Ivanovo used to be the textile heart of Russia, filled with cloth and spinners.
Six hours north east from Moscow, the city used to be the base for textile manufacturer Schujskije Sitzy whose 7,000 employees wove cotton tablecloths and bed sheets.
After the end of the socialist era, the industry and the city dwindled but the town has been revived in recent years by a new textile factory which produces 1,500 tons of fabric every month out of the old Schujskije Sitzy production site.
Roman Kusnezov owns the factory. He invested in equipment made by Trützschler, a global market leader from Mönchengladbach, Germany. Now, the 800 people work there and engineers manage the facility from an air-conditioned control room as if it were a nuclear power plant.
Mr. Kusnezov is proud of the factory he runs, which makes more fabric now than during the 200 years since the company started.
With interest rates on loans as high as 26 percent, local businesses cannot raise enough capital to finance their primary products.
The textile industry struggled after the global financial and economic crisis but should now be a gold-rush mood in Ivanovo. Firms like Schujskije Sitzy, which invested in modern facilities up until 2008, should be benefiting from the weak ruble.
The currency’s exchange rate plummeted by 50 percent compared to the euro and 60 percent compared to the dollar, because of Russian President Vladimir Putin’s Ukraine policy, capital flight and Western sanctions.
This should all be making Russian products more competitive on the export side. Likewise, demand for domestic goods should attract companies as the weak ruble brings up the price of imported clothing while Made in Ivanovo stays affordable.
Although Russia’s economic power is expected to fall by 4 or 5 percent, the textile hub could come out a winner. But the falling ruble also makes raw materials and products bought abroad more expensive. And Western sanctions make financing new investments practically impossible.
Sitzy has annual sales equivalent to €33 million, or $36.5 million and its customers include the furniture giant Ikea and German wholesaler Metro which buy textiles for the Russian market.
Video: Trutzschler’s machines fabricate fabric.
But Sitzy and other companies like it don’t yet see themselves as beneficiaries of the crisis. Mr. Kusnezov enthuses about German production engineering and doesn’t doubt his company’s competitive ability – but he worries about procurement costs. “The price of cotton is decreasing, but it’s not as low as the ruble,” he said.
Mr. Kusnezov depends on German suppliers for replacement parts and chemicals, and the decline of the ruble makes their products significantly more expensive. He reached a compromise with the German producers to avoid having to cancel orders, as other textile factories have been forced to do. “For the sake of quality, we want to keep importing chemicals from Europe.”
Cost pressures are high and not yet offset by growing demand, Mr. Kusnezov said. So far he hasn’t raised prices, he isn’t sure whether the market can take it.
Galina Barikina sells goods made in the region at the shopping mall Rio and she doesn’t think higher prices would be acceptable to her customers. She sells clothes for everyday wear, from striped marine shirts to olive green camouflage shirts – and even baby rompers in military colors. Most items cost less than the equivalent of €1.40.
The army shirts have become fashionable but Ms. Barikina hasn’t seen much of an increase in sales. Her boss has had to hike the prices by a double-digit rate since October. Since Mr. Putin reacted to Western sanctions by introducing a partial embargo on goods produced in the West back in August, the purchase costs have increased for manufacturers across all product groups. “We’ve been changing the price tags so often I can barely remember what things cost,” Ms. Barikina said. She predicts people will buy even less clothing or bedding, given the higher prices and the ongoing crisis.
On Ivanovo’s main street, there’s little sign of the crisis though: the restaurants are packed and the streets are busy. But economist Leonid Ivanov, President of the Ivanovo regional Chamber of Commerce and Industry said Russians always act like that, and the buzz hides an underlying malaise.
Mr. Ivanov said the current situation is much worse than the 2009 recession, which was triggered by the U.S. financial crisis. Back then, Russia was not cut off from the financial market as it is torday. “This crisis is hitting us twice as hard,” he said, adding that western sanctions have stifled the banking industry at a time when demand is already low.
Both the mayor and governor of Ivanovo – the governor is also a textile entrepreneur – recently demarcated three new industrial parks, offering investors lower taxes and the chance to buy land.
But this is not helping, With interest on loans of 24 to 26 percent, local businesses cannot even get enough capital to finance their primary products. They also lack the means to build up additional capacities for exports.
In past years, the Russian government did not manage to reduce companies’ dependence on the Western financial system, even though it had high revenues from oil and gas exports. Now the West is using sanctions to prevent state banks from gaining refinancing, so they can no longer provide resources to smaller banks. The country’s government has no strategy to counter the credit crunch; instead, Moscow has set aside tens of billions of euros for bank bailouts.
“Technical textiles offer us huge potential which would also guarantee the survival of the classic home textile segment.”
Mr. Ivanov is concerned about the prospects of the local textile industry. “Anyone who didn’t gain a foothold abroad before the crisis won’t be able to establish those contacts overnight.”
Russia is now paying the price for what its economic experts failed to do for many years, namely set up a globally competitive economic system with a strong legal basis, investment protection and a stable currency. A system with a diversified export structure that wouldn’t immediately drift into crisis when prices of oil and gas are low. A system that attracts capital from elsewhere, whether the economy is strong or weak. Ex-President Dmitry Medvedev had promised this modernization and Mr. Putin never delivered – to the business community’s annoyance.
Nevertheless, Vasily Gushchin, one of the region’s few successful exporters and CEO of one of the biggest textile manufacturers Ivregion Synthes, is planning to build a factory for synthetic textiles. It will cost €200 million. Whether he will be able to move forward with plans to launch the project this summer remains is uncertain. He is dependent on a consortium of European banks for the financing. The entrepreneur does not wish to disclose which banks are involved or whether they plan to stay on board.
In the future, Mr. Gushchin plans to make efficient insulating and fire-resistant materials for oil rig workers. “Technical textiles offer us huge potential which would also guarantee the survival of the classic home textile segment,” he said. Mr. Gushchin is also vice president of the union of textile manufacturers and light industry. He has not yet had to lay off any of his 1,000 production employees. He hopes that the overall situation will ease up. But, he said, “There won’t be a positive scenario for 2015.”
This article originally appeared in weekly business magazine WirtschaftsWoche. To contact the author: email@example.com.