MARKET OUTLOOK RUSSIA 2018 - SWEDISH BUSINESS IN RUSSIA: RECOVERY OR FALSE START? - Business Sweden
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CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY MARKET OUTLOOK RUSSIA 2018 SWEDISH BUSINESS IN RUSSIA: RECOVERY OR FALSE START?
The Russian market is at yet another At the same time, the Russian economy
tipping point. The situation can has shown a remarkable resilience
deteriorate with more geopolitical throughout the period from 2014. And
turbulence or it can continue its even though the market is not growing as
progress to a more developed fast as it would in an optimal scenario, the
economy. Regardless, there are risk of a total collapse seems very unlikely
business opportunities to nourish
Looking at the aggregated input from the
Understanding where the political and Swedish companies on the market, we
economic situation is headed in Russia is can conclude that business opportunities
not easy. We believe that input from the remain. A vast majority of companies are
Swedish players on the market on their still aiming at expansion in the short and
expectations and intentions is an long term perspectives
important complement to other sources of
information and analysis We believe that a key success factor is to
be in control of the company’s strategy
This report is concluded in April 2018, and risk level. In this report we outline
after the presidential elections, but before central considerations in this regard
the new government is presented
Looking back to spring 2017, our
conclusion was that the short term looks
promising, but there is great uncertainty
about the mid term. In April 2018 it is
evident that uncertainty is larger than in a
long time
Sanctions have been sharpened at
several occasions, with following volatility Andreas Giallourakis
in stock markets and in currency
Market Area Director Eurasia, Trade
Commissioner Russia
BUSINESS SWEDEN 2
SWEDISH COMPANIES ARE CONCERNED ABOUT
UNCERTAINTIES BUT AIM FOR EXPANSION IN RUSSIA
197 COMPANIES CONTACTED 98 COMPANIES PARTICIPATED 51% REPRESENT LARGE
GLOBAL COMPANIES
MACROECONOMIC OVERVIEW FINANCIAL DETAILS STAFF & HR
2,4% CURRENT INFLATION RATE
(BELOW THE CENTRAL 76% EXPECT GAINING MARKET
SHARE IN 3 YEARS 48% RAISED SALARIES MORE
THAN INFLATION IN 2017
BANK’S TARGET OF 4%)
70% COMPANIES DID NOT
CHANGE OR LOWERED 55% EXPECT TURNOVER
GROWTH IN 2018
35% INCREASED THEIR
STAFF IN 2017
2X
THEIR PRICES IN 2017 TIMES EASIER TO FIND
EMPLOYEES IN 2017
COMPARED TO 2014
FOOTPRINT & INVESTMENTS MARKET ASPECTS CONCLUSIONS
82% HAVE LONG-TERM + LARGE MARKET SIZE 3 VARIABLES TO
EXPANSION PLANS + STRONG DEMAND FOR COMPANY’S CONSIDER WHEN
IN RUSSIA PRODUCTS DETERMINING STRATEGY
28% PLAN GEOGRAPHICAL + GROWING RUSSIAN ECONOMY
EXPANSION IN 2018
- HIGH UNCERTAINTY LEVEL 3 POTENTIAL STRATEGIES
38% PLAN TO INVEST
IN 2018
- PRICE-SENSITIVE CUSTOMERS FOR RUSSIA IN
?
