The Cipher Brief sat down with economist Anders Aslund, a former advisor to Russia and Ukraine. Aslund discussed Russia’s economic problems and the state of the current business climate.
TCB: Companies operating in frontier markets like Russia are used to the ups and downs and periods of uncertainty. To what extent is what we’re seeing in Russia—sanctions and a period of prolonged tension with the West—the “new normal?”
AA:. We’re seeing three big problems. One is that Russia has undertaken no economic reforms for the last decade worth mentioning. And this means that the business environment gets ever worse and corruption—particularly top level corruption—increases. The second and most important right now is falling oil prices. Russia’s GDP in dollar terms is half of what it was last year, and that means that the market for a U.S. company is half of what it was a year ago. The oil prices are likely to stay low for a long time. And the third issue, with these financial sanctions, there’s very little financing available for Russia.
TCB: Setting sanctions compliance aside, has it gotten harder to do business in Russia?
AA: Russia imposed rather severe sanctions against imports of foods from the West. So indeed, yes, it looks much worse. Previously there was an economic court system that was independent from the ordinary court system, and that economic court system was considered quite just and fair. Westerners have won about two-thirds of the cases in them. Now, this good court system has been absorbed into the ordinary court system, which does not have a good reputation.
TCB: That’s interesting that you say that. I was going to ask you about, whether rule of law in Russia has improved, gotten worse, or stayed the same?
AA: According to a number of different surveys, the number of bribes has declined sharply, while the size of the average bribe has actually increased. What we are also seeing is that the revenues from bribery are being concentrated higher up in the state apparatus. Young Russian women are often advised that it’s better to marry a senior state official than to marry a tribal oligarch. Why? Because the senior state officials are just as rich, and their tenure and security are much greater than that of an oligarch.
TCB: How are economic sanctions affecting American companies already in Russia?
AA: Well, the most important sanctions are the financial sanctions. All banks in Russia – including the few American financial institutions that operate there — are sharply reducing their operations. Investment banking—as opposed to retail banking—has been hardest hit.
Sanctions in the oil sphere have hurt U.S. companies in three areas: piped oil or shale oil, arctic oil, and deep off shore. For instance, all of Exxon Mobil major projects have now been frozen. Exxon was the prime victim of the US sanctions against Russia.
TCB: And what about consumer companies like Coke and Pepsi, or even GM and Ford—what would be your advice to them? How are they coping with the new landscape?
AA: Russian GDP in dollar terms has fallen by half, so consumer companies are seeing a quickly disappearing market. GM has decided to close down in Russia all together, which previously was a big market for them. The automotive industry has been very badly hit, with the market for cars declining about one-third. Although Ford has decided to expand, those decisions have been driven by the need to buy out or withdraw from certain investments. So these moves are not a sign of optimism, but rather crisis management. Other consumer companies so far are doing a bit better than the car companies.
TCB: Most of the news coming out of Russia is pretty bad. In your view are there any bright spots around the corner, any opportunities that no one is really talking about, or not talking that much about?
AA: The opportunity is that asset prices are very low, so if you want to buy something in the Russian industry, it’s very cheap right now. We can see one case of a company actually expanding, and that is Schlumberger, a large drilling corporation.
TCB: They’re expanding?
AA: Schlumberger is trying increase its market share by scooping up low-priced assets. We may see more of this as the Russian stock market continues to fall and other companies take advantage of low prices.
One sector that is growing is agriculture. Of course there are many big American companies that are involved in agriculture—mainly servicing agriculture, but that is something that should come back quite sharply in the near future. You could say that agriculture is the only part of the Russian economy that is actually growing now.
