Nyet effects: Russia’s resilient economy

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Hello, and welcome to the Intelligence from the Economist. In New York, I'm John Fassman.

And in London, I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Miami isn't just the best place in America to get a Cuban coffee. It's more of a Latin American commercial hub than any city in Latin America. And continuing political upheaval further south is only going to make Miami more important to the region.

And if you're driving through France this summer, you may notice an unusually large number of bridges under construction. They're not for cars or even for people at all. They're built for wildlife to try to reduce the number of animals killed by drivers. But first, More than 100 days into the war in Ukraine and the biggest sanctions program ever imposed on a major economy is still being tightened. America and Europe have frozen Russia's currency reserves, while global businesses have left the country. 32 years after the first McDonald's opened in Russia, the franchises were sold to a Russian oligarch. On Sunday, the company began operating under a different name. On June 3, the European Union joined America and Britain in placing a partial embargo on Russia's oil exports. The EU also cut off Sberbank, Russia's biggest lender, from the Swift Interbank messaging system. All of this is intended to bring economic pain to the Kremlin and to cripple the Russian war machine. But the Russian economy has proven surprisingly resilient.

A number of months into Russia's invasion of Ukraine, we're starting to get a clearer picture of what's happening to the Russian economy.

Callum Williams is the Economist's senior economics correspondent.

And I think that it's, by most measures, doing better than people had expected.

Callum, the last time we talked, it sounded as though Russia had sort of sanction proofed its economy and that it was weathering the storm. It kind of sounds like that's still the case. How much better is Russia doing than people expected?

When sanctions were implemented in early March, and when all those companies said that they were going to either suspend their Russian operations or leave Russia entirely, there was a feeling that Russia was going to enter a very, very serious. An immediate financial crisis and recession. And you kind of got the financial crisis bit for a few days, a few weeks maybe, but that subsided fairly quickly. In terms of the real economy, the Russian economy has continued to hold up, actually fairly well. Yes, there was a definite slowdown in activity in March and April, but if you look at the very, very latest figures, by some measures now, in May, Russia actually grew faster than both the US and Germany. Of course, that's partly to do with the fact that the US is slowing, as is Germany, but it gives you a sort of measure of how much better Russia is doing compared to what people might have thought.

Does that mean sanctions have failed?

I don't think there's any question that sanctions have had an effect. Clearly, the Russian economy is slowing quite sharply. There is almost definitely going to be a recession, although I don't think it will be anywhere near as deep as some forecasters expect. The sanctions that are in place have clearly had a big impact on the banking system. If you look at the number of banks, say that a cutoff from Swift, it's very high. There's little doubt now that for a long time Russia is going to be practically uninvestable, both in terms of private companies coming in and setting up new shops and so on, and also in terms of funding the government. The government looks likely to default fairly soon. So in a formal sense, the sanctions that have been implemented have succeeded. But I think really the question to ask is another one, which is, have there been sufficient sanctions implemented? And clearly the big thing where there have been many fewer sanctions relates to export of oil and gas. Russia is still exporting billions of dollars worth of oil and gas A month. It's accumulating vast amounts of foreign currency via those sales. And that in turn allows it both to support its economy and continue to buy imports, but also to support its military.

So, Callum, Russia is selling lots of oil and gas at high prices. Who's buying?

The question of who's buying it is a tricky one because there's who's actually doing the purchase from Russia and then there's who ends up actually using the oil and gas. It's certainly the case that China appears to be buying a lot more Russian energy. So in May of this year, China Chinese imports from Russia were roughly double what they were the year before. There's been a lot talked about India buying Russian oil. Then there's the question of if that oil is then rerouted to Europe. And Europe, of course, itself continues to rely very heavily on Russian gas. So, in a sense, everyone's involved in this.

And how is this impacting the Russian people? How are they feeling about things?

Consumer confidence is not high, but it certainly isn't as low as you would expect. And you might make the case that consumer confidence is actually higher in Russia than it is in most rich countries like America, which sounds completely insane when, yes, inflation is very high in the U.S. and that's bad, but Russia has been completely ostracized from the rest of the world. If you look at business confidence, also, the number of companies in the manufacturing and mining sectors who think that sales in the next few months are going to improve is much higher than the number of companies in those sectors who think the sales are going to go down. Confidence is fairly high. Now, there is a case that as the war drags on, people will lose that kind of rally round the flag effect, and that did happen to an extent following the invasion of Crimea eight years ago. But it's hard to make the case that there's been this massive shock to the Russian economy. The other thing to bear in mind is that you can still find lots of instances where there are Western goods and services that are available to Russians to buy.

But I would imagine the life of a middle class Muscovite in terms of what they can do, how much they're saving, has changed a great deal. What do you think life looks like for that class of people these days?

I think it depends on where you are in the income distribution, really. So prices in Russia have gone up by about 10% since the beginning of the year, which is much higher than in most other countries. So for people that are on fixed incomes, pensions or whatever, that's really bad, I think, for people, particularly in Moscow, who are more sort of Western leaning, they've been really cut off. They've been cut off from so many of the fruits of capitalism that were both promised and delivered from the 90s onwards. So the psychological shock of that is significant. But nonetheless, I remain convinced that the macro effect of that will remain a lot smaller than people think.

