Road to Recovery?

Resilient Russia Shrugs Off Sanctions

russian luxury-Bloomberg
Russians still like to shop despite the current economic climate.
  • Why it matters

    Why it matters

    Although the Russian economy appears to be weathering the Western sanctions relatively well, companies exporting to the country are facing particularly tough times.

  • Facts

    Facts

    • The World Bank revised its forecast for Russian GDP, saying that it will “only” shrink by 2.7 percent instead of 3.8 percent this year.
    • The ruble has appreciated against the U.S. dollar and the euro by 30 and 25 percent, respectively, since February.
    • The German-Russian Chamber of Foreign Trade has seen a rise in inquiries from companies wanting to open offices in Russia.
  • Audio

    Audio

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It’s almost business as usual in Russia, despite ongoing Western trade sanctions on certain products as a result of the Ukraine crisis.

Economic data indicates that the sanctions so far have not affected the Russian economy nearly as much as expected. The World Bank recently followed the Russian economy ministry in revising its prognosis that the country’s gross domestic product, or GDP, would “only” shrink by 2.7 percent instead of 3.8 percent this year, and that 0.7 percent growth could even be a possibility next year.

Since February, the ruble has appreciated against the U.S. dollar and the euro by 30 and 25 percent respectively, and a reduction in the base rate has brought down inflation slightly from its 13-year record high in March.  The budget deficit has also stopped growing and market indices continue to rise.

“The nervous situation resulting from the Ukraine crisis has calmed down somewhat.”

Alexander Libman, German Institute for International and Security Affairs

Russian President Vladimir Putin brimmed with confidence last week when he addressed more than 2,500 businesspeople from around the world at the St. Petersburg International Economic Forum. The president said  Russia was out of the woods, claiming the West had failed to force the country to its knees with its punitive action.

Some foreign observers agree. “The nervous situation resulting from the Ukraine crisis has calmed down somewhat,” said Alexander Libman of the German Institute for International and Security Affairs.

Because of this and the rising price of oil, he said, investors are now more invested in the ruble once again, following an irrational flight. What also helped, he added, was the government’s move to prevent a run on banks by offering sound bailout packages.

But economists warn about too much euphoria. Earlier this week, the European Union chose to extend economic sanctions against Russia, which had been due to expire on July 1, until next January in a move to keep pressure on Moscow over the Ukrainian conflict. The sanctions include a ban on certain goods and technologies and limited access to some financial markets.

The looming escalation in Ukraine could depress markets once again, according to Igor Gretskiy, an economist at the St. Petersburg State University. He noted critically that Russia has failed to enact a number of needed reforms and is suffering from what he labled the “Dutch disease” – having too great a dependence on oil exports coupled with insufficient investment at home.

“Russia is dragging along a sheer mass of state-owned companies with no prospects of exporting their products, even at a lower ruble exchange rate,” Mr. Gretskiy said. Russia, he added, is always threatened with recession when the oil price declines, he explained, and even with higher prices little more than stagnation is to be expected.

Still, numerous German companies already sense opportunities. Huber Technology, a medium-sized manufacturer of water treatment plants with headquarters in the Bavarian town of Berching, is converting to direct sales and is planning to develop a complete production facility in Russia. Of course, the investments come with risks, said country manager Hans-Dieter Häusler.

“A crisis is the best time to invest,” he said, adding that Russia will soon be on the way to recovery and urgently need to replace its ailing waste water system.

Retail activity is also picking up. The Tengelmann retail group plans to open 12 “Plus” supermarkets in Russia this year, and Westphalian clothing manufacturer Gerry Weber also intends to expand its Russian business activities.

Officials at the German-Russian Chamber of Foreign Trade reported a rise in inquiries from companies interested in opening offices in Russia. Ulf Schneider, who runs a consulting business in Moscow, confirmed that regional authorities, in particular, are now especially open to foreign investors. “They are now rolling out the red carpet for companies that want to open new branches in Russia,” he said, adding that the same applies to Ukraine.

Exporters, on the other hand, still face challenges. According to the German engineering association, VDM, incoming orders from Russia in the first quarter had declined by 83 percent compared to the previous year. There has been no new investment in industry, partly because few are able to secure financing. That, in turn, is a direct consequence of the sanctions.

The only problem is that Germans are also being adversely affected.

This story first appeared in WirtschaftsWoche. To contact the author: florian.willershausen@wiwo.de

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