Russia – Two Years Under Sanctions

Written by Markus R. Bodmer

Igor Almazov, Board Member of Joint Chambers of Commerce. Photo: Alex Spichale
Igor Almazov, Board Member of Joint Chambers of Commerce. Photo: Alex Spichale
Looking at the Russian economy today, it is difficult to distinguish the consequences of EU sanctions from the general recession, which began in early 2013 and was exacerbated by the decline of oil and gas prices over the last two years.

Russia’s GDP declined by 4% since sanctions were introduced, corresponding to €75 billion at an average ruble exchange rate. In addition, capital outflows reached €200 billion. Capital flight, the loss of income from natural resources and the western embargo strongly affected the ruble, whose decline in turn temporarily supported the national economy by allowing the state to pay off internal obligations. Roughly estimated, the effect of EU sanctions caused the Russian economy to shrink by 15–20% in two years.
Examining the effect that the sanctions left on the Russian balance of payments, Igor Almazov, Member of the Board of the Joint Chambers of Commerce, explains: “To cover the deficit, the National Reserve and National Welfare Fund came up with about €72 billion in the past two years. For the first time since 2013, Russia entered the western borrowing market in 2016 and placed Eurobonds for $3 billion. More than half of the Eurobonds were underwritten by American and Asian investors, the rest by European banks. What’s more, a privatisation programme of state property started in 2014 with the aim of selling a huge number of enterprises to the private sector, including to western investors. As for inflation, it is one of the Russian government’s top priorities to keep it low. After a rate of 12.9% in 2015, it is expected to come down to 10% in 2016.”

Chances for Swiss Industry
Switzerland, not a member of EU, participates in the sanctions to a limited extent but has some scope to bypass them. Almazov refers to two examples: “An advantage is drawn by the banking sector, where Switzerland has a strong position. In addition, cheese and general food exports to Russia have increased as they are still affordable for the upper and middle classes” adds Almazov.
Not only as a result of the sanctions, but also because of the collapse in oil and gas prices, bilateral trade between Switzerland and Russia has decreased steadily since 2014. However, now that the Russian economy has passed the low-point of the economic recession, a majority of companies have started to adapt to reality and managed to regain positive assessments from international rating agencies. As for the Swiss export industry, Almazov observes: “I constantly see new opportunities, especially for medium-sized companies which introduce technologies that are not yet well established in Russia. Swiss multinational companies are already in Russia and know the situation well. None have left Russia so far. Among Swiss products which are interesting to export to Russia, the agriculture sector is on the fast-track. Technologies in meat processing and cheese production also have major potential.”

Potential Needs Stimulus
Russia is known for its bureaucracy and other regulatory obstacles, and certain rules have to be taken into consideration to do business with this vast country and its administration. Almazov explains: “Those banking on a better economic climate promoting exports to Russia should start thinking about local production, so-called localisation. It doesn’t mean that products have to be fully produced in the country. In machinery for example, part of the equipment can be exported to be assembled locally. Moreover, with the new economic development programme, the Russian government is reluctantly looking for ways and methods to boost the economy. My observation of the implementation of the development programme gives me good reasons to believe that Russia will be in another place in five to 10 years.”

Publication date: 03 November, 2016