Sanctions Create Opportunities as Well as Obstacles

Denis Abramov / Vedomosti

Consumer goods companies who localized their operations before the recent downturn are doing well but there is little evidence of 'winners' from retaliatory sanctions.

Sanctions are creating demand for experts with highly technical skills in areas like oil and gas, and engineering. It is getting harder to hire some western specialists, however, and Russian companies are looking to set up their own affiliates.

European Union specialists cannot get hired by western companies working in some sectors of Russia's oil industry, for example those with technical skills such as "fishing", or retrieving broken equipment that obstructs and oil well, said Nick Rees, country director, Progressive Global Energy recruitment and outstaffing specialists. Recruiters are looking to Asia and Latin America to fill the gap.

Companies like Halliburton of the U.S. remain keen to increase their presence on the Russian market, even if they are restricted by U.S. sanctions policy to providing only conventional oil field services. Siberia remains busy for the tie of year and Rees said he "has hundreds of drillers out around Siberia". The question remains open, Rees says, as to whether Asian companies have the expertise to replace the likes of Exxon in difficult projects like the Kara Sea. Western companies such as Total are also looking to expand in countries like Azerbaijan and Kazakhstan, which is creating big demand for drillers.

Maxim Kaurov, Staffwell Executive Director, specializing in oil and gas, energy and industrial, confirms that the oil and gas industry is still hiring. Russian oil and gas companies will create their own oilfield divisions or affiliates, replacing western players, and this will create new vacancies.

However there is some debate whether Russian counter-sanctions have

created opportunities for domestic producers on a large scale. Import substitution and state orders must be supporting the manufacturing sector, as compared to other sectors of the Russian economy, said Alexander Morozov, chief economist, HSBC (Russia and CIS) in a research note. "The overall situation in manufacturing looks rather stable. Cost efficiency measures create a cushion against global markets headwinds and high funding costs."

Across the industrial and manufacturing sector — metallurgy, mechanical engineering and energy — Kaurov also used the word, stable. He did not see any concrete steps to increase output as a result of protective sanctions, or any impact on recruitment.

Kaurov said sanctions would have to continue for more than a year for an increase in Russian business or ventures to be noticeable — a view supported by Andrey Chulakhvarov, Head of Permanent Staffing Department, Coleman Services.

Felix Kugel, Vice-President and Managing Director, Russia and Region, Manpower Group, said expats were more apprehensive about coming to work in Russia or staying. There has been a long-term, steady decline in expats on the market as Russians have grown professionally. On the other hand those expats who have seen changes in the country over several years tend to be more optimistic.

As to sectors, he pointed out that some pharmaceuticals companies had been hit by sanctions where chemicals had dual usage.

Other companies in fast moving consumer goods, for example, that had already localized their production and supply chains before the recent downturn, and who sourced their raw materials locally, were doing relatively well, Kugel said, especially those who produced goods in the mid to lower price range.

In the food sector, producers are reluctant to boost production lines, as it implies added capital expenditure that was not budgeted for this year, said Chulakhvarov. "Producers face a simple choice: borrow money to build more production lines and increase output from existing lines or just take advantage of falling foreign competition and raise wholesale prices."

In the past week the two biggest domestic food retailers reported a more than 20 per cent rise in third-quarter turnover, though this may have been due to shoppers favoring Magnit and X5 Retail Group in place of more expensive grocers.

Chulakhvarov said if the ruble continues to depreciate and the economy shrinks further, competition to retain talent is likely to accelerate.

Intervention by the Russian central bank has not stopped a sharp fall in the ruble. Some experts now think the government may let the ruble slide so that taxes on oil and gas sold in dollars translate into larger budget revenues.

The dollar has been rising due to the perception that the U.S. recovery will continue and that the U.S. Federal Reserve will consequently raise interest rates. Closer to home, however, the EU, Russia's main export market, has been slowing. In Russia itself, manufacturing output grew more slowly in September while new export orders declined sharply, according to the latest HSBC Purchasing Managers' Index compiled by Markit.

The falling ruble is not directly affecting the retention of staff or wage negotiations nor, on the flip side, has there been a marked acceleration in the draining of talent or increase in people looking for opportunities abroad.

Staffwell CEO Teri Lindeberg said employees understand that ruble devaluation is a market-wide problem and specific to their employer. Foreign exchange volatility is less of a problem for employers. Where salaries are fixed in euros or dollars, it typically concerns companies whose clients and business partners pay in those currencies, for instance at law, finance or consulting firms, especially where there is international work being done, and therefore international payments. 

Lindeberg said that hiring for key roles or growth can attract a pay increase of up to 20 per cent, but for non-key hiring, companies can negotiate pay downwards, either offering the same as the candidate earns at their current employer, or a nominal increase.  "The majority of job seekers do not change their employer due to compensation issues. Instead it is lack of employee engagement, poor management and lack of opportunities that drive resignations,' she said.

One specialism that's likely to be in demand is anti-crisis managers by the end of the fourth quarter, said Chulakhvarov. With the possible exception of the banking sector, there is no rise in requests for specific skills. "Sanctions, in effect, lead to diminished opportunities and therefore to lesser income. This calls for efficient cost-saving practices, and it is reasonable to expect that soon, by the end of the fourth quarter, companies may increase vacancies of anti-crisis managers, but that remains to be seen."

Despite tightening internal policies and an unpredictable macroeconomic situation, most Russian or foreign companies are still hiring, said Yelena Rogova, marketing communications manager of Hays Russia. Some international pharmaceutical producers have issued earnings estimates for next year in the double digits.

Jobs in demand include sales managers across all industries not hit by sanctions, IT managers and product-, brand-, and senior brand managers, said Rogova, along with accounting and finance. Specialist needs include market access managers in the pharmaceutical industry who liaise with government to secure funding for drugs to treat rare or orphan diseases, and medical science liaisons who acts as a bridge between clinical medicine and other areas of the healthcare industry such as pharmaceutical or medical device manufacturers.

The downturn, combined with sanctions, have damaged business confidence and hurt industrial projects, start-ups, and those food producers who have not localized their production in Russia. However the majority of big international FMCG food producers have operated in the country long enough to have localized all manufacturing processes and necessary ingredients, said Rogova.

This month Norway fell into line with the latest round of U.S.-led sanctions against Russia. While the markets and the headlines react to sanctions, the economy remains more affected by the exchange rate and dimming prospects of economic growth.

The Economy by Numbers

Russia's manufacturing recovery remains fragile. As measured by purchasing managers' actions and intentions, the outlook declined for the first time in six months. The latest HSBC Purchasing Managers' Index compiled by Markit was 50.4. A reading above 50 suggests an expanding manufacturing sector, under 50 suggests contraction.

Companies do not believe growth in demand for manufactured products can be sustained, said Alexander Morozov, chief economist, HSBC (Russia and CIS) in a research note. Other companies said they suffered a shortage of working capital. They are trying to preserve profit margins in the face of rising costs, and are not able to pass on those costs in full to their customers, Morozov said.

Employment has been falling in Russia for 16 months in a row, according to HSBC and Markit, though it remains at ultra low levels in Moscow and St. Petersburg. However, companies do seem to be using efficiency savings to increase output rather than hiring more staff.

Russian GDP had been predicted to grow 0.5 per cent this year, according to the median estimate of 38 economists surveyed by Bloomberg in mid-July. The economists cut their 2015 growth forecast to 1.6 per cent from 1.8 per cent.

Inflation will be about 8 per cent this year, according to officials, exceeding the government's 7 per cent target.