- VOLATILE CURRENCY TURBULENT TIMES
BUSINESS SWEDEN 3
CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY THE RESPONDENT BASE
WIDE COVERAGE AND
SATISFACTORY RESPONSE RATE METHOD
RESPONDENT BASE
Mixed respondent base – high representation of large companies
197 companies with permanent representation in Russia were
sent an invitation to participate in the survey
98 RESPONDENTS
Different sizes and industries represented among respondents
Regional and country managers and other leading positions
Survey open 4 weeks in late March/beginning of April 2018
Representative sample for the Swedish business in Russia
covering most company groups represented on the market
Survey was conducted after the Skripal event but before the new
US sanctions were announced on April 6
Turnover Globally (MEUR)
20% 28% 3% 51% 50%
500
OF THE RESPONDENTS
28% 10% 30% REPRESENT COMPANIES
WITH A GLOBAL TURNOVER
10
ABOVE € 500 MILLLION (40%
11% IN 2017 SURVEY)
RESPONSE RATE
0 10 500
Turnover in Russia (MEUR)
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 5
CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY MACROECONOMIC OVERVIEW
LOWERED INFLATION AND
DECOUPLED RUBLE COMPANY PRICING POLICIES
2014–2021E
Prices relatively stable in 2017 100%
18% of respondents raised prices in 2017, all of them by less 75%
than 20% (38% raised prices in 2016) 50%
25%
70% did not change or lowered prices in 2017 0%
2014 2015 2016 2017 2018E 2021E
34% plan to raise prices between 0-20% in the next three years
Raise/-d by more than 20%
Raise/-d by 0-20%
Price of oil on the rise and the Ruble stays stable No change or lowered
High inflation and Ruble depreciation from 2014-2016 reached
more moderate levels in 2017 INFLATION, USB/RUB AND OIL PRICE
Ruble regained strength from lows of 70 RUB/USD in 2015 to Inflation
2014–2018 Index
highs of 56 RUB/USD in 2017 value 100=2014 dec
20% 120%
Ruble decoupled from oil price and stayed stable despite rising
oil prices, unlike previous dynamics 15% 100%
10% 80%
Governmental external debt at 12% of GDP and foreign currency
reserves strengthening to over 450 BUSD gives stability 5% 60%
0%
Major events such as the US sanctions in April 2018 trigger 2014 2015 2015 2016 2016 2017 2017
40%
volatility dec jun dec jun dec jun dec
Inflation USD/RUB Price for Crude Oil
(Left axis) (Right axis) (Right axis)
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 7
CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY FINANCIAL DETAILS
STRONG BELIEF IN MAINTAINING
AND GAINING MARKET SHARE 76%
OF THE COMPANIES
40% expect gaining market share in 2018 (lower than last year: 52%) EXPECT TO GAIN
MARKET SHARE
73% increased or maintained market share in 2017 WITHIN THREE
76% expect gaining market share in three years time YEARS
Only 1% in total expect loosing market share in 2018, three years
and ten years time
TURNOVER EXPECTATIONS
55% expect turnover growth in 2018 (lower than last year: 74%) 70%
67% expect growth until 2021, slightly less in 10 years perspective 50%
30%
Around 20% believe their turnover will suffer from contraction in
10%
2018 and three years ahead 2018 2021 2028
Contraction Growth
38% estimate the long-term profitability in Russia to be high
compared to other markets (lower than last year’s 46%)
LONG-TERM PROFITABILITY
36% expect it to be moderate, 17% consider it low EXPECTATIONS
60%
“It is very difficult to predict the growth. “Overall, we believe that the market
It mainly depends on oil/natural gas will be tough, but we will further 30%
prices as well as political developments identify niche spots on market with
that might prevent growth” higher profitability” 0%
Undisclosed respondent within the industry Undisclosed respondent within the 2016 2017 2018
of Agriculture, Forestry and Fishing industry of ICT Low Moderate High
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 9CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY STAFF AND HUMAN RESOURCES
COMPANIES INCREASE SALARIES
COMPANIES’ SALARY CHANGES
100%
AND STAFF
50%
Real salaries trend is returning to positive
0%
2015 2016 2017 2018E 48% raised salaries more than inflation in 2017
Increase/-d more than inflation
45% lowered real salaries in 2017
Lower/-ed or increase/-d less than inflation
44% plan to raise salaries more than inflation in 2018
COMPANY STAFF CHANGES Stronger tendency to hire in 2017
90% 35% of all respondents increased their total staff in 2017, 42%
60% maintained their total staff in 2017
30%
88% of all companies with Russian turnover up to 10 MEUR increased or
0% maintained their staff in 2017
2015 2016 2017 2018E 2021E
Decrease/-d No change Increase/-d 36% and 62% respectively plan to increase their total staff in 2018 and in
three years time
ACCESS TO TALENT
MANAGEMENT STAFF
The labor market is looser with good access to staff and management
100% In the years leading up to 2014, it was significantly harder to find talent
50%
Reduced amount of expats not likely to increase drastically
0%
2014 2016 2017 2018 2014 2016 2017 2018 Only 4% of all respondents intend to increase amount of expatriates
Low Medium High Low Medium High
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 11CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY FOOTPRINT AND LOCAL INVESTMENTS
COMPANIES AIM FOR EXPANSION
DESPITE TURBULENCE ECONOMY GROWTH EXPECTATIONS
15%
31% 38%
Expectations of Russian economy growth are promising
61% of the companies believe Russian GDP growth rate will 8% 8%
perform at least as good as the average of advanced
economies within the 5-year horizon
46% predict it to outperform the average of advanced
