Russian market: Winter is coming

As the economy feels the pinch, he reveals concerns about state interference, Russia´s ability to manage in the face of challenges- and “self censorship” within the business community.

Almost two months on from the most stringent sanctions yet imposed by the US and EU, Russia is starting to feel the chill. Frozen out of credit markets, shunned by investors as well as a falling currency, there is a growing sense that the political situation in Russia is now severely hampering the countries economic prospects.

Speaking from his Moscow office, Alexander Pechersky, a Russian markets expert acknowledges that things are getting tough:

“The economic situation is definitely not very good. Our economy is running at near zero growth.  A lot of internal players and investors are cutting down on large investment due to political uncertainties- they are not taking any important decisions.”

Uncertainty surrounding the future impact of sanctions both at home and abroad has seen a mass exodus of capital from Russia this year. An estimated $95 billion has left the country, but Mr. Pechersky notes that while the outflow is a concern, there are those who speculate that the current state of flux could be an advantage, especially considering the devaluation of the ruble.

“First of all, I wouldn’t say that our foreign trade and exchange rate –even the devaluation of the ruble- is completely negative. If we look at the global competitiveness of Russian manufacturers, devaluation has actually given them some advantages.”

While the sanctions are having an effect, Pechersky notes that Russia was scarcely a beacon of economic efficiency before the beginning of the crisis in Ukraine:

“To understand the Russian economy, it is important to see that the basic economic preconditions before the sanctions and the Ukrainian crisis were not that good in several sectors such as energy, construction and transportation.”

Such conditions have served to dampen optimism for investors operating in Russia, although there are unlikely to be many complaints voiced publicly.

“..If you are doing business you understand that is better for you not to be involved in politics because if your views are not in line with the general line you might have some problems. It´s a form of self censorship.”

That reticence about Government oversight in the economy extends to foreign investors who are eschewing the opportunity to come to Russia, with myriad concerns about the conditions of doing business once they arrive. The state is currently in the middle of an action which has effectively halted McDonald´s business in the country. Such arbitrary interference in foreign companies is undoubtedly acting as a deterrent for foreign firms. In addition, the continued presence of state companies in large sectors of the market is making life increasingly difficult for foreign firms.

When asked about the biggest deterrents for foreign firms, Mr. Pechersky noted

I’d say the unpredictability in the application of the law. When we understand that for political reasons, the law and how it is applied to different enterprises might change. In many cases, you cannot rely on independent judicial procedures….In many sectors we have still a lot of national companies which are either government related or they have quite significant local positions. In the face of sanctions and isolation, Russia will not allow international players to evolve fast enough in the Russian market.”

Despite these concerns, Pechersky asserts that Russia can still be a good place to do business for those willing to think strategically.

“Despite all the sanctions, from a long-term perspective, Russia will remain one of the largest European economies and if you have Russia on your strategic map you should adapt your strategy to the current situation and try to build a local presence here. Otherwise, you risk not being present in the market. I have a good example: in dairy products, French manufacturer Danone is present in the Russian market. It lost a lot of money due to the sanctions, but now they are seeking opportunities to start production here. If a business wishes to sell here in the long term, they should try to think locally.”

 

 

 

 

 

 

 

About the Author

Ana Fuentes
Ana Fuentes is The Corner Editor-in-Chief. Currently based in Madrid, she has been a correspondent in New York, Beijing and Paris for several international media outlets such as Prisa Radio, Radio Netherlands or CNN en español. Ana holds a degree in Journalism from the Complutense University in Madrid and the Sorbonne University in Paris, and a Masters in Journalism from Spanish newspaper El País. You can contact her at: anaf[at]thecorner.eu

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