Russia Recreates Itself

Selection_089The propensity for salacious cars that adorn the inner ring road of the Sadovoye Koltso, Moscow shows no sign of abating nor does the daily hustle and bustle of Moscow’s metro system as it transports its 10 million daily commuters to and from work. But underneath the hardened exterior, that stoic trademark of Russian resilience that has come to be a hallmark of its historical ability to endure and be adaptable to challenging times is being tested once again.

A combination of protracted economic sanctions on food imports and the technology industry, the implosion of the rouble and an unabated and sustained downturn of global oil prices have all contributed to an economy in recession resulting in job losses and food price increases that are biting into the average Russian’s already stretched budget.

So these are certainly interesting times in the country’s history, for most Russians there is a reticence that things can only get worse. There appears to be an all too common inference that this will continue. Recently Deutsch Bank announced the closure of its Investment operations in Russia and some of the International Blue Chip Consulting companies based in Moscow have seen a drastic reduction in contractual assignments that have seen some senior executives roles become dormant. The sanctions, coupled with speculation on oil and the fall in value of the rouble has pushed the Russian economy into a prolonged recession during 2015 and at the same time almost all imports to Russia were virtually blocked as oil and gas exports remained constant. It appears that looking forward to 2016 the central bank will not be able to or does not wish to enact an active credit policy that is to say a quick growth of money volumes and therefore a reduction of the key rate. This may prevent any forthcoming impetus or stimulation into the economy next year. The economic situation in the Russian economy today is highly complex.

Therefore given this current complex economic environment anyone following the news on Russia could be forgiven for being confused. Indeed in addition to constant news flow of the depressing state of an economy which is over-reliant on natural oil and gas resources, there has come positive economic reports from leading economists that the slowdown in Russia is calming, while corporate profits have been growing. A recent report late September 2015 said the recession in Russia is likely to have hit bottom when GDP fell by 4.6% in the second quarter, thus companies with growing profits are likely to spend much more which in turn is likely to contribute to an adjusted recovery. This stabilisation may be more important to the economy than the remaining weak consumer demand. So not all bad news then.

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Indeed in recent days there have been various news articles inferring senior political moves and strategic meetings held between the different sides in the Ukraine that an on-going peace settlement maybe in reach. There appears to be a realignment in the current political stance from the US, given the current events and swiftness of action by Russia in dealing with an implosive situation in Syria. We will see. But where some Russian nationals talk of a return to a status quo and an economy and culture pre 2014 it would be hard to envisage with any confidence that this could happen. What has been now set in train is an economic strategy that has been slowly and quietly put into place by the key political players of a Russia focusing on a reliance on localisation, self-sufficiency and a continuance of the further development of the Euro-Asia market and its bedding down, governance, and its tactical and operational ability to trade seamlessly between its members mainly Russia, Kazakhstan, Belarus. Kyrgyzstan and Armenia. More (but not all) of the 12 ex CIS countries may well join in the forthcoming years as it gains momentum, that will further strengthen the community and make the Euro-Asia market more viable and will solve the need to look to the west and previous suppliers of agriculture, agro-fishery, hardware and FMCG goods. A marketplace that currently stands in the region of 181 million people will further develop, notwithstanding issues, challenges and barriers. The down valuation of the rouble in December 2014 negatively affected business between Armenia and Russia and many companies in Armenia lost considerable sums on goods ordered prior to the down value and its knock-on effect resulted in trade figures subsequently down this year. For some commentators, this was a sign of a dysfunctional marketplace however this will not prevent the union from moving forward… it will not be allowed to fail.

So what about the current economic strategy for localization and self-sufficiency? Russia has been steadily improving its socio-economic standards and investing in raising the quality in a number of key strategic sectors; the health care system being one of them. The Pharma 2020 Strategy, initiated in 2010, is aimed at modernizing the country’s pharmaceutical industry and reducing the reliance on imported medicines. The government has already allocated over $4 billion in order for Russia to be partially self-sufficient in medicines (50-70%) by 2020. The Pharma 2020 Strategy entails the creation of several biopharmaceutical clusters and provides preferential procurement treatments for locally-produced medicines, among other incentives. Thus, the localization of production in Russia by major pharmaceutical companies, as well as the increase in funding for R&D activities, should provide a suitable platform for the local pharmaceutical industry’s organic growth. This has seen major international blue chip companies such as Astra Zeneca invest Millions of dollars to build a state of the art manufacturing plant 50 kilometres south of Moscow to facilitate delivery and manufacture of medicines within the country. This will indeed assist in the rebirth and distribution of new jobs from those lost and may also hasten medical development into much needed rural areas it is hoped.

Russia must find alternative sources from a country with an over dependence and reliance on the oil and gas industry. Localization encourages public and private companies to be more engaged in the country’s economy, to develop industrial production, train their personnel, and also build local networks of equipment and services suppliers. Successful import substitution creates added value to the national economy in a form of a supply chain and has a multiplication effect on adjacent industries. Key drivers would be the agricultural sector and agro fishery sectors. The huge potential within both these industries is particularly prevalent here in Russia. A 220-hectare site south of Moscow, an area rich in agricultural land and minerals is prime for joint venture farming facilitation and urban and or retail development. These will be the areas where either Russian entrepreneurial investment or joint international investment will encourage a refocus within a country that is awakening from its slumber and a desire to now look from within than to buy foreign products and food. In my day to day role I have already come across and interacted with Russian entrepreneur businessman and women who have innovatively begun their own businesses in the retail grocery sector. One is setting up a French cheese factory investigating and trialling its manufacture here to great results, another seeing various gaps in the market such as bakery products, and now adding value to the market place with Russian branded products. These are just the first seeds of initiative and business for thought that will continue and further strengthen a country that will have a more robust and durable economy based on its self-sufficiency and localization programme. There is more to follow for that there is no doubt.

Therefore in summary the next few years will continue to see a difficult trading environment and hurdles will continue to have to be overcome. However if the correct focus, education, and a strategy that could be aligned (but over time), I see no reason why the people of Russia could not see another prosperous future period for their next generation. There has never been a better time to see an entrepreneurial spirit and investment become the overriding strategy for Russia during these challenging times. Indeed international companies not affected by sanctioned industries could be well advised to look to the country for joint investment opportunities as in a few years the opportunity will have passed and the door to such a huge potential marketplace of 181 million people – and growing – will be well and truly shut and a place at the table where the next generation of wealthy business owners will not be available.