economies within the 5-year horizon
61%
expect Russian GDP growth to perform
no worse than the average of advanced
92% believe Russian economy will perform with at least 1% economies in the coming 5 years
growth rate within the 5-year horizon
LONG TERM EXPANSION PLANS
For the next 5 years, the International Monetary Fund forecasts
advanced economies to develop with 1.7 - 2 % GDP annual
growth rate
Long term expansion outlook is steady and positive
82% 14% 1%
1%
82% aim at long term expansion on the Russian market, 4% 2%
same level as in 2017
Expand Maintain Decrease
Leave Left in 2017
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 13PHYSICAL FOOTPRINT
EXPANSION CONTINUES FOOTPRINT CHANGES IN 2018
Expand geographically
? QUESTION ASKED (MULTIPLE CHOICE): 28%
67% Maintain presence
IN WHICH FEDERAL DISTRICT/-S OF Planned to expand, but
halted the plans
RUSSIA DOES YOUR COMPANY HAVE
Not relevant / Company
THE MOST CUSTOMERS?* 2% liquidated
3%
28%
>80%* THESE ARE ALSO THE TOP PLAN TO EXPAND IN 2018
FEDERAL DISTRICTS INDICATED (SAME LEVEL AS 26% IN 2017)
>50-80
FOR RECENT AND PLANNED
>20-50 SHORT TERM EXPANSION
>10-20
REGIONAL EXPANSION HIGHLIGHTSSWEDISH COMPANIES WITH A LOCAL FOOTPRINT
CONTINUE TO INVEST IN THEIR RUSSIAN BUSINESS
Strengthening of Swedish production in Russia continues
40% of the companies with local production are planning investments in 2018
16%
69% plan further investments in the coming 3 years
Out of 45 producing companies without production in Russia only 28 clearly
50%
state that they are not considering local production, 7 are intending to go local
34%
The number of companies investing in local production remains stable
38% made investments in 2017, 31% in 2016
35% plan for investments in 2018, 36% planned for investments last year Have a local production in Russia
Directions for investment include manufacturing, land and office space, Not relevant / Not a producing company
staff and working condition improvements, opening stores, marketing Do not have a local production
34% 38% 35%
COMPANIES COMPANIES MADE COMPANIES PLAN
HAVE LOCAL LOCAL INVESTMENTS FOR INVESTMENTS
PRODUCTION IN RUSSIA IN 2017 IN 2018
69% OF THEM PLAN TO INVEST
FURTHER UNTIL 2021
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 15CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY MARKET ASPECTS
SANCTIONS ARE PLAYING A SIGNIFICANT ROLE FOR
SWEDISH BUSINESS IN RUSSIA – OUTLOOK NEGATIVE
Sanctions sharpened in 2017 and early 2018 41% were negatively affected by sanctions and
Current US and EU sanctions towards Russia embargoes in 2017
are not expected to decrease in the near future 53% were not affected in 2017
Most business opportunities are possible despite 6% of the companies were positively affected in 2017,
sanctions, embargoes and import substitution mainly companies with local production having
European companies need to comply with both EU benefited from reduced competition from imports
and US sanctions. The sharpened US sanctions in
April 2018 risk having significant effect on international 32% were negatively affected by import substitutions
trade, also involving Swedish companies in 2017 (more than 22% in 2016)
12 companies state positive effects by import
substitution, mainly among companies with local
production
6%
53% NOT AFFECTED
BY SANCTIONS AND 32%
53% EMBARGOES IN 2017 NEGATIVELY AFFECTED
41% NEGATIVELY
41% BY IMPORT SUBSTITUTIONS
IN 2017
AFFECTED (MORE THAN 22% IN 2016)
Negatively affected Not affected Positevely affected
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 17CORRUPTION IS AFFECTING THE BUSINESS – MAINLY
AMONG EXTERNAL PRIVATE COUNTERPARTS
The transparency international ranking is not improving Swedish companies try to avoid corruption
Dropped to rank 135 in 2017 in the Transparency Companies perceive the level of transparency in
International index (from 131 in 2016) transactions to be low
Score unchanged 29/100, other countries climbed the Bribes and kickbacks are mentioned as examples of
index corrupt behavior often witnessed among competitors
More corruption is witnessed in other companies Most companies have action plans, codes of conduct
18% reported exposure to corruption in their own and zero tolerance to corrupt behavior
business
21% reported having witnessed corruption in 2017
among companies around them
Highest occurrence witnessed corruption among
private external counterparts 18%
100% 86%
78% 76%
Has your company 75%
18%
been exposed to
corruption* in 50%
Russia in 2017 in
14%
REPORTED EXPOSURE IN 2017 connection with… 25% 8% 12% 12%
5% 9%
(HIGHER THAN 2016: 13%) 0%
Public bodies Private counterparts Internal counterparts
Exposure No exposure I don't know
*CORRUPTION IS DEFINED AS IN THE MEANING OF CRIMINAL BEHAVIOR SUCH AS BRIBERY OR FRAUD
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 18MINORITY EXPECT CORRUPTION
TO INCREASE IN 5 YEARS
35%
Situation not deteriorating, but improvement is not evident EXPECT DECREASED
28% noticed improvement in the past 5 years CORRUPTION
59% see no change or can’t judge the trend IN THE NEXT 5 YEARS
Further improvement expected
The development is moving in the right direction the pace is
slow and problems are still significant DEVELOPMENT AND EXPECTATIONS
However, the majority of businesses is not experiencing OF THE EXTENT OF CORRUPTION
corruption in their activities
35% 36%
33%
“Regardless any collaboration with “A client's ex-employee was trying to 28% 28%
get money in order to avoid court 26%
public organizations you either pay
‘extra’ or you have problems. We don't proceedings.”
