Major Russian industries break down under weight of sanctions

Key sectors of Russian industry are breaking down under the weight of import and export bans, deficits of spare parts and materials, the closure of foreign markets and the freezing of financial transactions. Reports are emerging of problems in everything from trucking to the production of milk cartons, as companies struggle to sustain operations.

On Tuesday, Russian lead producers announced they are in danger of shuttering factories due to the absence of overseas buyers and a decline in domestic demand fueled in large part by a sharp contraction in the auto industry. Even with some enterprises having already cut production by 30 percent over the last several months, warehouses are full with unsold lead.

European consumers previously accounted for nearly 50 percent of all Russian lead sales, and they have effectively been absent from the market since March due to logistical and financial problems brought on by Western sanction. As of July 10, EU purchases of Russian lead will be entirely prohibited. Lead companies also say they are encountering major obstacles getting the government licenses necessary to divert production to Asian countries.

At an industry-wide conference held on June 7, Russian freight companies declared they are at risk of bankruptcy due to a steep decline in prices, high costs for replacement parts, and an inability to purchase new vehicles from foreign suppliers. In April, the EU barred the country’s trucks from entering its soil.

Domestic demand is down, too. Between March and June 1, corporations saw freight prices drop by 13.2 percent on average for the top 100 destinations, with some major routes experiencing two to three times that decline. The fee charged for transporting goods between Moscow and Saint Petersburg, Russia’s two largest cities, fell by 34.4 percent during those three months. Whereas previously, 1 million Russian trucks made 300,000 daily shipments, now 1.1 million trucks are making just 180,000. Air cargo is also down.

The government is aware of the problem, with the minister of transport acknowledging in May that sanctions “practically broke all the logistics in the country.” It has made grants and low-cost loans available, but companies say that is not enough. They need help with the cost of fuel, and they are overburdened by taxes. In addition, while the ministry of industry and trade has approved “parallel imports”—branded goods that are brought into the country without the permission of the trademark owner—of Scania and Volvo products, they have not done so for Mercedes, MAN, Iveco, DAF and Isuzu. As a result, the rubber necessary for truck repairs is, for instance, in short supply, reports news outlet RBK.

Russia’s ports are also in crisis. In March, cargo turnover in Saint Petersburg, one of the country’s largest harbors, fell by 41 percent in absolute volume. The government has responded by cutting rental rates that shippers have to pay for the use of port facilities, but experts say that without an increase in demand the problem cannot be overcome.

There are ongoing discussions over the creation of new maritime links between domestic and international ports, including some in Iran. But putting such plans into action requires significant investments, as well as time, because in many cases the infrastructure to send or receive the kinds of cargo that would be borne by Russian ships does not currently exist. A looming EU and UK ban on insuring Russian maritime transport will further complicate the situation.