitating”, with lower incomes, but basic goods and services still available. A major juice company, for example, warned customers that its boxes would soon be all white due to a shortage of imported ink.

Credit…Natalia Kolesnikova/Agence France-Presse — Getty Images

“The economy is now entering an almost stagnant phase where it can avoid a collapse,” he said. “It’s a more basic level of economic existence, which Russia can continue for a while.”

On Friday, as inflation stabilized, the Central Bank of Russia cut its key rate to 9.5%, the level before the invasion. On February 28, the bank raised it to 20% in an attempt to avoid a financial crisis. The ruble, after plummeting in value in the days following the invasion, is now trading at four-year highs.

One of the reasons for the ruble’s unexpected strength is that global energy demand has surged in the wake of the pandemic. In June alone, the Russian government expects a windfall of more than $6 billion due to higher-than-expected energy prices, the finance ministry said last week.

At the same time, Russian consumers spent less, further supporting the ruble and giving Russian companies time to set up new import routes.

Russian officials, however, acknowledge that the toughest times for the economy may still be ahead. Elvira Nabiullina, the central bank’s chief, said on Friday that while “the effect of the sanctions has not been as acute as we initially feared”, it would be “premature to say that the full effect of the sanctions is over. is manifested”.

For example, it remains unclear how Russian companies will be able to obtain microchips used in a wide variety of products. During Mr. Putin’s meeting with entrepreneurs, one developer said he was “very concerned about our microelectronics”.

Mr. Putin cut: “Me too. Honest.”

Credit…Maxim Shemetov/Reuters

The ties that unite the Russian economy to the West, today in the process of unraveling, date back decades, sometimes more than a century. Aeroflot, the national carrier, has acquired dozens of new Boeing and Airbus planes and promoted itself as a convenient transit airline for people traveling between Europe and Asia. In the Ural Mountains, a factory has worked with Siemens, the German manufacturing giant, to produce modern trains to replace rusting Soviet equipment.

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 usher the country into the industrial age, announced last month it was pulling out of Russia.

“Sanctions are suffocating the economy, which doesn’t happen all at once,” said Ivan Fedyakov, who runs Infoline, a Russian market consultancy that advises businesses on how to survive under the current restrictions. “We only felt 10-15% of their effect.”

But when it comes to food, at least Russia is better prepared. When McDonald’s opened in the Soviet Union in 1990, Americans had to bring everything. Soviet potatoes were too small to make fries, so they had to acquire their own russet seed potatoes; Soviet apples didn’t work for the pie, so the company imported them from Bulgaria.

Credit…via Reuters

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 taking place in Ukraine”, one of its Siberian franchisees, Aleksandr Govor was able to keep his 25 restaurants. open. Last month, he bought all of McDonald’s Russian operations for an undisclosed sum.

On Sunday – Russia Day, a patriotic holiday – it will reopen 15 stores, including the former flagship McDonald’s store in Moscow’s Pushkin Square, the place where in 1990 thousands of Soviets lined up to sample the West. The chain will operate under a new yet-to-be-disclosed brand, although the new logo has been unveiled, which is meant to feature a burger and fries.

The hash browns will have a Russian name, according to a menu leaked to a Russian tabloid. And, since the secret sauce is exclusive, there won’t be a Big Mac on offer.

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Post expires at 9:01pm on Wednesday June 22nd, 2022

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