pay extra, but we have to spend so
much time and efforts from top 8% 7%
management to fill in documents, go “We were at first not included in the
to meetings…” official public grant system, but later
we were included because we brought
Decreased / No change Increased / I don’t know
this to the attention of the governor.
Will Will increase
“Safety manager and/or purchasing We have been unable to buy assets
decrease
specialist may not allow our products from a state owned bank, even though
to be purchased unless they receive a the bank wants to sell us assets.”
bribe.” Development past 5 years
Expectation of coming 5 years
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 19MAIN CONSTRAINTS AFFECTING SWEDISH BUSINESS
IN RUSSIA ARE RELATED TO UNCERTAINTY
The three main stated disadvantages of the Russian market are:
High uncertainty level in the economy in general (44%)
Low-price oriented customers (43%)
Volatile local currency (38%) ? QUESTION ASKED (MULTIPLE CHOICE):
Other concerns includes: WHICH 3 MAIN DISADVANTAGES ARE
Embargo, sanctions, political tension (25%) AFFECTING YOUR COMPANY'S ACTIVITIES
IN RUSSIA?
Regulatory complexity (20%)
Unreliable legal and judicial systems (15%)
Unfair competition (14%)
Corruption (12% of companies named this as a crucial factor among others)
44% 43% 38%
HIGH UNCERTAINTY LEVEL CUSTOMERS MORE SENSITIVE VOLATILE
IN THE ECONOMY TO PRODUCT’S PRICE LOCAL CURRENCY
…of the companies THAN ITS QUALITY
name it as one of the
main disadvantages
affecting their business
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 20LARGE MARKET WITH STRONG
81% DEMAND ARE MAIN ADVANTAGES
LARGE AND The long term profitability is high
POTENTIAL
74% consider their long term profitability high or moderate
MARKET SIZE
of the companies name it as one out of three 17% estimate their long term profitability as low
main advantages of the Russian market
Large growing market with strong demand and growth
The three main advantages positively influencing companies’ activities
in Russia picked by multiple choice are listed to the left
74%
Other positive factors include:
Good profitability & ROI comparing to other markets (21%)
STRONG DEMAND Low competition level (14%)
FOR COMPANY’S PRODUCTS Geographical closeness (11%)
Favorable taxation system (7%)
31%
The Swedish brand stays strong
94% claim that the image of Sweden 94%
in Russia is positive SWEDISH BRAND
GROWING
DEVELOPING 83% of companies that profile themselves IS PERCEIVED
VIBRANT RUSSIAN ECONOMY as Swedish say this has a positive impact POSITEVELY
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 21CONFIDENTIAL FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY CONCLUSIONS AND RECOMMENDATIONS
WORK STRATEGICALLY IN A
VOLATILE ENVIRONMENT INTERNAL FACTORS
AND STRATEGIES
Set strategy and regularly revisit implementation
Base strategy on available resources, time horizon and risk appetite
Be in control of company strategy, don’t let circumstances dictate the long
term direction of the business Resources Horizon Risk
Dedicate senior resources to monitor the situation and secure direction
Aggressive/Heavy footprint approach is risky and resource heavy and
may give long term dominance
Careful/Opportunistic approach with low footprint, based on current
business is a common mid way that enables scaling up at later stage
Aggressive Intermediate Quiet
Quiet/beyond the horizon approach suit the risk averse but will not capture
the long term potential
Follow Russia closely – eventful times are likely to continue THE EVENTFUL
The long term opportunity lies in the large, resource rich economy, well MID-TERM
educated population and attractive geographic position between east and
west, but the road to it may be long and bumpy
For many companies, 2017 came out well, 2018 has started in an
ambiguous way, uncertainty seems greater than in a long time during
?
