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On Balance, Sanctions Have Consolidated the Russian Economy

Foreign сompanies that stayed in the Russian market have benefited too

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This post first appeared on Russia Insider


The author is Chairman of the Disciplinary Committee of the National Association of Corporate Directors in the Russian Federation


In the two years since sanctions began we have witnessed an exodus of many non-Russian companies and expat personnel spooked by strident political tones reminiscent of cold war days, and the economic uncertainties sanctions caused. The net effect has been a shake out of short-term players, benefitting those foreign firms who remained or chose this time to enter the market.

Import replacement was a priority in 2014 and 2015 benefitting mainly agricultural producers. Everything from apples to wines and from beef to pork developed full production cycles in country. The door for non-Russian companies with expertise and experience in production and processing in Russia has opened wide, and a number of European, Asian and other producers are developing business in Russia. GDP from agriculture in Russia averaged 402.35 billion rubles from 2003 to 2016, with an all-time high of 976 billion rubles in the third quarter of 2015. As a result of sanctions farm machinery is set to increase by 35% in 2016, reflecting local market dynamics.

Russian producers and manufacturers have not been idle either. When the first economic sanctions hit Russia, the response was sanctions in reverse. The politically charged draconian decision to reduce dependency on imports and stimulate the Russian economy, were actually taken in Washington and Brussels, not Moscow. Stimulated by a political impasse over world-views, they were comparable to Janet Yellen suddenly raising rates in the US by a full percentage point or more. This common sense but politically risky move dramatically affected the short term market, while strengthening economic viability in the long run.

Sanctions, combined with weaker, unstable oil prices, forced several ultimately positive development, led by a gradual turn away from oil & gas toward development of the domestic market. Lack of access to long-term funds from the USA and Europe as well as capital flight out of Russia, especially in 2014 and 2015, hindered this development, however, in 2016 capital flight was replaced by ruble investments in both production and infrastructure. Unemployment has gradually dropped to 5.3% and is trending lower.

Thanks to the sanctions and worldwide financial stresses, the ruble ranges between 40 – 50% lower in both Dollar and EURO exchanges, stimulating development of export markets, shrinking returns in many countries to the point where negative rates have become the new normal. For better or for worse, returns on the ruble look like they will remain in positive territory for some time. But Russian debt and the Russian economy broadly is a non-issue when compared to most countries. The lower costs and improving efficiencies of doing business in Russia, combined with the steady easing of regulatory barriers and the proximity to Asian, Middle Eastern and European markets make Russia an increasingly desirable business hub in the early stages of a growth curve. That and an incredible array of resources, both human and natural, all contribute to real bottom line advantages.

Among many examples is the automotive industry, where due to competitive costs Hyundai, Volkswagen, Ford and others who manufacture in Russia, now are exporting to Mexico, the Middle East, Georgia and Africa, with an eye to further expansion if logistics and costs are favorable. Textiles, a once dowdy soviet style industry that crashed during perestroika is gathering steam again, without the ‘dowdy’ or the ‘soviet’ and with a growing volume of finished goodsexported globally under known brands. Though it started later, the digital economy in Russia is growing dynamically, with systems introduced in both the public and private sectors, from e banking to streamlined documentation. The Ubers of the world are all here, aware that Russia has one of the strongest e-commerce growth curves relative to population.Ease of doing business in Russia has improved in the past five years from a high in the 90’s to a current 52, targeting the 20’s in the next three to four years.

When I read about Russia’s desperate state of affairs in the international media, or hear it preached from political pulpits, I wonder what kind of looking glass sees such a dismal virtual reality. Where is the threat? Russia is not the evil Soviet empire, it is not interested in playing global missionary or exporting “isms”. The best diplomacy is fair trade, and all it takes is a visit and a willingness to explore reality.


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