The cost of war: Inside Russia's economic unease

Ed Butler (0:01)

Hi there, I'm Ed Butler, welcome to Business Daily from the BBC. Today, we're asking, what is going on inside the Russian economy?

SPEAKER_2 (0:12)

Everything here is closed down. Here was a cafe, now it's for rent. How painful, how frustrating.

Ed Butler (0:19)

Yes, there are stories of growing economic struggle in one of the world's largest oil and gas producing powerhouses. So is the toll of the Ukraine war beginning to tell?

Sergey Petrov (0:32)

We understand it's going wrong. No future. They stop investing in the people, in the future, in the long run. They try to survive.

Ed Butler (0:40)

Unpicking the reality of Russia's economic pain, that's Business Daily from the BBC.

Filling up at gas stations in Russia seems to be getting increasingly stressful these days. This was an argument over alleged queue jumping. Russians are having to wait six hours or more sometimes to fill their fuel tanks. The reason? Well, largely this is due, it seems, to Ukraine's sustained drone attacks on Russia's oil refineries.

And not just those. Ukraine's extended its attacks to include retail warehouses as well, like the Wildberries chain, known as Russia's Amazon. This was the scene of panic after one recent strike in Yekaterinburg. Some small business owners who house their commercial products inside Wildberries say they've been ruined.

SPEAKER_2 (1:52)

That's it, that's over. My brand officially no longer exists, because we have nothing left. The Kalendino warehouse burned down. No inventory and no savings to keep going somehow.

I've been wiped out. I'm officially broke.

Ed Butler (2:12)

The lament of one former small business owner. Prices are rising rapidly, and the struggle to get by in Russia is affecting all aspects of life. Take the picturesque Black Sea town of Sochi, Vladimir Putin's favorite resort, which hosted a recent edition of the Winter Olympics. After repeated Ukrainian drone strikes there, locals say it's become a commercial ghost town.

A lot of empty commercial property. Look, one, two, three, four, five, six. I used to come down here and buy sweets. All these businesses closing down.

But is it really so bad across Russia as a whole? Yes, it's true, inflation and interest rates are up. But President Putin points out that unemployment remains low. And in a press conference last month, he said that the economy was actually still growing.

SPEAKER_4 (3:12)

Economic dynamics are generally modest, but positive. GDP growth is around 1%.

It is clear that economic growth is affected by a number of factors, including external pressure and terrorist attacks on industrial facilities and infrastructure. Of course, there are no critical consequences from such attacks.

Ed Butler (3:37)

But economists say that this growth is unsustainable long term, because it's only government spending that's driving it.

The state coffers are running low. The deficit is rising. And the low unemployment rate may not be the sign of strength that Vladimir Putin claims. The BBC Russian Service economics editor is Olga Shamina.

Olga Shamina (3:58)

Russia has a very poor demography. Its fallen population is very, very bad. And of course, this leads that Russian have a big shortage of working force.

So Russia has very low unemployment rate. Due only to this lack of working people. So the new wave of mobilization will make this labor shortage again even more sharper. So that's a big problem. And it push out of the country people who have opportunities to live, who has competence, who have money, who have skills and so on. So it will be frustrating for Russian economy because it also loses good human capital actually.

Ed Butler (4:40)

Meanwhile, certain indicators like inflation and interest rates are historically high still in Russia.

Olga Shamina (4:50)

Actually, they are not getting high because Russian economy was very under-financed before the war. The government didn't invest in the economy, in society and so on. They make reserves, they made reserves. And so on, when the war started, it pushed a lot of money into economy.

And it lead to these big, big numbers on inflation. And Russian Central Bank, it made rates very high to fight with it.

So when it came to the point now that Russian small, middle business, which is not connected to military section, it is under-financed because it can't actually go to bank and take a loan because it's too expensive. They can't compete for this labor. And it can't go to banks. So this small business is in a very bad state.

Ed Butler (5:43)

Olga Shamina of the BBC's Russian Service, here on Business Daily from the BBC.

I'm Ed Butler and today we're looking at the state of Russia's economy. Just how bad is it? Sergey Petrov is a former Russian billionaire who built a car sales and rental business from nothing back in the 1990s. Now, the Kremlin critic lives in exile after he says his business was targeted following criticism from the government and allegations of corruption on both sides. Still, he retains close ties with business people inside the country. He also says that while some can profit from the sanctions and government military spending, most regular businesses are struggling.