How Russian businesses are skirting sanctions

TekhnoVita, a manufacturing equipment distributor based in the Russian city of Samara along the Volga River, is fighting for its survival. Ms. Varzhitskaya’s next stop was Kyrgyzstan.

“No one is putting their hands down or giving up," the 32-year-old said. “Maybe the quality of the products we bring in will be worse and the prices will be higher, which will affect inflation and prices, but the jobs are still there."

Russian businesses are scrambling to find new suppliers and changing products and processes to adapt to sanctions imposed by the West following Russia’s invasion of Ukraine in late February. Shippers are rewriting routes, and importers are struggling with delays.

“Yes, war is bad and people are dying, but how do we influence this?" Ms. Varzhitskaya said. “We have to work, we have to feed our families, and everyone is trying to find ways to solve this that will satisfy everyone."

Sanctions are expected to push the Russian economy into a deep recession, further stressing the country’s businesses. The country’s gross domestic product is projected to fall by 8.5% this year, the largest decline since the early 1990s, according to the International Monetary Fund. Data released last week showed that new car sales, a key indicator of consumer sentiment, sank by over 78% year-over-year in April, according to the Moscow-based Association of European Businesses.

Inflation has surged in Russia and many foreign-owned businesses have shut down. But store shelves have largely remained stocked and job losses have been modest. The situation is likely to worsen as sanctions take hold and businesses burn through inventories.

IMZ-Ural, the iconic maker of sidecar motorcycles used by the Red Army in World War II, shut down soon after the war began. “We were hit from both sides," Ural’s Chief Executive Ilya Khait said. “We couldn’t get anything in and couldn’t get anything out."

Ural exports 95% of its production and imports some 80% of its components, including shock absorbers from Italy, fuel injectors from Japan and brake parts from Spain.

The company is moving production, along with some of its150 employees, from Irbit in Russia to a new assembly line in Kazakhstan, around 360 miles southeast. “It is ambitious but we’re hoping to restart production by August," Mr. Khait said. “As it looks right now it is unlikely that we will go back to Russia but we have to adapt, no other way around it."

For the companies that can buy supplies, actually getting them is another challenge. “Old routes that were drawn in pencil on maps are becoming practical," said Mihail Markin, head of business development with Moscow-based logistics company Major Cargo Service.

The company, which works with more than 2,000 clients in Russia, has seen imports fall 50% to 70% depending on their origin. Sanctioned goods aren’t getting in, but deliveries for other products such as clothing and appliances are slowly ramping up because the ruble has stabilized and logistics companies are finding workarounds, he said. Russian companies that rely on sanctioned parts are also starting to place new orders after switching to suppliers in countries that remain friendly to Russia, Mr. Markin said.

The supply routes are often more complicated, longer, more expensive and have lower capacity than in the past, he said. Clients want more details on the journey their products will take. “They want to look at the map and for you to tell them exactly how much each step will cost," Mr. Markin said.

Instead of using trucks that can’t cross the Russian border, cargo is now loaded onto ships in Italy or other South European ports, taken to Turkey, reloaded onto Turkish ships that deliver it through the Bosporus to the port of Novorossiysk, Russia, and picked up by truck there, Mr. Markin said.

Another solution is to load cargo onto trucks in Europe, transfer it onto trains, which can cross the border, to move it to big cities and put it back on trucks to get to its final destination, he said.

Costs for imports from Europe have roughly doubled, he said, and shippers no longer offer long-term prices. “Here’s the price till the end of the week," he said.

Asian routes are picking up the slack, with the port of Vladivostok in Russia’s Far East becoming much more active, and the Trans-Siberian Railway getting loaded up, he said. Russian trucking companies are going to China and other Asian countries, Mr. Markin said. Overall, the cost to transport from China has declined since February, he said, but delivery times are less predictable.

Demand for Alta Roma coffee has soared in Russia as other suppliers such as Lavazza have pulled out. But getting the coffee into the country is slow and expensive, said Francesco Capobianco, co-owner of the brand’s parent company, Russian-Swiss coffee roaster Almafood.

Alta Roma imported between two and three containers in March and in April, down from the typical 10 a month, Mr. Capobianco said. One container was stuck in Istanbul for 20 days in March. Truck shipments from Europe, meanwhile, cost the company about 12,000 euros per container in April, up from 4,000 euros before the war in Ukraine, he said.

At current rates, the company’s inventory will run out in June. If coffee supplies don’t improve, Russians “will drink tea, or chicory, or barley, or vodka," Mr. Capobianco said.

When the ruble tumbled following the invasion, healthy foods maker Fit o’clock saw a sharp increase in prices. The cost of zucchini rose nearly nine times and thermal labels used for packages jumped nearly seven times, said Elena Tihonova, the company’s co-founder.

The company replaced some of the cardboard packaging with stickers, which cost 40% less. It cut the middlemen from some transactions, dealing directly with Indian and Turkish suppliers of chickpeas and lentils, which it uses for its meatless cutlets.

It faces a bigger challenge with its production machines, most of which came from Germany, Italy or Japan. Those require maintenance and Ms. Tihonova doesn’t know what happens if one of them breaks down. Chinese alternatives are of inferior quality, she said.

“It is like transferring from a comfortable BMW to a Chery," the Chinese car brand, she said.