In the wake of Russia’s alleged involvement in the nerve agent scandal in Salisbury in the UK and the diplomatic sanctions as a consequence, developments relating to Russia have been making the headlines of late. The Russian currency, the ruble, has also been adversely affected which adds to the uncertainty felt by Swedish companies. Is it still possible to export to Russia, or is it time to apply the brakes?
“Swedish companies can most certainly continue to do business with Russia. In our view the economic conditions are still favourable, in large part thanks to the fact that oil prices are going up. Indeed, oil prices are one of the most important reasons for keeping an eye on export companies with business dealings in Russia. We are now seeing weak but stable growth, and inflation is at a record low,” says Martin Ingvarsson, EKN’s country analyst for Russia.
As well as oil prices, geopolitical tensions and sanctions also affect the chances of Swedish companies doing business in Russia. Moreover, Russian bureaucracy can be seen as complicated, and corruption is a big issue. Another factor affecting export opportunities is the fact that President Putin has been in power for a long time and will remain there for a further six years – at least.
“There is thus a certain amount of predictability, which is positive when seen from one angle, but it also means the political system remains in place. Improvements are needed in areas such as infrastructure, the labour market, the pension system, healthcare and welfare, and the prospects for reform do not look bright. This inhibits the potential of the Russian economy to grow much faster than it is doing today, which in turn affects interest in and the conditions needed for Swedish exports to Russia,” says Martin Ingvarsson.
Both the EU and the US have introduced sanctions against Russia, summarised in separate lists of sanctions and specifying the organisations, companies and individuals coming under the sanctions. Both these lists are long ones, and when new sanctions were issued more recently by the Americans this naturally posed a challenge for companies looking to export to Russia.
“It creates uncertainty. Above all the banks are put on their guard and become more cautious. But for our part at EKN, we have effective ways of monitoring and dealing with the sanctions. We are following developments carefully, doing thorough background checks and making regular assessments,” says Martin Ingvarsson.
EKN’s country risk level for Russia is four at present, which means that Russia’s creditworthiness is average (the scale is 0 to 7; the lower the number, the higher the creditworthiness). EKN sees no immediate change in risk level, but there are positive trends that mean it is not impossible for Russia’s country risk to be upgraded to three in the future.
Swedish exports to Russia increased sharply during 2017. The guarantees issued by EKN for dealings with Russia amounted to SEK 5 billion in 2017, compared to SEK 1.6 billion in the previous year. The explanation for this is the positive economic trend in the past two years.
“It was falling oil prices that put Russia in a very difficult situation and triggered a financial crisis between 2014 and 2016, at a time when the country was also hit by a number of sanctions. We are now seeing that export companies have the courage to invest in Russia once more. They see that the Russian market has great potential,” says Martin Ingvarsson.
According to Martin Ingvarsson, many Swedish export products are compatible with what is often commodity-based production in Russia, which suits not least Swedish companies in the mining industry. Russia’s willingness to pay is often high, and Swedish companies are often given priority over other clients.
“There is a good match between Russia and Sweden, and moreover we are close to the Russian market in geographical terms. All in all, Russia is far from being the most difficult market in which to do business,” says Martin Ingvarsson.
Stefan Karlsson, head analyst at EKN, adds:
“If Swedish companies feel unsure in terms of both risk and knowledge about Russia, they can contact us for support and advice.”
1. The oil price.
The oil price has a big impact on Russia’s economic development. Will Russian oil exports continue driving the economy? The situation looks good right now.
Which sanctions are in place, and which new ones might be added? Some sanctions are more disruptive than others. It’s best to watch out for a situation that could escalate and result in very hard-hitting sanctions.
3. Owner structure.
As always, it’s best to do a thorough check on the party you intend to do business with and on the connections and owner structures involved. It’s a case of KYC – “Know Your Customer” – to ensure the sustainability of the transaction and to avoid breaking any laws and regulations.