And why is that?

Fundamentally, it's to do with what kind of economy are we dealing with here. My sense is that there is a sort of societal resilience that you wouldn't have found in other countries. So we have a tendency, I think, to, as Western observers, to imagine what we would think if we were in that position and therefore to assume that there would be instant economic collapse. But I just don't think that really describes the kind of place that Russia is. And so I think if you consider all of the different aspects of the economy, the fact that it's heavily dependent on energy, the fact that it still is able to continue selling stuff abroad, the fact that the economy is fairly self sufficient by the standards of most other countries, the fact that it still has large inflows of foreign currency, all that means that I think reading across from what we would expect to happen in somewhere like the UK or France or the United States to Russia is the wrong approach.

So it sounds as though Russia is humming along better now than most people expected. How long do you think this can last?

It remains to be seen exactly what will happen whether Western countries decide to stop or severely reduce their purchases of Russian energy. That's obviously one thing. And looking slightly longer term, one argument you hear a lot is that there's been this huge wave of emigration from Russia and it tends to be the kind of Western educated, smart computer scientists who are fleeing and therefore that will kind of drain away all their expertise on the Russian economy. It's actually very hard to get a sense of how big of a phenomenon that really is. Then there's the question of investment, the kind of fresh new foreign investment, building factories, building hotels from abroad, will surely come to a grinding halt. The government will also face higher costs when it comes to borrow. So I think this means that the longer term outlook for the Russian economy, which wasn't great to begin with, to be honest, partly because of demographics, looks even worse than it did.

Callum, thanks so much for joining us.

Thanks, John.

Foreign.

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So I spent some time wandering around Domino park in Miami's Little Havana, where there were a lot of Cuban seniors passing their day.

Alexandra Sewich Bass is our Senior correspondent for Politics, Technology and Society.

Whenever you walk in Little Havana, you can hear live music. So even in Domino park, there was a background of live music coming from a nearby restaurant, people dancing, people playing musical instruments, and then you have cars whizzing by. It's a very lively atmosphere and a place where people go it was the middle of a weekday afternoon, but it was still fairly populated with people enjoying their days. I was interested in how Miami is not just an American city of growing importance, but also a commercial hub for Latin America that is only to become more significant in the years ahead. It's a very different type of city than other American cities. More than half of Miami Dade County's residents were born outside of the United States, and it has the largest proportion of immigrants of any metropolitan area in the country, around 70% of the 2.7 million residents in the county are Hispanic.

And you say it's a commercial hub. What do you mean by that?

In Miami Dade county, which comprises the city of Miami and about three dozen municipalities, around 1200 multinational corporations have set up the headquarters of their Latin American operations. So that's quite unusual to have perhaps a Latin American operation out of Miami. But that's a testament to how important the city and the county are for regional affairs and commercial operations. The county's GDP was around $172 billion in 2019. That's roughly as big as the combined GDP of Ecuador and Uruguay. Miami's airport handles about 43% of all flights from the United States to South America, and it's become a meeting place for the region. So one person who I spoke to for the story said it's easier to commute from capitals in Latin America to Miami than between the capitals in Latin America. So you see that as the place where people choose to go for conferences to negotiate deals and the like. It's Miami that's on people's minds.

So which Latin American countries in particular are we talking about? Because I certainly know that Cuba has a strong representation in Miami.

That's right. After the Cuban Revolution in 1959, many Cubans who could afford to left the island and flocked to Miami. After that came the Nicaraguans who were escaping a socialist revolution in the 1970s and the civil war that followed it. And then you've had Miami representing wave after wave of political instability and groups of people who were wanting to leave their country. So from the mid-1990s, Colombians came in droves, fleeing drug related violence. And you've seen many others recently as well, following elections in Latin America, choosing to invest in Miami real estate or come there full time. I spoke to Jorge Perez, the boss of a property firm, related, who explained why there's such a pull.

There's two reasons for the Latin Americans to come over here. If the countries are doing really well and there's a lot of money, we get a lot of buyers because now they have money and they want to have a pied aur or a condo or whatever here. At the same time, when the countries are doing poorly because of political economic upheavals, we also see a lot of migration because people want to take their money out and put it in a secure investment. And Miami has seen the largest amount of investment coming from everywhere in Latin America, from Mexico in the north, all the way to Argentina and Chile in the south.

In short, all these groups have prospered and contributed to Miami's prosperity.

And how is it that they're contributing to Miami's prosperity then?

Apart from bringing an influx of money and investment? As Jorge told me, these are people who are starting businesses. They're aspirational.

The people that actually leave their countries, whether they're rich or poor, are the most entrepreneurial people in those countries. It takes a strong person to say, you know, I don't even speak the language, but I'm getting out of here and I'm going to start working construction or opening up a little restaurant. So I think we create an entrepreneurial class, particularly of small businesses, that has helped Miami greatly achieve its economic success. Additionally, I think they have helped tremendously with the huge labor shortages that we have here.

And you mentioned that historically the immigration into Miami has kind of come in waves.

