The sanctions imposed on Russia by the West after its alleged support for the separatist rebel militias in Ukraine are now taking their toll on the country’s business sector, our sources in Moscow tell Global Sources Magazine’s special correspondent David Edgar.
THE international media are also reporting that these sanctions are having a serious impact on the Russian economy. The International Monetary Fund (IMF) this month estimated they could lead to 9 percent being shaved off the country’s GDP over the next few years.
But Moscow is not taking the sanctions lying down. In retaliation for European Union (EU) and American bans on investments in areas of the Russian economy, the Russians have extended an embargo, first imposed in August 2014, on selected products from several EU countries and from Australia, Canada, Norway and the US. Last week, Moscow announced it was adding Iceland, Liechtenstein, Albania and Montenegro to the list.
On August 6 a decree came into effect ordering that all food brought into the country in violation of these bans should be destroyed, unless used for personal consumption. The international media splashed images of piles of perfectly good fruit, vegetables and other products waiting to be burned or pulverized.
One example that stood out was an “illegal” venture that imported 2 billion roubles ($40 million) worth of embargoed cheese, only to have it bulldozed. Going even further, the authorities suddenly declared that flowers imported from Netherlands could be “infected with western California flower thrips,” and they too were a target for destruction.
The burning of Dutch flowers is also seen as pure retaliation for a relentless Dutch investigation into the downing of Malaysian Airlines Flight 17, which was shot out of the sky over Ukraine in July last year, allegedly by a Russian-supplied missile system.
Whatever the official excuse, there is likely to be plenty of political posturing and, despite such bizarre spectacles as burning flowers and bulldozer-creamed cheese, plenty of contraband will filter down to a black market which is feeling both emboldened and chastened by the recent slashing regulations.
Feeling the squeeze
The political machinations have yet to turn toward Russian gas exports. The EU still relies on Russia for around 40 percent of its current consumption, but on the other side of the coin is the fact that Europe is Gazprom’s primary export market.
Figures show that Russia has suffered significantly from the fall in global oil prices, on which the economy had become heavily reliant over 15 years. Oil and gas have fed around $2.1 trillion into state coffers over this period.
Aside from the energy companies, Russia’s banks and financial institutions have taken hits, but the new round of sanctions will hit the import-export trade of small and middle-sized firms in retail, agriculture and technology. The Moscow sources told Global Sources Magazine that these are the businesses facing the direst of consequences. One source cited a firm that has suffered particularly bad effects – it is a big player in the country’s nanotechnology sector, but the source declined to name it.
Among consumers, those suffering the most from the anti-Western counter-measures are the middle classes. Around 15 percent of Russia’s 143 million people are considered to be the core (21 million) middle class and a further 25 percent (36 million people) are on the lower margins of this population sector.
These 57 million people represent a large proportion of total Russian spending, where the picture is likely to look stark this year. PriceWaterhouseCoopers has estimated that car sales n Russia could fall by up to 35 percent in 2015, for example.
Saving the day?
But Russians curbing their spending does have one upside – during the first half of 2015, rouble savings were up 6.6 percent to just under 15 trillion roubles ($223 billion), and such saving is itself an important source of funding for investments.
Major investments have been battered by the country’s financial crisis, with institutions and individuals shying away from what they see as a risky environment. Russian investments already fell 8.5 percent between July 2014 and July this year.
A director at a Russian bank, who spoke to Global Sources Magazine on condition of anonymity said: “Towards the end of 2014, our currency was trashed. While some of the ground has been regained, it remains very unstable, and it will take a long time for financial institutions – on behalf of Russia and the rouble – to win back the confidence that has been lost.”
Russia’s shift to the free-floating rouble last year saw the currency nosedive, but in the longer term, it does promise more flexibility and is expected to contribute to a gradual recovery in investor confidence.