Token sanctions on Russia not seen impacting foreign investor plans

By bne IntelliNews March 31, 2014

Ben Aris in Moscow -

The token sanctions imposed on Russia by the US and EU following the annexation of Crimea do not appear to have much of an impact so far on the expansion plans of foreign companies already working in Russia.

French retailer Leroy Merlin, which sells home improvement and gardening equipment, said it would triple the number of its stores in Russia to 80 units by 2019 from 28 outlets now, according to Vincent Gentil, general director of Leroy Merlin Vostok.

Likewise, German engineering giant Siemens also said it will continue localizing its facilities in Russia and cooperating with local companies, CEO Joe Kaeser told President Vladimir Putin on March 25. Kaeser said that Siemens has already invested about €800m in the Russian economy and will continue this policy as Russia remains a key strategic market for the company.

Siemens supplies services to the state-owned gas giant Gazprom and has a pivotal role in the modernization of state-owned Russian Railways, which it supplied with eight high-speed passenger trains for the St Petersburg-Moscow and Moscow-Nizhny Novgorod routes. There are also plans to open at least another half dozen high-speed rail links with regional cities as part of Russia's hosting of the 2018 FIFA World Cup football championships.

Even the UK, which has been amongst the most outspoken critics of the Kremlin's moves in Ukraine, says it will continue buying gas directly from Russia in 2014 despite the crisis. Centrica, the UK’s largest energy company, will start importing gas directly from Russia in October under a deal signed back in 2012. The UK, like many European countries, has little choice but to rely on Russia for energy supplies; domestic UK gas production is falling by around 7% annually.

Pushed and pulled

The reason for all this business is a push-me-pull-you effect. A European consumer market stuck the doldrums, despite the nascent economic recovery, is pushing companies into Russia and the continuously rising Russian income levels and high profit margins are pulling them in.

The increasing importance of Russia's retail market to European business has made the showdown over Ukraine a political nightmare for European leaders. While the US has also little trade with Russia, European countries are already heavily exposed to Russia. Some 50% of Russia's exports – mostly commodities like metal and energy worth about $150bn – go to Europe. While only 7% of European exports go to the other way, in money terms these exports – processed food, apparel, toys, milk and a lot of machines and equipment – are worth about $250bn.

Germany is by far the best represented with almost all of its leading retailers present and expanding. Germany has over 6,500 companies working in Russia with France and Italy having some 600-800 companies. The UK is much less represented with only 400 companies working in Russia. But the heavy commitment to Russia explains German Chancellor Angela Merkel's reluctance to impose anything more than symbolic sanctions on Russian officials. This means it's highly unlikely to back meaningful trade or financial sanctions, as they would hurt the German economy as much as, if not more so than, Russia.

And more European companies are on their way to Russia as they start to wake up to the opportunities. Russia is already in the top three largest consumer markets in Europe with a total retail and services turnover of some $660bn in 2013, which continues to enjoy double-digit growth. Average Russians have minimal personal debt and seen their incomes continue to rise by about 10% throughout the crisis period that started in 2008. The upshot is the Russian consumer is a shopaholic.

The difficulties of doing business and the high barriers to entry are a problem, but they also mean that for companies who make the effort, the margins are also very high. Moscow-based investment bank Aton found in a study last year that while Russia has one of the lowest per-capita foreign direct investment figures of any emerging market, the investment made is amongst the most profitable in the world.

The Kremlin is also happy to see foreign companies set out their stalls in Moscow and the far-flung regions, and has made a clear distinction between politics and commerce. Russia will continue cooperating with foreign energy companies, and no sanctions will force those willing to develop locally to leave the country, Prime Minister Dmitry Medvedev told RIA Novosti on March 25. "Everything will be all right. Those who want to cooperate with us in any sphere, let it be science, production partnership or investments in our economy, will remain in place because it’s a normal process," Medvedev said, assuaging fears that possible tit-for-tat reciprocal Russian sanctions could hurt the business interest of companies that have already invested. 

Token sanctions on Russia not seen impacting foreign investor plans

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