KALUGA, Russia—Valery Volodin, a welder at a sprawling Volkswagen factory in western Russia, spent most of the summer relaxing at his dacha, or weekend home, tending to his garden and tending to his children. Mr Volodin, 41, had little choice: the car factory closed in March, joining more than 1,000 multinational companies that had shut down operations in Russia due to the invasion of Ukraine.
Since then he has been sitting at home while Volkswagen is looking for a buyer. Once a month, he enters the factory in the Kaluga industrial zone to collect 50,000 rubles, about $800, a payment that under Russian labor law is the equivalent of two-thirds of his previous salary.
“We go to work, but the factory is empty,” said Mr. Volodin in an interview. He doesn’t mind a temporary break from the physically demanding work, but he doesn’t know how to plan for the future.
“We are living day to day for now,” he said.
His experience is playing out across Russia for hundreds of thousands of workers after the West imposed sweeping economic sanctions designed to hinder Moscow’s ability to wage war and undermine public support for President Vladimir V. Putin.
More than nine months after the invasion, neither the war effort nor the economy have collapsed, and the economic pain for many Russians is still limited. Mr Putin has avoided any substantial domestic pressure that would threaten his leadership. But the impact of what some have described as the most coordinated and deepest economic sanctions in modern history is evident in communities across Russia – and the worst is yet to come.
The sanctions have hampered Russia’s reluctant efforts to modernize its economy along Western lines and catch up with European living standards after the fall of the Soviet Union, said Vladislav Inozemtsev, the Washington-based director of the Center for Post-Industrial Development. Studies, a Russian research team. That has dampened hopes that the country could soon become a modern, prosperous nation.
“The slogan is now ‘Don’t make it worse’, and that is an important shift,” Mr Inozemtsev said. “Even the government is no longer committed to national development.”
Beneath the veneer of normality, he said, key drivers of growth, such as technology transfer and investment, are crumbling. “It’s like a cake that fell on the table and it kind of looks good, but inside it’s all blown up,” said Mr. Inozemtsev.
The most visible and dramatic impact has been on manufacturing, a sector that employs 10 million Russians and has been at the center of Mr Putin’s ambitious program to diversify the economy away from dependence on oil and gas exports . The auto industry accounts for a large percentage of those workers: automakers employ 300,000 Russians, according to the country’s statistics office, and the advocacy group says another 3.5 million work in related industries.
In September, automotive production was down 77 percent year over year, while car sales were down 60 percent compared to the same period in 2021. A major reason is that Russian industry relies heavily on Western components. Even Putin has acknowledged the problem, admitting last week that in some industries the dependency on imported parts is as high as 90 percent.
To adapt, Russia is turning inward, cutting ties with the rest of the world and moving toward an economic model similar to Iran’s, where political legitimacy rests on providing citizens with the essentials rather than driving transformative growth, Mr Inozemtsev said.
The Russian government was better prepared to weather the sanctions than many in the West expected.
Since the start of the war, the International Monetary Fund has raised its economic outlook for Russia twice and forecasts a 3.5 percent fall in gross domestic product this year, similar to government forecasts. This decline, while a major reversal from pre-war growth expectations, stands in stark contrast to the double-digit collapse in Venezuela’s economic output following a wave of US sanctions in 2019.
“Sanctions have not destroyed the resilience of the Russian financial system, nor have they affected macroeconomic stability,” Prime Minister Mikhail Mishustin said at a government meeting last week.
A combination of high oil revenues, large currency reserves and an expert team of economic officials has made Mr. Putin was able to soften the blow – much to the frustration of some Western leaders who had hoped the sanctions would now have more effect.
But the loss of investment, technology and skills caused by the sanctions is likely to reverberate for generations, depriving many Russians of the chance for a brighter economic future, experts say.
When Volkswagen started full production cycles in Kaluga in 2009, Mr. Volodin not only a job, but also unexpected support.
“I was paid to be trained for my job,” he said, still impressed. When a robot replaced him, he was retrained.
