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Russian Cars and Booze Feel the Putin Effect

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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Some of the events surrounding Russian President Vladimir Putin's standoff with the West -- a sharp ruble devaluation, a ban on imported goods -- should have presented a big opportunity for one group: Domestic producers of consumer goods. So far, though, they haven’t benefited much, a failure that might reflect a deeper economic malaise.

In the past, Russian producers have proven adept in crisis situations. When the ruble crashed amid the financial turmoil and government default of 1998, many economists thought the country was in for a long slump. But with imported goods suddenly more expensive in ruble terms, domestic makers of everything from cars to booze seized the chance to grab market share, a shift that combined with rising oil prices to drive a rapid recovery. In the year after the default, the number of cars produced increased 35 percent, according to data compiled by Bloomberg. Production of vodka and other hard liquor rose 63 percent.

This time around, the import substitution isn’t happening. Despite the added advantage of Putin's ban on a broad range of imported comestibles, domestic production of food, beverages and tobacco was little changed in August from a year earlier, when the latest devaluation began. The same was true of vodka. Automobile output declined 31 percent. Here's a chart comparing production of cars after the ruble devaluations of 1998 and 2014:

And here's a chart showing the same for booze:

So why the poor performance? One partial explanation may be that the price of oil, Russia's major export, recovered in 1999 but has stayed low during 2015, taking a bite out of domestic demand.

But there's another important factor: Putin. By tightening the government's grip on the commanding heights of the economy and severely limiting individual freedoms, he has made the country a much less hospitable place for entrepreneurs and skilled managers. In doing so, he may have actually impaired the country's economic dynamism. If that's the case, Russia, which is heading into a deep recession, will have a very hard time recovering.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net