Four years of sanctions: Western business joining the “common sense party”

Russia is meeting the fifth year of the “sanction wars” with a big portfolio of new foreign investments. This means that the anti-Russian sanctions have proved to be absolutely ineffective. Despite political declarations, more and more western businessmen are beginning to realize the advantages of business in Russia. As a result, we can see more and more medium-sized and even small foreign businesses developing in Russia.

In late Oct 2017, Russian President Vladimir Putin said that during the three first quarters of 2017, Russia received twice as much in direct foreign investments - $23bn - than it did throughout 2016. Head of the Russian Direct Investment Fund (RDIF) Kirill Dmitriev added that in 2017, Russia’s nonfinancial sector received over $30bn in direct foreign investments.

In Jan 2018, during the World Economic Forum in Davos, Russia’s Economic Development Minister Maxim Oreshkin said that the U.S. sanctions were not so much a countermeasure against Russia as a way for U.S. companies to gain the upper hand over their European rivals. “In finance and energy, Russia and Europe continue to cooperate very actively,” Oreshkin said. It was then that Moody’s upgraded Russia’s ratings from stable to positive and even though they are still on the non-investment Ba1 level, the agency pointed out that Russia's macroeconomic framework coped well with the oil price shock and with the impact of sanctions imposed to date.

More and more foreign investors are showing interest in Russia’s industry and even though last year, it recorded just a 1% growth, in some of its segments, like light industry, machine building, chemistry and instrument engineering, the growth was double-digit.

A few days ago, a joint venture founded by Kurskkhimvolokno and Corex Nederland B.V. (Europe’s third biggest producer of cardboard packaging) started operating. The project is not big – just 100bn RUR in investments – but it is a good example of Russia’s policy of import substitution. For many years already, Kurskkhimvolokno has been successfully implementing a project to substitute foreign polymer fibers with domestic analogues. Today, this is one of the fastest growing businesses in Russia.

A month ago, 3M announced a plan to move its production in the British city of Northallerton to the Alabuga factory in Tatarstan. The enterprise is supposed to produce 2.5 million liters of liquid anticorrosive coatings for the oil and gas industry of Russia and the CIS.

Paints and lacquers industry is also very dynamic in Russia: last year, it recorded a 10.2% growth and produced almost 1 million tons. Recently Nor Maali of Finland invested almost 400mn RUR in a production at Moglino in Pskov region with a view to enlarge annual output from 1 million tons to 10 million tons in the next five years. Nor Maali is the first resident of the Moglino Special Economic Area.

High technologies are also on the rise. In late Dec 2017, McCauley Sound set up Russian Sound Systems, the first sound and light equipment production in Russia. The plant is supposed to produce sound systems for large public events, like 2018 FIFA World Cup Russia, and to import its products to the CIS and Eastern Europe. The Russian products will be three times cheaper than their foreign analogues.

One more international high-tech project has been launched in Fryazino, where Oticon Medical of Denmark has set up a production of sound processors for people with a hearing loss. Last year, General Electric Healthcare invested 105mn RUR in a production of computed tomography and supersonic scanners at the Leader technopark in Lyubertsy.

In Oct 2017, Zoppas Industries of Italy set up a production of heating elements in the village of Stavrovo, Vladimir region. The company has invested almost 600mn RUR and is going to sell the products in the Eurasian Economic Union. Last autumn, the Czech producer of protective components for DMG MORI machine tools, HESTEGO, set up a subsidiary in the territory of Zavolzhye industrial zone in Ulyanovsk region.

In Oct 2017, VOSSLOH AG of Germany and Beteltrans (subsidiary of the Russian Railways) established a rail fastening system production in Engels, Saratov region. The project was launched in 2014, when the “sanction wars” were at their peak, with as much as 500mn RUR having been invested since then.

Last autumn, Backaldrin Kornspitz of Austria invested 580mn RUR in a dry baking ingredients production at Stupino Quadrat Special Economic Area.

According to the Center for Macroeconomic Analysts and Short-term Forecasting, in Q1-Q3 2017, the direct foreign investment inflow balance in Russia made up $26.8127bn against $39.643bn in the pre-sanction 2013, $17.295bn in 2014, -$3.053bn in 2014 and $10.871bn in 2016.

Food, drink and tobacco industries recorded the biggest growth – from $33mn in 2014 to 1.691bn in Q1-Q3 2017. In machine building, the index was $916mn in Q1-Q3 2017 against $2.173bn in 2013 and just $211mn in 2014. The inflow of direct foreign investments in science and engineering has grown from $73mn in 2014 to $1.716bn in 2017.

“The situation is not bad: we see that a growing inflow of direct foreign investments and the beneficiary is not only the energy sector but also some processing industries. As a result, we have gone back to the level of 2010-2012. This is a moderately favorable scenario,” says Vladimir Salnikov, Deputy Director General of the Center for Macroeconomic Analysis and Short-Term Forecasting.

According to the expert, the last crisis has paved the way for investors with long-term plans: low RUR rate has enabled them to buy new assets in Russia and to spend less on enlargement. “Our authorities are committed to develop non-energy exports and to substitute imports. The latter task is a good way for some companies to grow amid general stagnation but the former one is still unachievable for most of our producers,” Salnikov says.

According to macroeconomic expert Alexander Polygalov, the Americans keep toughening the sanctions, while the Europeans are beginning to sabotage them. “Even if somebody in Europe is forced to impose sanctions – as was the case with Siemens and turbines for Crimea – they make tough pro forma statements against Russia but none of them hurries to leave the country. Simple math is enough to explain the situation: Europe accounts for over 40% of Russia’s trade, China for 12-15%, the United States for just 3%,” Polygalov says.

He notes that oil and gas are the most affected sector. “But recently we have seen some changes in the United States’ sanction policy. There was a threat that the Siemens case – when the Americans said, “walk back or we will cause you problems somewhere else” would become a general practice but that was possible under Obama. Trump is not as tough as Obama was: his sanction list is just a copy of the Russian Government’s telephone book plus a couple of Russian names from Forbes,” Polygalov says.

The last report by the Russian Presidential Academy of National Economy and Public Administration and Russia’s Economic Development Ministry says that many companies have adapted themselves to the sanction regime and are focused on enhancing their efficiency and developing their major assets in Russia.

The report quotes President of BP Russia David Campbell as saying last year that his company would continue investing in Russia. “But foreign investors are still facing big obstacles in Russia, like unfavorable investment climate and the risks of low economic growth in the coming years and new macroeconomic restrictions,” says the report.

“The key obstacle to a larger inflow of foreign investments is not very stable macroeconomics and shaky RUR rate. Export-oriented investment projects are strongly dependent on the RUR rate as most of their components are imported. Unfortunately, RUR is not stable. Today its real effective exchange rate is at the level of 2013. Against USD, it has fallen but against the currencies of our major trade partners, it is on the pre-crisis level. In industry, costs are even higher than they were in 2013. The only advantage is that in Russia wages are low despite certain growth over the last years,” Salnikov says.

According to Assistant Professor from the National Research University Higher School of Economics Pavel Rodkin, the sanctions have not affected the global financial capital. As a result, Russia continues buying U.S. bonds despite its contentions with the United States.

“The sanctions are affecting not only Russia but also their authors in the West, but they are having no impact on global financial mechanisms. While the real sector is suffering from restrictions and losses, the financial capital is getting stronger. Hence, we can say that the sanctions are meant to benefit the global financial capital,” Rodkin says.

Nikolay Protsenko