Those were the heyday for Kaluga, an industrial area about 200 kilometers south of Moscow. The former governor actively courted Western investors, learned English and built a modern airport with several flights a week to Germany. He transformed a regional economy 80 percent focused on the Soviet military-industrial complex into one linked to the West. Pharmaceutical companies flocked to the Kaluga region, which has a population of one million, as well as car manufacturers.
Volkswagen hired about 4,200 employees. Volvo and Stellantis, which produced and sold the Peugeot, Citroen, Opel, Jeep and Fiat brands in Russia, also established themselves in the region. According to Dmitri Trudovoy, the president of the independent trade union Workers’ Association, an ecosystem of suppliers and related industries was emerging to serve them and employ at least 25,000 people. German and other foreign language courses at the local university were a gateway to an office job at the companies.
It seemed as if a new, modern business model was being built step by step in the region, a hint of how the Russian economy could evolve.
In 2020, Volkswagen’s production alone accounted for about 13 percent of the total industrial production in the Kaluga region.
Now most automakers in the region have shut down their operations and Mr Trudovoy said workers had no idea who would take over Western factories and whether they would keep their jobs.
“They’re nervous and scared for their future,” he said.
Kaluga’s industrial production fell by 30 percent between February and July this year compared to the same period the year before, according to Rosstat, Russia’s statistical office, becoming one of the hardest hit regions.
Russian state-owned enterprises and the government have vowed to replace lost production with local brands. But there are several signs of decline. In June, AvtoVAZ, Russia’s best-known domestic car brand, the Lada, announced that its new cars would only meet 1996 emissions standards and would not have passenger airbags.
In a symbolic move, Kamaz, a subsidiary of AvtoVAZ, announced that it would use a Moscow factory abandoned by Renault after the invasion to restart production of a Soviet-era car brand, Moskvich or Muscovite, which had long been an almost comic synonym. for the shortcomings of communist consumer goods.
The slowdown in car production also means that even the Russian police will struggle to acquire new patrol cars. The Interior Ministry has been unable to find a supplier for the 2,800 new vehicles needed for the traffic police, according to the Russian newspaper Kommersant.
Kamaz claims it will produce 50,000 “modern, comfortable, high-quality and safe” cars at the plant next year, many of them with electric motors. To support these efforts, the Russian government plans to funnel about $500 million to domestic automakers.
But modern history provides few examples of successful attempts to replace imported Western technology with local substitutes, said Mr. Inozemtsev, the economist. Russian companies lack the know-how and skilled workers to replace Western capital in technology-intensive industries. Relying on homegrown substitutes will result in “primitivization,” Mr Inozemtsev said
Production will not disappear, he said, but will gradually decline, resulting in a lower quality and quantity of products that will gradually reduce the standard of living of Russians.
In Kaluga, the car collapse iindustry has far-reaching side effects. The real estate market ground to a halt after the outbreak of war, said Kirill Gusev, editor of the online real estate site Kaluga House. Things started to improve over the summer as people got used to a new normal, but it collapsed after Putin announced a military call-up of hundreds of thousands of men in September.
“Real estate is essentially long-term planning, but right now we’re in a place where you can’t do that at all,” Mr Gusev said. “We’ve all seen how easy it was to collapse normalcy.”
“After the mobilization, the banks stopped lending because the customers could be summoned,” he added.
Natalia Zubarevich, a geography professor who tracks socio-economic data at Moscow State University, said: “What we are seeing is falling income, broad depression, less consumption. All this will have a negative impact on the country’s economy.”
Kirill Mikulin, owner of a popular bar in Kaluga, feels the blow. He had already adapted by finding replacements for half the beers in his pub, which he had imported. Buoyed by the apparent return to normalcy during the summer, he opened Hops & Hopes, which sells 13 craft beers on tap and 250 others in bottles.
His downtown store failed to attract paying customers last night.
“We believe in the new year,” he said, hoping sales would pick up before the holiday.
“But we might get screwed after that.”
Valerie Hopkins reported from Kaluga, Russia, and Anatoly Kurmanaev from Berlin.
