Can Russian Businesses Be Trusted? It Depends
Despite sanctions, Russian businesses continue to eye the Western markets. The EU economy remains attractive and it offers Russian companies a familiar environment, one in which the devalued ruble could give them a competitive edge. Interest from Moscow and Russian companies, however, is viewed with growing skepticism in the West in light of never-ending diplomatic rifts and spy scandals.
Deteriorating relations with the West have done considerable damage to Russia’s already struggling businesses. And as business falters, the state has expanded dramatically since 2014. It now controls more than 70 percent of the Russian economy. Russian authorities have created a system that no longer cares about the competitiveness of its individual businesses, while in the West, Russian companies are seen as serving the Kremlin’s interests - too toxic to deal with.
Many such companies therefore have been pushed to rethink their development strategies. One of the solutions is to appear more international -- specifically, refitting corporate and public images to be Western-friendly.
Uralchem, one of Russia’s major producers of chemical fertilizers, has built its own transhipment terminal in the Baltic Sea and opened a chain of subsidiaries in Latvia to boost outreach to the European Union and secure its presence in the region. PhosAgro, Russia’s top fertilizer-producing chemical holding, established a range of offices throughout the European Union and Switzerland in 2016 and has declared Europe among its top strategic markets. The company works to maintain its international image and its distance from the Kremlin.
Finally, Metafrax Group, Russia’s largest producer of methanol, announced the launching of a new brand directed at Western markets in summer of 2019. The company likewise maintains a chain of subsidiaries oriented toward the EU market. It established Metadynea Trading SA in 2014, headquartered in Geneva and owned by Seyfeddin Rustamov, the main shareholder of PJSC Metafrax, to boost its trade exports westward.
The strategy to remain and compete in Western markets has been somewhat effective, and Russian companies’ export portfolios are growing, but they still face challenges. Even before the annexation of Crimea and the diplomatic downturns that followed, the Russian economy already appeared as opaque and dominated by oligarchs. Now, it is nearly impossible to believe that any major business in Russia could operate independently from the state.
The reality, however, is more complicated. Companies like Metafrax and PhosAgro represent one side of a divergence in the Russian sphere: While some companies are completely beholden to the state, others are more eager to chart their own path and participate in the market economy.
The trends they are fighting against are stark.
As Russia’s economic ecosystem dealt with collapsing oil incomes and the pressure of sanctions, some businessmen preferred to flee and acquire new passports. Those who stayed had to find different ways to adjust.
With the government securing monopolies in almost every field and maintaining a tight grip on dissent, companies were called upon to further project the Kremlin’s influence domestically and abroad. They had social responsibilities as well: Firms were compelled to keep armies of workers employed, regardless of productivity levels and actual corporate needs, in order to curtail possible political protests.
The first function was delegated primarily to major state-run companies. Gazprom or Rosatom famously support the Kremlin’s interest to undermine EU solidarity on the sanctions regime. Gazprom’s revenue on the European gas market rose by 34.7 percent last year to end up comprising 37 percent of Gazprom’s sales by total volume -- and the completion of the Nord Stream 2 pipeline still looms. Gazprom also announced the opening of an electronic trading platform with the goal to add an extra ten to fifteen billion cubic meters annually. Rosatom, the state-owned nuclear company, won a €12.5 billion investment in Hungary’s Paks plant. In the Czech Republic, the company will likely benefit from plans to finance new nuclear projects in the coming months.
The productivity of the Russian workforce is among the lowest in Europe, but the country maintains a record-low unemployment of 4.7 percent. Major Russian companies are often advised by officials to avoid drastic measures to improve their businesses and to maintain stagnant and ineffective organizational patterns for sake of political stability.
State-run companies follow this model with ease. As Russia’s diplomatic ties broke down, most Russian firms saw fit to curtail Western corporate practices. They instead re-embraced an old approach, choosing cosmetically upgraded Soviet-style work models dazzled with redundancy and bogged down in never-ending and utterly ineffective bureaucratic procedures. Stable and currently growing global energy prices seem to make the situation comfortable for the state and most of local-market players.
However, not all companies in Russia want to play this game. In August, Russian banks issued the highest-ever number of credit cards, and household income has been on the decline for four years. Little wonder that few anticipate anything good happening unless domestic policies start to change -- but change does not appear to be coming. Therefore a turn toward international markets seems to be the only solution for those companies that are still not affiliated with the state and want to earn and grow.
Unlike the state sector, such companies follow strategies that are more pragmatic and driven by traditional for-profit interests. Although they seek to adhere to international practices and standards, link together chains of foreign subsidiaries, and ultimately relocate abroad, they likewise strive to maintain constant interactions with the state as a guarantee of survival. These companies try to avoid integration into Moscow’s strategies. In contrast, those companies that do represent the Kremlin’s interests will never bother to hide it. They wear their loyalties on their sleeves.
Whereas it is hard to restore trust on the business level, and the diplomatic situation will likely get worse before it gets better, it is important not to treat all Russian companies in the same way. In particular, those that want to look increasingly to the West should be given a chance.
Dmitriy Frolovskiy is a political analyst and independent journalist. He is a consultant on policy and strategy in the Middle East and Central Asia with private entities, and has written about Russia’s foreign policy toward the Gulf Cooperation Council states and former Soviet territories. The views expressed are the author's own.