Sanctions aren't keeping name brands out of Russia. Why not?

The sanctions imposed after Russia invaded Ukraine were supposed to prevent it. But Russian audiences have been enjoying “Avatar: The Way of Water,” James Cameron’s new blockbuster film, much as they have most Hollywood movies in recent decades.

It’s the sort of thing that wasn’t supposed to be possible after the West cut economic ties with Russia. Big Western film companies withdrew from the Russian market, and local distributors were stripped of their licenses to show almost all Western movies.

But while the mechanics have changed, the end result is similar. Big movie halls are rented out to another company, often representing itself as a “film club.” That company then sells tickets for a short Russian-made film, but then also shows the more than three-hour-long “Avatar” movie “for free.” Experts describe the quality as top notch, and the showings are widely advertised.

Welcome to the Russian consumer economy a year into the war.

Frustrating U.S. and European sanctions hawks, Russia appears to be weathering the West’s attempts to damage its economy in response to the invasion of Ukraine. And in the most visible sign of its resilience, the Russian consumer market still offers ample supplies of Coca-Cola, iPhones, Western car parts, computers, appliances, designer clothing, and more. Via what are known as “parallel imports,” Russian businesses have been able to use legal and semilegal channels to bring name-brand goods into the country despite Western attempts to deny Russia access to them. 

While parallel imports do come with their own set of problems – and don’t stave off potential long-term damage that sanctions could still cause – they have shown the limits of Western sanctions as a blunt instrument against Russia.

“Parallel imports are not an ideal solution, even if they seem to solve the problem,” says Ivan Timofeev, an expert with the Russian International Affairs Council, which is affiliated with the Foreign Ministry. “The goods don’t come with the servicing, the warranties that they used to. They’re more expensive. But, at the same time, a lot of unofficial services have appeared to fill those gaps. So, you wouldn’t think you could get your German or Japanese car fixed anymore. But all sorts of businesses have sprung up where they have the parts – obtained through parallel imports – and expertise to do it. That’s why, when you look at any Moscow street, it’s still crowded with those cars running along as usual.”

Fred Weir

The Samsung outlet at the Europark shopping mall still has its brand-name goods on sale in Moscow on Jan. 27, 2023.

“Everything can be done”

The Russian economy looks much the same as it did a year ago, with well-stocked supermarkets, bustling e-commerce, crowded shopping malls, and a lively cafe, restaurant, and nightlife scene. Prices are up, but at around 12%, inflation seems manageable and has been declining in recent months. The ruble is stable, employment is high, and public opinion maintains at least tepid support for the war effort. Even Russian President Vladimir Putin recently noted that he had not expected Russia’s economy to survive the sanctions storm quite so well.

At least so far, Russia appears to be confounding wave after wave of Western sanctions.

Some of that is down to good fortune, such as high energy prices last year (which are now falling) and a bumper grain harvest last fall, and Russia’s ability to find non-Western markets for those vital exports.

Another factor is long-term economic planning aimed at sanctions-proofing the economy since 2014, which explains why Russia’s banking system didn’t skip a beat after the war started, and domestic payment systems like Visa and Mastercard continued working domestically even after the parent companies pulled out of Russia.

Yet another is import substitution – a very controversial subject in Russia – in which state support and some degree of market innovation enable Russian businesses to generate local replacements, which may prove acceptable even if they are somewhat inferior to the sanctioned goods.

But it is parallel imports where the big Western brands get through sanctions. Last year Russia’s Ministry of Trade approved the import of over 100 categories of goods with no need for permission from the companies that produce them.

Russian distributors order goods from companies located in countries that don’t participate in the sanctions regime, such as Turkey, Kazakhstan, or Armenia, which buy the goods and send them on to Russian customers. Circumventing the old supply chains has become a huge business, estimated to be worth around $20 billion in the second half of last year, which somehow retains a semblance of legality.

Sometimes that legality can be stretched thin, as in the case of “Avatar: The Way of Water” playing in “film clubs,” about which big film distributors expressed shock and denied involvement. “This is a violation of the law of the Russian Federation and all international copyright conventions,” Olga Zinyakova, president of Karo, Russia’s leading chain of cinema houses, told journalists. No one has publicly explained how the quality prints of the film arrived in Russia.

But many parallel imports are more transparent. Stanislav Mareshkin is sales director of the Magna Group, a St. Petersburg-based logistics company that has pioneered the rerouting of supply chains from Europe to friendly countries in Russia’s immediate neighborhood. He says business has tripled since last February, when the war started.

“Many companies that used to work directly with suppliers in Europe and America are now unable to interact with them at all,” he says. “Everything is broken and blocked. So, people are looking for new ways. We were able to find alternative routes rather quickly, through Kyrgyzstan, Belarus, Armenia, and other countries. We now offer our customers fast delivery, including customs clearance, legal advice, insurance, and certification. When trucks with Russian and Belarusian license plates were banned in Europe, we figured out how to switch to alternative means of transport. Everything can be done.”

“A much more dynamic system”

Dr. Timofeev argues that it’s a mistake to look for Soviet-style dysfunctions in Russia’s economy, like empty shop shelves and long line-ups, as some Western observers tend to do.

“Russia today has a market economy, and even state companies have to play by market rules,” he says. “If you perceive the Russian economy as something rigid and static, like the Soviet economy was, then you might expect that it would start to collapse as vital imports are denied. But it’s a much more dynamic system. People have incentives to find solutions, or workarounds, and they often do.”

It also seems likely that the much advertised withdrawal of Western companies from the Russian market may not have been as total as often assumed. The speaker of Russia’s State Duma, Vyacheslav Volodin, said recently that 75% of foreign companies never really left, but rather found creative ways to disguise their continued participation in the Russian market. That appears to be borne out by foreign studies.

In some cases Russian businesses have simply taken over a Western one, and run it pretty much as before. That’s what happened to McDonald’s, whose 847 outlets and vast infrastructure in Russia were taken over by a Siberian entrepreneur and have returned to the market under a new name, Vkusno i Tochka, offering almost exactly the same services at similar prices. Similarly, Starbucks is now Stars Coffee, Baskin-Robbins is now BR and Ice, while KFC is, well, KFC.

In some cases Western companies have paid a high price for leaving. The Canadian mining company Kinross, for example, was forced by Russia’s regulatory agency to sell its lucrative Far Eastern gold mine to a Russian buyer for half the agreed price.

Experts say the damage inflicted by sanctions will show up over time, resulting in demodernization, slowdowns, and loss of productivity.

For example, Russia is mostly self-sufficient in food production, which explains why grocery stores are full of produce. “In the late 1990s we imported about 40% of our food. Now it’s 10%,” says Pyotr Shelishch, chairman of Russia’s independent Consumer Union. “But Russian agriculture faces serious challenges in obtaining seeds, equipment, and spare parts to keep it going. It will be some time before we see if these problems can be overcome.”

Despite present appearances, and the relative success of some stopgap measures, Russia’s effective decoupling from the main engines of the world economy is likely to have lasting negative consequences, says Yevgeny Gontmakher, an economist and former Russian government official.

“The Russian economy, which benefited so much from cooperation with Western companies over the past years, is now going to be on its own,” he says. “They will now have to accept goods at higher cost and lesser quality, and revert to less modern technologies. Overall, we’re looking at a primitivization of the Russian economy.”