That's right. I think that from where we sit Today, there's an argument that Miami is only going to become more important to Latin America going forward. The political upheaval in Latin America that drives people to Miami shows few signs of abating. So right now, you're seeing a lot of Haitians and Cubans escaping gang violence, poverty, political repression. They're attempting to make their way by boat to South Florida. Since October. October 2021, the US Coast Guard has intercepted about 3,500 Haitians, which is more than the previous four years combined. Following the elections of leftist leaders in Peru and Chile last year, the number of people moving from those countries has also increased. I spoke with the owner of a furniture company who's based in Miami who says that immediately after those elections, the number of Peruvian and Chilean clients at his store in Miami went up. If more leftist leaders are elected in Latin America, it seems likely that we're going to see more conserv. Conservative types of people fleeing with assets or fleeing political repression, voting with their feet and those who are able to afford to, and even many who are not choosing to come to Miami.

And, Alexandra, I feel like every time we talk about mass movements of people, we also talk about the potential political effects of that movement. And Florida is famously a big election swing state.

That's right. Florida will be getting a lot of attention in the midterms. And South Florida and Miami, Dade county specifically, it's a very competitive, important area. But we're seeing Republicans gain ground in South Florida today. Our hearts are filled with hope because.

Of the determination of millions of everyday Venezuelans.

Trump spent a lot of time in South Florida.

The people of Venezuela are standing for freedom and democracy, and the United States of America is standing right by their side.

And his policy on Venezuela really activated the Venezuelan community and brought support from Venezuelans, Colombians as well. And Republicans have been very skillful in their messaging, labeling Democrats as socialist. And that has really animated the passions of a lot of Latin Americans who do not want to see America follow down the same path as their home countries that are no longer hospitable to them. And so we are seeing a lot of attention, rhetorically and in practice, being paid to South Florida. And that attention is only going to continue as we see more outreach to Latin Americans and members of the diaspora community.

Alexandra, thanks very much for joining us.

Thanks, Jason.

Summer signals a migration in France.

As.

Those in the north pack their cars for a holiday by the country's southern beaches. This year, though, some may find their journeys a little delayed.

I was driving down the A6, which is the main motorway that links Paris to the south of France. And I noticed there were a lot of roadworks, a lot of bridges under construction. And when I looked into this, I discovered that they weren't building roads over the motorways for cars or for pedestrians or even bicycles, but actually for wildlife.

Sophie Petter is the Economist's Paris bureau chief.

These are what are known as green bridges or wildlife crossings. And they're structures built over the motorway, designed to reduce roadkill and help animals roam more freely from one side of the motorway to the other. So think of hedgehogs or badgers, wild boar, even weasels, some deer, and anything else sort of furry or spiky that might need to cross.

So you noticed them on this trip. But green bridges are not new as a concept, right?

Well, they're not. It turns out that they were actually first built in France in the 1950s. And one company that runs motorways built its first near Fontainebleau in 1960. But the early versions that they built were pretty basic. And today's models are quite different. The one that I saw being constructed near Chagny in Burgundy, they're quite deluxe models. You have a 25 meter wide structure with a pond for frogs and a amphibians. You have opaque wooden fences on the side to shield those creatures from the glare of headlights. And then you have little piles of rocks and branches and landscaped vegetation. So it's all designed to encourage the wildlife to cross, as if they didn't know there was a motorway underneath them. And pedestrians, of course, are banned.

It sounds wonderful. Do they actually make a difference? Do they save animals?

Well, it's very hard to tell. In Europe, an estimated 29 million mammals are killed on roads each year. So we know what the destruction of motorways results in. But we don't have any data to prove how many are actually saved by these eco bridges. But they are used. There was one study done by Vinci, which is a motorway operator in France. They measured and monitored wildlife use over their eco bridges over a period of four years. And they found that each year each bridge was used on Average by over 1,000 red deer, 150 wild boar, over 100 roe deer, and then 48 foxes, eight badgers, four weasels, one hedgehog, one wolf and more. So they do make a small difference, but they aren't by themselves, obviously, single handedly saving France's biodiversity.

Right. So even though we're not sure how effective they are, more of them are being built, right?

Yes. I mean, this is what's so astonishing. In France at the Moment, one company, APRR, is building itself 19 new green bridges over motorways in France by 2020, and it's spending a total cost of over 80 million euros. So these are not cheap to construct. And it will bring its network of green bridges in France up to 119. And that's just for one motorway operator. I think the reason they're doing that is clearly to green the reputations and to keep their operating concessions, which are awarded by the state. And it's not just in France. Governments have been building eco bridges in other countries in Europe as well. In fact, Sweden is putting up something that they call Reno ducts to help migrating reindeer. Germany's built over 80 of these wildlife crossings. And the Netherlands have built the longest green bridge anywhere in Europe. And green campaigners obviously approve. But they do point out that a more effective way to protect wildlife would just be to reduce car use in the first place and to limit the construction of new motorways.

Sophie, thanks so much for joining us today.

It's been a pleasure.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple podcasts and you can subscribe to the economist@examiner.com intelligenceoffer we'll see you back here tomorrow.

Sam.