The New Priorities of the Russian Economy: Is There a Place for France?
- Jun. 18 2015 00:00
Emmanuel Quidet, president of the Franco-Russian Chamber of Commerce and Industry, advises to invest
in Russia now and not to be afraid of the crisis.
What changed for foreign investors last year?
What changed last year are of course the sanctions. There are three things to note: the first is the economic crisis, which began in September 2013. The second is the Ukrainian crisis and the sanctions that resulted, especially those of July 2014. The third is the fall of oil prices and the devaluation of the ruble, which had a significant impact at the end of last year on business in Russia. The combination of these three factors makes the economic situation quite difficult.
To what extent are French investors affected?
It depends on the sector of activity. There are sectors that still work well and will do so as long as consumption levels maintain themselves. Of course, the recession is mainly due to lower revenues of the population and the fall in oil prices, but consumption is still a strong motor of the economy in Russia. There are, however, areas that suffer more from the situation. For example, the automotive sector suffered a fall from 40 percent to 50 percent of sales. The tourism sector has also been severely affected by the devaluation of the ruble, which has had serious consequences for airlines and travel agencies.
There are also the sanctions, which have had a very deleterious effect on the economy, especially those that cut off Russian banks from long-term (over 30 days) international financing. Foreign companies, in particular, cannot find financing for their projects in Russia from foreign banks, and financing from Russian banks is much more expensive: with a 20 percent interest rate, no project is viable. The French companies operating in Russia are struggling to develop their projects, except the very rich companies that can finance themselves, such as Auchan, which continues to invest and open stores in Russia through self-financing. This funding problem is now a key issue for French companies in Russia, and it prevents them from investing in the country. In spite of this, France invested heavily in 2014, and there are projects to come in 2015 as well. The cumulative volume of French FDI in Russia amounts to 14 billion euros. And you have probably noticed that no French company has left Russia since the beginning of the crisis. Why do they stay? Because they believe in Russia's future.
I was in Tolyatti in May, where I met Bo Andersson, the CEO of AvtoVAZ. This company has suffered from the crisis. He said: "For us, it is out of the question to leave the country. Russia is to become one of the 10 largest automotive markets in the world." Why? Because there are today, I believe, 350 vehicles per 1,000 inhabitants, while in the West it is between 600 and 800 depending on the country. Economic crises are recurring phenomena, and businesses are used to managing them. Political crises are more troublesome, because they are unmanageable. That is why we demand the lifting of economic sanctions.
What about new investors who want to establish themselves in Russia? Isn't it really complicated for them?
The biggest difficulty is the lack of funding. This is a result of the economic sanctions. The fact is that large French companies are already in Russia. The new projects are carried out by small to medium-sized enterprises, which have no cash flow. Some still manage to establish themselves here. Auchan, Castorama and Decathlon continue to develop, and they are willing to financially assist businesses that want to produce here, to be able to buy their products in rubles.
What is the attitude of French investors vis-à-vis Russia's turn towards the East?
This turn towards the East is often caricatured. On one side, the Russians say: "Europe does not want us, so we are going to do everything with China." I don't believe this at all. Russians do not want to be bound hand and foot with the Chinese and I think they are afraid of that, because China is much richer and its population is much larger. On the other side, there are Europeans who say, "It is impossible, they will have no choice but to continue to do business with us." Both assumptions are false.
The Russians are not going to turn 100 percent to China, but we cannot pretend that they are not turning to the East. This represents a danger to us, because more and more trade is made with China. Twenty years ago, the EU was Russia's first trade partner, and Germany was its first partner country. Today, the EU is still its first trade partner, but the first partner country is China. Everything China wins is often something lost for Europe. You cannot replace French cheese with other cheeses. It is impossible. But there are other things that you can replace. Fruits and vegetables will probably not come from China, but all that was purchased in Europe can be imported from North Africa.
Another example is the high-speed Moscow-Kazan train, which will be financed by the Chinese. If they are financing it, it is obvious that Chinese trains will run on it, even though Alstom is still the great specialist of the TGV. Even without the crisis, there had been an acceleration of the development of relations with China, and this is quite normal. Russia wants to have multiple partners, and the crisis only accentuates this phenomenon.
In your opinion, is the Russian program of import substitution feasible?
