Export destination Russia: What now?

Sanctions, falling commodities prices, weak ruble: the Russian economy is in a crisis. Has Russia become passé as an export destination? We asked Yves Morath, head of Swiss Business Hub Russia.

Russia is stuck in a deep recession. Has the crisis reached bottom?

After years of remarkable growth, Russia's economy went into recession in 2015 as a result of low oil prices, internal structural weaknesses, and international sanctions. However, international economic experts are anticipating that the economic situation will improve in 2016, possibly with slight growth. For 2017, there is general consensus that the economy should recover further. Since there are many reasons for Russia’s economic difficulties, only some of which can be influenced by the Russian government, it is currently not possible to make precise forecasts. The Russian government has recognized that there is a need for action, and it has taken a variety of measures to improve the macroeconomic parameters. In particular, it is also learning how to exploit the benefits associated with the ruble’s low exchange rate.

What effect has the crisis had on trends in the growth of Swiss exports to Russia?

In the first 10 months of 2015, exports from Switzerland to Russia fell by more than 20%. Hit particularly hard were watches, with a decline of 35%, and machinery, at nearly 27%. By contrast, pharmaceutical products did relatively well, with exports falling by just 4%, roughly.

To what extent have the basic economic conditions deteriorated for Swiss exporters in Russia in the course of the ongoing crisis? Are there any bright spots?

For most exporters, things have gotten more difficult. In addition, the strong franc has exacerbated the situation. There is less money available on the Russian market. And when in doubt, Russian customers are tending once again to opt for cheaper versions, both for consumption and investment goods. For some Russian customers, high-quality Swiss products have now become a priori too expensive. Regardless of how good they are and how thoroughly Russians are aware of the advantages of quality, such purchases are often simply outside their own abilities at the moment. On the other hand, the tense political situation also means that Russian buyers are again placing greater weight on Switzerland’s neutrality and are at times giving preference to Swiss products over those from countries with which Russia has a less relaxed relationship. Moreover, the Russian government is pursuing a policy that is targeting in-country production, aiming to replace foreign products with domestic ones in the area of public procurement.

Which sectors can still expect good opportunities in Russia?

In any case, it is worth conducting a target analysis of the Russian market for the product in question, since even in the currently difficult situation, there are segments that are developing positively. At the moment, these include food processing, railway suppliers, and in some cases IT and suppliers for the pharmaceutical and medical technology industries. But we’re also aware of Swiss companies that are performing successfully even though their competitors are struggling with considerable losses. It therefore makes sense to arrange for a customized study, which we offer in connection with country consultations or as part of an initial meeting in Zurich at Switzerland Global Enterprise or in Moscow at Swiss Business Hub Russia. By analyzing the market now and finding a reliable partner, companies will be in a good position to immediately benefit from the coming economic upturn. And let’s not forget: The Eurasian Economic Union has been in effect since January 2015. Customs provisions and technical regulations will now gradually be modified and made uniform. For companies doing business in Russia, this means, in particular, that they also have direct access to markets in Belarus and Kazakhstan. And the reverse is also true, of course.

To what extent does the crisis play into the hands of foreign (also Swiss) companies? Is Russia becoming more accommodating and open to foreign exporters and investors? Above all, to European ones, now that the charm offensive towards China has apparently not paid many dividends?

At the moment, investors certainly can’t complain about a lack of interest on the part of Russian agencies and regions. They are trying to gain companies for their region with good offers and high quality infrastructure. On the one hand, in terms of price, the development of local production in Russia is interesting due to the low costs. On the other, local production allows companies to benefit from the Russian policy of import substitution. It is for this reason that a variety of Swiss SMEs have recently taken this step. There is no doubt that European products are still very popular. Those who can afford it by all means prefer a European product to a Chinese one. Furthermore, Russian customers are generally very capable of assessing a product’s advantages and disadvantages.

Where’s the rub for Swiss companies in Russia? Where do the greatest challenges lie?

In our opinion, financing is currently the biggest problem on the Russian market. Due to international sanctions, loans have become very expensive. Those who are nevertheless able to offer internal financing models have a big advantage.

What in particular needs to be taken into account with regard to an internationalization toward Russia?

Since the Russian market is somewhat more complex than other European markets, it is particularly important to have a reliable local partner. Since several importers ran into difficulties with the devaluation of the ruble, it hasn’t gotten any easier to find one. But the effort is worth it. Particularly because the Russian government is currently enacting a variety of new laws and decrees designed to stimulate the economy, it is very important to have someone local who is well informed and has a first-rate network. For companies that have their own local office, the selection of competent staff is of decisive importance. As a European country, we are relatively close to Russia. On the other hand, attention needs to be paid to many peculiarities. For instance, the instinct to not show any weakness is certainly much more pronounced here than in Western Europe. On the other hand, where relations are good, a Swiss business partner can count on a very high degree of loyalty. Many clichés are apt, though perhaps somewhat attenuated. In general, one can say that nearly all businesspeople are positively surprised after their first visit here.

Russia country consulting (various dates in February and May)

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