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Beyond Russian Oil, Gas and Agro is a Country Hard at Work

These lucrative Russian industries are totally ignored by the west, but there is colossal room for growth.

This post first appeared on Russia Insider

While the investing world focuses on guesstimating the portents of the latest US Federal Reserve show or the thermonuclear game of chicken with North Korea, some countries are making steady advances without a lot of fanfare.

When outsiders speak of Russia, it is as if the ghost of Soviet Union never imploded over a quarter century ago, and is still seen as some evil empire threatening the PC lifestyles of the globalized rich and famous. The time is well past to update and adjust such dusty viewpoints. From a business perspective, when reading about Russia in the financial press one rarely comes across anything about the internal dynamics at work within that nation, it is either oil and gas, military hardware or wheat exports that capture the attention of the ‘experts’. Shedding some light on other many depths of life and business is just common sense, and necessary when evaluating any country. I’d like to remind you what Ralph Waldo Emerson once noticed, that “Common sense is genius dressed in its working clothes”. It fits today’s common sense approach to business and life in Russia.

It might surprise some to hear that in the first six months of 2017 non-oil and non-energy exports from Russia amounted to the equivalent of 57.2 billion dollars in several currencies.  That is over 18.6% more than the same period last year and this positive trend is continuing. Good growth is happening with foodstuffs +19.4%, precious metals and gemstones +15%, textiles, clothes, shoes + 11.6%, glass, ceramics, and quarried products +10%.

A particularly interesting indicator is the export growth of Russian textiles, clothing and footwear. These light industries pretty much died when the Soviet Union dissolved, and were buried by cheaper imports due to the high ruble rates in the years leading up to 2014. Since then this market is building up a lively head of steam and the demand for Russia’s products is growing. While Russian companies has been used for two decades as cutting and sewing jobbers and subcontractors for the garment industry worldwide, the fabrics used were almost exclusively imported. Not so today as the rebirth of Russian textile factories is happening throughout the nine time zones of the country. Production of fabrics in 2016 alone grew by almost 20%, which resulted in over 5.3 billion square meters produced. Growth has been strong in several clothing related areas such as suits, jackets, trousers, shorts, coats, hats, leatherwear and the like.

Just for the fun of it, I have listed a few websites, in English where available, which give a feel for what is happening in these largely unreported companies, and in these very early days of long term growth:

and (simply because this micro-mini design and manufacturing small business is so dynamic, high quality, and creative, yet so far below any commercial radar – but I find inspiration in its guts, vision, hope and spirit!).

All the above examples have shown growth in the area of 10% pa. One example, Gloria Jeans, who until 2014 leaned towards transferring production and its headquarters to Asia, today the company, is increasingly investing in production in Russia. This year the company announced its may invest 8 billion rubles towards new production capabilities in the Rostov region with prospects of increasing investment to 20 billion rubles.

Leather tanning and production of leather goods in Russia has grown 8% this past year, and so far in 2017 it looks to approach 10%.  Russia now makes leather goods for aviation, furniture, clothing and the automotive industries.  The leather industry has become quite competitive with close to 35% of production going to export. Footwear, both leather and textile, have grown by about 6% in 2016 and look to expand sustainably to 8% and more per annum going forward.

One factor, which has undeniably helped light industry to export, is the exchange rate.  A weak ruble reduced the cost of production inside the country; counter-sanctions on imports re-opened the playing field to local ‘made in Russia’ manufacturers. This in turn reinforced investor optimism leading to increased investment to modernize or create new state-of-the-art competitive enterprises that are actively trying to open and enter global markets. Subsidies by the Russian government also play a supporting role. In 2016, the government allocated 2.5 billion rubles that helped over 100 companies in these light industries. These subsidies included loans and loan guarantees. In 2017, this assistance will probably be about 3 billion rubles.

It is worth noting that since the 2014 fall of the ruble, the overall costs of sewing production in Russia is now lower than in China, and using imported fabrics is less profitable than producing the same or better fabrics in Russia. Same with shoes and clothing where the quality is now comparably better than in China. There is also the growing trend by Chinese entrepreneurs to buy clothing in Russia for onward resale through their established global distribution channels as Russian prices today allow for embedded positive margins.

As of this writing, Russian manufactured clothing accounts for only about 18% of local demand. This is changing very quickly as seen by the dynamics ongoing over the past three years. It does mean that the market can and will still grow to try and meet local demand (a further 75 - 80%), not to mention exporting to markets worldwide. In a later article I will get into some work being done in Russia today with biotechnology to convert some of the unique components found in wheat, flax, corn and other regional crops to produce beautiful, competitively priced and ecologically friendly yarns for textile production. A good synergy taking the economics of things beyond the simple export of raw materials and into the realm of deep processing and broad utilization of crops. Perhaps there is real genius in this common sense approach, and time will show it.

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