It will be a good thing if Russia takes advantage of the crisis to expand its investments internally. Obviously, you cannot produce everything in Russia, but it is not normal that Russia imports apples, chicken or meat. There are many things that Russia can produce itself. Investing in its own agriculture can be a real opportunity for Russia, and this opens new prospects for foreign companies. Russia will need technology, equipment, and partners. For example, Russia will need to import cows for meat production, and French cows are of very good quality for milk production: they produce three times more milk than Russian cows, and it is the same for meat. All this means opportunities for France, and we could intensify our partnership to develop Russian agriculture.
Are there any barriers in the Russian regions, for example in terms of access to tenders?
In general, no. In fact, there are regions where it is easier to invest. There are several attractiveness ratings of the Russian regions and it's always the same ones who are in the lead — the Kaluga region and the republics of Tatarstan and Bashkortostan. The other regions are more complicated. But even when this is the case, this does not prevent the French from investing, as in Samara and Tolyatti. Challenges never scare investors, even though they do not make things easier. It is mostly administrative difficulties that foreign firms, in general, and French in particular have to face.
What is the recipe for success on the Russian market?
Check that there is a real need for the product you want to sell, then come and be active. It is not enough to sign a contract and then leave: it is necessary to develop locally and maintain regular contact with your partners. And this corresponds very well to the French mentality.
What advice can you give to French investors?
My advice is to come now, taking advantage of the ruble devaluation. We tend to think that investing in Russia is not expensive. But this is wrong. Investing in Russia has always been expensive, but the counterpart is that there is no problem to make money there. Russia is a country geographically and culturally close to France, where there are people who have money. Today, thanks to the crisis, the investment cost is much lower. So do not be afraid of the crisis. The one who wins the bet is the one who takes a risk. A well measured risk, but a risk.
Interview by Maria Afonina
Example: French Greenhouses and the Russian Program for Import Substitution
The course taken by Russia in terms of import substitution has resulted in changes to state agricultural policy. The construction of new greenhouses and the expansion of outdoor horticulture are some of the new policy’s aspects. Foreign producers of greenhouses see new opportunities for collaboration.
In the Soviet Union, the area used by greenhouses was over 4,700 hectares. In Russia, as of January 2015, it is around 2,000 hectares. To fully supply the country with domestically produced greenhouse vegetables, the Agriculture Ministry plans to double this area in the coming years.
“By 2020, the plan is to build 1,537 hectares of modern greenhouses and modernize 368 hectares of existing greenhouse space,” said Pyotr Chekmarev, director of the department of horticulture, chemical use and plant protection, during a national conference on “Greenhouse Horticulture Development,” which took place at the end of April. “This area will produce about 1,000 tons of domestically grown vegetables.”
The state has already promised to give subsidies in order to implement the plan. Regional authorities have also expanded their role. For example, the Moscow region plans to attract 12.5 million rubles of investment before 2020 to triple its amount of greenhouse space.
Foreign companies, including those from Holland and France, already have much experience in the Russian market for greenhouse production. New prospects for the construction of greenhouses have attracted serious interest.
Dutch manufacturers traditionally offer glass greenhouses, while the French advocate the use of plastics (although they also work with glass technologies). Richel Group, a French company, has been working in Russia since 1998 and has studied the Russian market closely over the years.
“We use a double-filmed polyethylene, which provides good opportunity for natural light, better than glass. For this reason, we have a greater representation in the south of Russia than the Dutch. Our main competitors in plastics are the Italians and Spanish. Although of course, we have the advantage in terms of technology. Russia is a strategic market for us, and the country puts forward a variety of harsh natural environments. This is our area of expertise. I’m talking about high-tech greenhouses with a high degree of stability under different environmental conditions, including snow and wind. There are also differences in terms of approach to work. Dutch enterprises can be described as “North European” — more strict. We are more flexible, both in adapting to the client’s culture, and cases where we might encounter difficulties in our relationship with the client,” says Brice Richel, director of sales for Richel Group in the CIS.
“Together with our Russian partners we have projects in Moscow, St. Petersburg, Magnitogorsk, Novosibirsk, and Yakutia, but the majority of our business is in the North Caucasus and in the Krasnodar region,” the representative for Richel Group said.
The main hope of foreign companies is to reduce energy consumption. “State aid does not always need to take a financial form. It can include the delivery of gas, or the improvement of communications, for example, or easy access to gas and electricity, which is essential to the construction of greenhouses. We have greenhouse projects in Magnitogorsk, which are viable due to the low cost of gas and higher prices for vegetables in the region,” Mr. Richel said.