Implications for business

We have tried to highlight the most important aspects and trends that will affect the business in the medium and long term, and may become the cause of revision of the companies’ strategic priorities. Also, we provide an analysis of the attitude towards "sanctions war" in Russia.  

1. Reduction in the availability of financial resources

Investment climate in Russia despite a lot of optimistic allegations was not very favorable even before sanctions were imposed. It can be proved by significant investment outflow in 2012-2013 (54 and 61 billion dollars respectively according to the Bank of Russia). Now, after sanctions took place and the prosecution of Russian oligarch Yevtushenkov was announced, we can expect that the majority of foreign capital will outflow.

Certainly, the sanctions were imposed only on several companies; however, in fact, the significance of those companies in the economy is huge. It is true to say that it will be difficult to attract western capital even for those companies that were not affected by sanctions. Apart from that, such measures will mean the increase in the country risk rate, which will affect all borrowers in Russia. Therefore, foreign banks, not only American and European, but also Asian ones, will have to either deny working with Russian clients or increase interest rates.

The above-mentioned facts mean that companies will have to look for options in Russia, where limitations are set by major financial institutions. While central banks of other countries keep interest rate around 0%, Central Bank of Russia sets it at 8%.

Thus, the cost of financial resources at government banks increases and there are no signs of positive changes in the near future. So, Russian companies lost the access to cheap capital and, partly, to technology, which is especially important in capital-intensive industries. The weak position of Russian companies may be one of the competitive advantages for foreign companies that operate in Russia. A more detailed advice on how EU and US enterprises can response we be covered in the Recommendations part of the paper.

2. Market shrinkage

The increase of private demand as well as high oil prices was one of key factors of economic upturn. The growth rate of private demand started declining in 2013 when it amounted to 4% versus 6.5% in 2011-2012. It was not expected that in the first half of 2014 it will be 0.5%, because the effect of sanctions was minimal.

Formerly, the growth of demand fueled consumer lending, but now it provokes anxiety. Some experts state that 58% of Russians consider their loan liabilities acrippling burden”. On the one hand, the percentage of loan payments (portion of credit payments in monthly income) in Russia is lower than in Europe. On the other hand, consumer lending cannot keep its growth rate as the interest rates go up.

The acceleration of investments outflow and the decline in the trust in the Russian economy lead to the weakening of the ruble and, consequently, to the rise in prices for the majority of goods. Additionally, the food embargo speeds up inflation.

The real disposable income of the population goes down and it is not anticipated to grow in the near future. It is accompanied with the decrease in lending and the availability of financial resources. That is why the fall of demand is especially unfavorable for Russian companies focused on national market because they will also experience the increasing cost of financial resources.

3. Import substitution

The government was concerned about the slowdown in the economy and proposed import substitution as a priority before any sanctions were officially imposed. It means that the imported goods will be gradually replaced by the ones produced in Russia. The state will provide local manufactures with support and incentives. Ministry of Industry and Trade was placed in charge of the development of a special programme “how to return the market to the domestic manufacturers”. Now import substitution can accelerate, and this is considered as almost the only advantage of the “sanctions war” for the Russian economy as a whole.

Additionally, taking into account the geopolitical situation, investment outflow and the necessity for import substitution, the government will have to increase the amount of investments into the economy. As there is a clear directive to give priority to domestic products (it is planned to limit government procurement of imported goods by 20% in the future), it should be taken into consideration.

Government investments will partly compensate the decline in the availability of financial resources and it will definitely stimulate business as a whole. It can also be the key factor for the growth of Russian companies when the share of foreign companies on the market can decrease.

4. Change of collaboration vector

As we have already discussed in a previous section, in the context of sanctions, the countries that did not impose any will benefit. The longer the “sanctions war” will last, the more Russian companies will look for partners not in the West, but in the East. A lot of firms have already started looking for not only equipment suppliers but also for banks and investors. Therefore, we can expect the partnership relations with China and other eastern countries will become stronger.