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Despite the Kremlin’s rhetoric on Russia’s economic stability and good fortune since its 2022 invasion of Ukraine, several economic indicators belie this narrative and hint at potential domestic turmoil as the country’s economy falters.

The legitimacy of President Vladimir Putin’s rule rests upon two pillars: economic wellbeing (the carrot) and political and civil repression (the stick). Putin and his regime consider themselves irreplaceable, boasting a narrative of internal stability contrasted against recent economic turmoil in the West. This propaganda extends to the Russian economy, as the government appears to prefer publishing numbers that it believes reflect favourably upon Russia while concealing more unsavoury statistics from the public. Ironically, however, even some data deemed palatable for publication hints at a difficult situation for Russia’s domestic economy. According to the statistics presented by the Russian authorities, Russia’s GDP only contracted by 1.9% in 2022, following an onslaught of Western sanctions and the war. Furthermore, Russia maintains a record-low unemployment rate of 3.2% as of May 2023, which is notably lower than the EU’s 5.9% and still better than the UK’s 4%. Russia’s 2023 inflation rate is 2.76%, below Western rates like the US’s 3.2%. These numbers, however, do not provide a comprehensive view of Russia’s economic situation. Russia's prioritisation of its wartime industries, rising emigration rates and over-employment all played a role in mitigating any sharp declines in GDP. Additionally, Russia’s economy relies on the sale of raw materials, particularly oil, to withstand sanctions on sophisticated goods. This keeps the country relatively insulated from economic restrictions imposed by its Western neighbours. Maintaining a perception of stability and wealth is crucial for Putin’s domestic legitimacy, and consumer goods are important for this purpose. Putin’s strategy is reminiscent of Leonid Brezhnev’s ‘social contract’, which relied on the relative welfare of citizens in exchange for their political apathy. Any weakening of this contract undermines the system’s ‘immunity’ and increases its vulnerability during a crisis. Parallel imports and the substitution of popular foreign brands with obscure Russian versions (for example, Vkusno i Tochka for McDonald’s and Stars Coffee for Starbucks) attempt to portray an unchanged society in which the ‘special operation’ in Ukraine has not adversely altered Russian life. However, trends in Russia’s automobile industry may disrupt this carefully constructed image.

Grinding Gears

The automobile industry plays a crucial role in Russia’s projection of a ‘business-as-usual’ economy. For years, Russia has presented its ‘import substitution’ programme as a series of successes towards achieving technological sovereignty. Therefore, when Western automobile manufacturers began pulling out of Russia, Russia attempted to fill the void with domestic replacements, with mixed results. Western automobiles have become scarce in Russian dealerships, which are mainly selling the remaining stock after the brands left Russia. Most Western automobiles now arrive in Russia through parallel imports via third countries. The reduction in the market is reflected not only in quantity but also quality. With limited competition in the market, products tend to be more expensive and lower quality. Producers become accustomed to the prevailing conditions and have less incentive to innovate. Additionally, shortages of spare parts lead to disruptions. For instance, the underwhelming Lada Granta Classic lacks crucial components found in modern automobiles, while the Lada Niva Legend has only very basic equipment. Both automobiles are already technologically outdated, yet they accounted for 35% of the Russian market in 2022. A particularly embarrassing incident occurred at the St Petersburg International Economic Forum when the premium Lada Aura failed to start during an exhibition – a reputational failure for an automobile costing well over RUB 2 million. Lower- and middle-class Russians have been particularly hit by the departure of Western auto manufacturers as the market becomes more exclusive. The average monthly salary in Russia reached almost RUB 73,000 in April 2023, putting most new automobiles outside the price range of an average-salaried citizen. The cheapest automobiles on the market, the Lada Granta and Lada Niva, now cost around RUB 700,000 and 821,000, respectively. The currency exchange rate for the Russian rouble may contribute to a further decline in the affordability of new automobiles, creating room for the growth of the second-hand market. However, with the rouble depreciating to RUB 91 per $1, imports of new automobiles are becoming more expensive.

Turning East

Nonetheless, Russia continues to search elsewhere for import opportunities. Despite announcements from Iranian and Indian producers about negotiations over automobile production in Russia, the only substitutes appear to have come from Chinese companies. As of July 2023, Chinese imports accounted for 49% of Russia's automobile market – a significant increase from June 2021’s 7% share. Additionally, Russian automobile brand officials tout cooperation with ‘Eastern partners’ when proclaiming the resilience of Russia’s domestic automobile industry in the face of Western sanctions, but these ‘Russian-produced cars’ are often heavily reliant on Chinese parts. Even Chinese producers and import substitution are as yet unable to fill the production gap left by Western companies shunning Russia. Before the invasion, new automobile sales reached approximately 1.66 million automobiles annually, but in 2022, new sales and production plummeted by 60% and 67%, respectively. These numbers still likely benefit from the fact that Western producers only began leaving Russia in 2022, and significant stocks of automobiles remained with dealers. In June 2023, Russia’s Ministry of Industry and Trade claimed that the Russian automobile market grew 6% from January to May 2023 compared to the same period in 2022. Nevertheless, this relative growth is primarily due to the low base of the previous year, when monthly production fell to 3,700 automobiles in May 2022.

Stopping Short

While parallel imports have partially lessened the supply–demand gap, they have not resolved all problems. As evidenced above, some recent figures suggest a partial market recovery, but growth is modest compared to low sales in 2022. Domestic Russian automobile production is anticipated to continue increasing, mainly through the assembly of Chinese automobiles. AvtoVAZ, part of the Rostec complex and a producer of Lada automobiles, intends to increase production to 400,000 automobiles in 2023. However, even if this plan is achieved, the production volume would still fall short of the necessary levels. Factories assembling Chinese automobiles will also increase production, with the Moskvich factory planning to produce 50,000 automobiles in 2023. While this surpasses previous production rates, it remains below the Renault factory’s production capacity of 190,000 automobiles annually. However, increasing the production of Russian-made automobiles will pose a challenge. Moscow is currently prioritising arms production within its manufacturing industry, and Russia may struggle to close the gap in the foreseeable future due to workforce issues. As a result, the delayed consumer demand will only continue to grow. Those who have refrained from purchasing a new automobile may continue to wait for now, but they will eventually demand new models.

A Troubled Road Ahead

Russia’s workforce is tied to the country’s economic structure; many entrepreneurial individuals have migrated in search of better opportunities in the West, and the remaining workforce is often specialised but has limited access to higher-paying employment opportunities. Russia’s internal market workforce is sufficient to meet military and economic needs, but there are no significant incentives for comparable development in manufacturing and services to that in the West. In the face of Western sanctions, Russia will continue trying to rely on countries hostile or indifferent to the preferences of Western countries. The economic situation in Russia, as reflected in the automobile market, is unlikely to directly threaten Putin’s regime. However, it does present a significant security concern. The automobile market in Russia is showing signs of a decline reminiscent of the Brezhnev era, characterised by technological backwardness and diminishing quality. Russian automobile producers lack the necessary technologies and expertise to manufacture their own vehicles; most new automobile models introduced recently are essentially Chinese automobiles assembled in Russia. As a result, Putin’s ambitions for ‘technological sovereignty’ are unlikely to be realised soon, and tensions may rise as consumer demand becomes impossible to meet. Domestic complacency with regard to Russia’s wanton belligerence in Ukraine, and indeed, towards Putin’s regime, may be in for a bumpy ride. The views expressed in this Commentary are the author’s, and do not represent those of World and New World Journal or any other institution.