Russian businesses find a way to survive in the sanctions circle

Russian companies are spending money to replace foreign machinery, software, or build new supply chains when the country is under sanctions.

Bloomberg Economics data shows that business investment in Russia has increased by 6% in 2022, instead of falling by as much as 20% as initially forecast. Investment is a matter of survival for companies undergoing a “structural shift” of the economy amid sanctions.

The Central Bank of Russia said that the majority of Russian businesses increased or kept their investments in 2022. This helps explain why Russia’s GDP fell only 2% last year, much lower than forecasts in the past. the end of February – the time when the Ukrainian conflict began.

Faced with the shortage of goods and services caused by the sanctions, many new private enterprises in Russia have appeared. Many of them are lent or subsidized by the government. A Russian government loan program aims to pour 300 billion rubles ($4.3 billion) into small and medium-sized businesses.

In Russia’s western Pskov region, a factory is expected to produce enough batteries to replace imports. Another chemical company in Chuvashia plans to produce hydrogen peroxide for domestic consumption. Near Moscow, factories began to create hydraulic and pharmaceutical equipment.

Gazprom's gas wells in the Yamal peninsula.  Photo: Reuters

Gazprom’s gas wells in the Yamal peninsula. Image: Reuters

Maria Romanovskaya is one of the start-ups waiting for government support. Last year, she founded a cosmetics company out of her own pocket as Western brands withdrew. Then she applied for more capital from the government. Romanovskaya’s plan is to build more factories and move from contract manufacturing to developing its own product line.

“This segment is allocated a very large amount. We are eligible for two government assistance programs. And I applied for one of them,” she said.

The disappearance of many imported goods became one of the factors that changed the Russian economy during the war. The country’s growth is now based on what the Central Bank of Russia calls “reverse industrialization”. Accordingly, companies seek to replace technology that is blocked from access due to sanctions.

The amount of money that the Russian government and businesses are pouring into the economy also reflects the urgency of developing new infrastructure for commerce. Russia has had to give up many trade routes with the Western market that it once took billions of dollars to build.

For example, gas giant Gazprom had to invest twice as much as it planned because it left traditional customers. It plans record spending in 2023 to redirect exports to the east.

“The trend of investing in fixed assets will continue for a few more years,” said Tatiana Orlova at Oxford Economics.

Big profits from rising commodity prices could also make mining the biggest investment driver this year. Severstal – one of the largest steel companies in Russia – almost kept its investment. They also diverged from projects that risked supply disruptions or export restrictions. This year, Severstal is developing technology for use in metal mining and related industries.

Russian state-owned banks, such as VTB Bank and Russian Agricultural Bank, are also spending money to replace foreign software with domestic products.

Even so, the cost of economic independence will increase over time. Most likely Russia will have to accept more expensive products of lower quality.

As for most companies, they now have to prioritize survival over growth. A survey by the Central Bank of Russia found that among SMEs, only 25% plan to increase capital expenditure. As for large companies, this rate is 30%.

Sergey Yanchukov, director of Mangazeya, a company that deals in everything from mining to real estate, said it was still carrying out its spending plan. The company’s gold team met several times last year to assess risks and plan for the future. Their conclusion is that “investment is necessary”.

“The hard times will pass. But the projects are still there and there for the long term. So we won’t stop,” he said.

Ha Thu (according to Bloomberg)

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