Jake Cordell

LONDON (Reuters – Oleg Kechin of a chain a barbershops predicts Russia would be in its worst economic crisis for a generation.

While Joe Biden the U.S. President may have claimed that Western sanctions would cause economic havoc in Russia’s economy, Kechin’s business continues to draw in customers from Saransk (510 km / 320 miles southeast of Moscow).

“There’s no deep crisis. “In general, everything’s okay,” he stated. He said, “Everyone is talking about a decline in purchasing power. But I haven’t noticed it.”

If certain indicators are correct, however, this optimism may be misplaced. The outside world is reducing trade, and consumers have resisted spending. In addition to this, rising costs for basic goods are beginning to pinch household budgets.

Russian officials say the economy has been stable. Three percentage points were cut at the central bank to reach 11%. The bank expects to lower its prediction for inflation this year, which is currently between 18-23%.

Capital controls have forced the ruble to rally and is now at 66 against the dollar. It was stronger before Russia’s military intervention in Ukraine. [RU/RUB]

Vladimir Putin welcomed foreign companies that have bought up or dumped Russian assets and said Russia cannot be excluded from international trade.

However, not all people are convinced that the economy will survive. Roman, a Moscow 25-year old, asked not to be identified as his real name. He said that middle-class life is not dramatically different than it was before, but that he noticed worrying signs.

“One thing I am concerned about… are the constant price increases for basic goods, and even vegetables. That is a sign that the worst is still to come, I believe. He said. He said, “The labour market situation in my area doesn’t inspire me to be optimistic.”

‘DEMAND CRISIS’

Some indicators back up his concern. According to preliminary data from the finance ministry, VAT receipts (which reflect consumer spending) fell by 54% in April.

Maxim Reshetnikov, Economy Minister, stated Friday that there is a demand crisis in consumer and business spending.

Russia is no longer publishing financial flows data. But Bank of Finland figures, based upon local customs data, show that imports have fallen – but not just from Russia.

According to the bank, Chinese exports to Russia fell by 25% in April, while shipments from Vietnam and South Korea, Malaysia, and Taiwan increased more than half a percent.

According to the economy minister, manufacturers were working on reestablishing supply chain breaks caused by sanctions. He said that up to 2,000 backbone businesses could be eligible for preferential loan programmes.

However, inflation has risen to more than 17% since 2000. Many are still facing an increase in their real household incomes due to Putin’s announcement of a 10% rise in the pension cost and the min wage.

Russia’s greatest problem may not be rising prices. Although the strong ruble has helped to reduce weekly inflation, it will not stop the wider threat of economic output from Russia’s growing isolation.

Reshetnikov stated that there are “fears” of a possible deflationary spiral. This is when the money supply drops and leads to lower production and prices.

The budget will be under pressure as a result of the financing of a military operation in Ukraine. Anton Siluanov, Finance Minister, stated Friday that Moscow needed “huge financial resources”, in order to finance what Moscow called its “special military operations”.

STIMULUS

Russia’s National Wealth Fund has $110 billion in liquid assets. This fund has been used to help support Russia’s spending which is currently up 22%, according to the minister of economy.

Moscow’s finance minister stated that 8 trillion Russian rubles (or $1123 billion) had been allocated for stimuli to address “current circumstances”, but it was unclear how much of this was existing money, and what the duration of those stimulus funds were.

It is still not clear what the impact of Western firms’ departure on employment and economic output will be, which could include car manufacturers to banks.

Professor of Economics at France’s Sciences Po Sergei Guriev expects the effect to become more pronounced in the coming months.

Guriev said that “the real pain hasn’t started yet” as exiting businesses are still paying wages and others continue to produce using imported parts. He is also the former chief economist of European Bank for Reconstruction and Development.

Morgan Stanley (NYSE: )Economists expect a 13% reduction in household consumption by 2022, and a 23% decrease of investment. Alina Slyusarchuk (chief regional economist at the bank) stated in a note, that Russia has a potential rate of long-term growth of 1%.

Although the outlook for small Russian businesses appears dimming, it’s difficult to measure precisely because there is so little data published now and companies are not required to report their results.

Anastasia Kiseleva who is a partner of a Moscow-based public relations agency said that very few businesses want to plan long-term contracts or create strategies.

The purpose of small businesses, particularly those in the smaller ones, is to survive and not create or develop anything new.

Many Russians have experienced many deep crises after the fall of the Soviet Union.

Yevgeniy Sheremetov runs a Siberia tour company that operates near Lake Baikal. He said, “The worst lies ahead of us.” But residents in this country have grown accustomed to the difficulties. “I have my summer house with cucumbers and potatoes. I have never been scared since the 90s.”