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 three months on from the most stringent sanctions yet imposed by the US and EU, Russia is feeling 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 country’s 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. The Government has sought to address the issue by offering an amnesty to Russians with money stashed overseas. Over $100 billion has left the country in 2014 and Mr Pechersky is sceptical about the impact this latest measure will have.
“I don’t really believe in the efficiency of this amnesty. I think this is a measure for the media and to gain some headlines.” While the outflow is a concern, there are those who speculate that the current state of flux cold be an advantage, especially considering the devaluation of the ruble.
“Import substitution will become a main driver of the economy. There is a new opportunity for local players in the domestic market to gain an increased market share.”
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.”
That is despite the fact that inflation has reached 9% this year alone, and is forecasted to hit double digits in 2015. While this is unquestionably a problem for the country, Mr Pechersky doesn’t envisage the issue having any major impact on Vladimir Putin’s popularity in the short term.
“In order for that to happen, we would need to see very high inflation over a number of years. The perception of the inflation in country is very closely linked with the wider political situation I the country. It is something that may have an effect in a few years’ time, but at the moment it is unlikely to have a great effect. What is more likely is that local players come to the fore by consolidating their position through import substitution. The Government will really try to support that.”