Russia: some industries are taking advantage of crisis time

The beginning of 2016 has been nothing exciting for Russia so far. The amalgam of low oil prices along with prolonged sanctions still severely impact the economy. Both consumer consumption and investments are decreasing despite growing government spending. These factors certainly impact selected industries of Russian economy, including the strategically important ones.

Export diversification has been on the agenda of the Government for quite some time. For the year 2016, the share of oil and gas profits in state budget is forecasted to decline to 21% (while 3-4 years ago, it was over 50%). Yet, this can be a positive stimulus for development of non-energy export, rather than a move towards economy collapse. Depreciating national currency and low prices on commodities can increase export and stimulate investment activity in Russia. As a matter of fact, weak ruble helps export-oriented companies, especially those using local manpower and materials. While low prices make production and export very attractive.

In this blog we are reviewing promising industries, where Russian companies are able to meet competition on a worldwide scale.

Besides hydrocarbons, Russia is one of the biggest exporters of fertilizers. The country is ranked 2nd in the world for production of potassium fertilizers. Throughout 11 months of 2015 local enterprises increased the revenues from export of fertilizers by a quarter. Around 85% of all production is exported, which composes more than 15% of the world market for potassium fertilizers. The biggest trade partners in this are countries from EU, CIS, APEC. The main industry players are: Uralkaliy (the world biggest producer of potassium fertilizers), Uralkhim, Evrokhim, Fosagro, Akrona.

Iron and steel industry is another export oriented field. Few companies (Nornikel and Rusal) sell about 70-90% of their products overseas. In 2015 sales of aluminum increased by 17% and sales of copper almost doubled. Besides, Russia remains word largest producer of titanium. VSMPO-Avisma corporation is the key partner for Airbus and Boeing.

Another perspective story is exporting services in nuclear field. Russia is leading in the amount of power blocks built abroad (34 blocks in work). Portfolio of foreign orders of Rosatom is exceeding 110 bln USD.

Among most export-potential industries, Ministry of industry and trade names forest industry complex, transport, power engineering, petrochemicals, production and processing of precious metals. For 11 months of 2015 Russia has exported pulp and paper products in the amount of 8,8 bln USD; equipment and transport for 21,4 bln USD.

East Consulting client in pulp and paper industry – ILIM Group (largest pulp and paper company in Russia, strategic partner and owner of 50% of its shares is International Paper, the world’s largest pulp and paper company) comments on current state of the industry:

“The state of pulp and paper (PP) industry in Russia is defined by 2 main factors: current economic situation in Russia when ruble devaluated it increased competitiveness of export-oriented enterprises; and situation in the world markets of PP when the prices on PP products in different markets decreased. First factor led to positive development and growth of PP industry in Russia (for export-oriented companies), as costs are nominated in rubles, while profits from export are growing (in currency). The second factors had negative effect, as prices on PP products are going down due to insignificant growth in consumption by Chinese market – concludes Vitaliy Demidenko Director, Forestry and Forest Strategy, Ilim Group.

 “Currently for export oriented companies first factor has bigger influence than the second one, therefore despite uneasy times, big export companies are becoming more competitive on the world market of PP and their profits are going up. At the same time, smaller companies, serving mostly domestic market are facing problems, as internal market of PP is shrinking. Producers have limited opportunities to increase the prices because on the one hand consumer activity is going down and on the other hand the prices are controlled/ constrained by the government” notes Mr. Demidenko.

International market of power engineering is represented by Group OMZ (United Heavy Machinery Plants) and Power Machines, which produce equipment for metallurgical and mining industries, petrochemical, nuclear power, drilling equipment. Besides CIS production is exported to Europe, Middle East, India, Pakistan, South-East Asia, Africa and America.

Certain interest is shown in Russian products of aircraft (Sukhoi Superjet-100) and helicopter and helicopter engineering (MI, KA). International cooperation is actively developing with United Shipbuilding Corporation (OSK) supplying naval vessels and civil ships.

Export volumes continue to rise in IT sector. Russian companies are increasing market share in software, where dominant markets for export are USA, CIS, EU and Arab countries, Latin America and Africa. Among key players are: Kaspersky, ABBYY, MERA.

Refocus towards non-commodity export from Russia – is an ambitious goal which has been discussed on the governmental level for several years and which became a hot button point in current economic conditions. Weakening of the national currency can indeed stimulate export and trigger investment activity in Russia. There are plenty of opportunities for trade with Russia which could be considered also on SME level. East Consulting is specializing on business development and advising on investment opportunities. Our team can also be engaged in practical cases of partner-client search, promoting products and services, field studies. If you are interested in entering Russia or launch internationalization outside this country, please, contact our team.

Forecast of Ministry of Finance of Russian Federation in September 2015

Throughout last 15 years the main factor which affected PP industry growth was China. It is not the biggest market, but very dynamically developing. Chinese economy, along with consumption of PP products was growing. It can be concluded that China was the main growth driver for PP worldwide. Currently, China is not demonstrating such strong growth in consumption of PP products as it used to, hence the prices are going down. Potentially India can be considered as perspective market for increased PP product consumption, as it is the second biggest inhabited country in the world.

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