spring 2018
Short-term Mid-term Long-term
CAPTURE POTENTIAL BY WORKING WITH A CONSCIOUS STRATEGY
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 23THE AGGRESSIVE APPROACH –
AIM FOR DOMINANCE FIGHT THE
BEARISH MARKET
Go local and go heavy, establish a dominant position on the market
In public procurement and in projects with governmental financing, the
origin of goods is closely observed. In case there are local competing
companies with equivalent products, foreign suppliers are excluded
By actively seeking out opportunities to take a dominant position on the
market with own production, sales network, development and support
functions, market share can be increased
Be aware of specific risks for your company and have mitigations ready
Conditions for heavy entry are better than many suspect
Foreign investments and especially in production are dearly sought after
among Russian federal and regional authorities. The benefits given and
the level of support are unprecedented in Russia’s modern history
Asset prices are lower than in high growth periods, talent acquisition
possible with reasonable remuneration expectations
Positive news is very well received by market players. Exposure to media,
market and authorities is easier to attain than in boom years
A HEAVY FOOTPRINT MAY GIVE GOOD PAY OFF – AT A HIGHER RISK
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 24THE INTERMEDIATE APPROACH –
WAIT FOR SUMMER BE READY TO SCALE UP
Maintain presence with low footprint
Scale down local operations, but stay with key assets
Divest high risk assets and resource intense footprint
Maintain presence with legal entity, product rights and certifications,
capacity to do business, but leave heavy presence to partners
Build external partner network and an insightful internal core team that
are top of the key players on the market
See the long term perspective
By maintaining the legal setup and key resources, the option of scaling
up business on short notice persists when company strategy changes
The signal to the market of not exiting is important. Maintaining even a
small fraction of business locally may play a key role in communication
at later stages and strongly contribute to confidence from the market
Maintain profitable revenue streams and capacity to take opportunistic
deals. Abstain from investing in non core business. Be flexible and
adapt to circumstances
STAY ON THE MARKET BUT REDUCE LEVEL OF RISK
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 25THE QUIET APPROACH –
LOW INVESTMENT/LOW REWARD STAY BEYOND
THE HORIZON
Stay beyond the horizon and sell cross border
Divest all local assets, serve market from head office or regional presence
Only work through partners, distributors, online sales
Maintain brand presence through third parties and online
This may also be the first stage when approaching market as a new player
Beware of the risks when relying on third parties
This is the least capital intensive approach, but doesn’t necessarily bear
the lowest risk
Third parties outside your control can put your brand at risk if not carefully
supervised
You can cut supply chain and exposure over night, but so can counterparts
RELY ON PARTNERS FOR LOCAL PRESENCE
MACRO FINANCIAL STAFF & HR EXPANSION MARKET CONCLUSION BUSINESS SWEDEN 26Thank you for taking your time to Work with business setups that can
read the Market Outlook Russia handle such preconditions. Maintain
some redundancy and spare
The near and mid term future of the capacity for increased volatility in
Russian market is more than ever results and workload
affected by world politics. The
uncertainty and unpredictability of Remember that there is also an
the past few years is likely to remain everyday day-to-day business
during 2018 outside geopolitics. Life goes on and
business is being made regardless of
Positive scenarios could include a the overarching worries
reform oriented government being
presented in May 2018, a clearly Exports from Russia is an
communicated succession plan after increasingly important topic on the
the current presidency comes to an domestic agenda. Giving opportunity
end. Agreements on the great to enablers of such initiatives,
political divides, where relief of manufacturers of machinery,
sanctions and re-energized trade providers of software and technical
relations could boost growth solutions that enhance efficiency,
sub suppliers of components etc.
Negative scenarios include
escalation of conflicts of geo political Share your concerns and successes
character. Extended sanctions and with us. We want to work side by
retaliatory actions that affect side with the best companies out
individuals and businesses there and create value for you!
Don’t be a stranger, vi hörs,
/Andreas
+46 703 909 473, +7 495 788 11 30 Our purpose is to help Swedish companies grow global sales
andreas.giallourakis@business-sweden.se and international companies invest and expand in Sweden
www.business-sweden.se
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