Workarounds: how Russian businesses currently deal with foreign partners

General situation on the market

The West's plans to crash Russian power production industry have failed. The Russian Federation keeps finding new market channels and, moreover, proves its technological independence. For instance, in 2023 Russia reached record levels of drilling of oil-producing wells. This explosive increase indicates that Russia can easily function without western suppliers of oilfield services and manufacturers of drilling equipment.

To top it all off, in the overall assessment, industrial and economic growth accelerates more and more with each year. On an annualised basis, in 2023 the GDP increased by 8.7% in terms of material production and by 5.4% (as opposed to 3.4% in April of previous year) in general terms. The retail trade turnover in Russia increased by 9.2%, while the unemployment rates dropped by 3.2%. Real income from wages increased by 10%. Industrial production increased by 7.1% (including 12.8% increase in the processing industry, 1.2% – in the raw materials production, 2.9% – in the farming sector, 13.5% – in the construction industry). [1]

How can we explain such results and the ability of the Russian economy to withstand the sanctions that were and still remain the most limiting sanctions ever? In fact, the measures taken against Russia can be considered as economic warfare. It seems that the initiators of sanctions – the USA and the EU, among others (in particular, the United Kingdom), – have underestimated the ability of the Russian economy to resist and transform, as well of the Russian government – to react appropriately.

It must be noted that the electrical engineering industry is one of Russia's fundamental strategic directions, especially now that the import to Russia is restricted. Now is the moment to reinforce Russian manufacturing industry, implement new technologies, restore productions that ceased to work due to higher import equipment demand, establish new production processes that have never existed here before.

By convention, the electrical engineering industry is divided into three directions: machinery engineering (that Rem&Coil belongs to), domestic appliances manufacture, and cable production. The classifier also includes the production of lighting equipment and batteries.

In 2022, such global giants as Schneider Electric and ABB stopped taking orders for electrical equipment from Russian customers. Later Siemens also stated that it suspends its activities in the Russian Federation. It must be noted that not only manufacturers, but also educational institutions that train future specialists in the field of electrical engineering have incurred economic losses at that moment.

Due to this fact, 2022 was a year of finding new suppliers, components, consumers, logistic and banking solutions. Some issues have been solved which is evident on the diagram: within the first three quarters of 2023, electrical equipment production surpassed the levels of the entire year of 2022. It is clear that the increase of prices has played its role. It was, however, observed previously; therefore the current situation was to be expected.

To paint the full picture, we will demonstrate how the ratio of product groups varied over time. The category of electric motor, generator, transformer, switchgear, and other measurement instrumentation is in the lead. In 2021, it accounted for 35%, in 2022 – 37%, within the first 9 months of 2023 – 41%. Note that this category includes the biggest number of players (see the circular diagram). It is followed by the cables and cable fittings category – its share didn't vary dramatically within the past three years (31, 33, 30%). It is important to note that this category could show negative dynamics in monetary terms due to sufficient offer and lack of production expansion needs.

Transfer issues

To start with, Russian businesses encountered issues with logistics, transportation and money transfer and had to find solutions.

The biggest challenge we have faced are financial transactions, since our economy depends on the US dollar and all transactions are carried out in dollars. Correspondent banks are located in the USA which results in payment blocks or returns. Funds used to come within 3-4 days, but now the circumstances have changed, and money transfer can be delayed for up to 4 months. This can lead to serious issues for companies with no financial reserves, especially when huge sums of money are delayed.

Although businesses are starting to use other currencies, such as Chinese yuan, another problem arises: not everyone is ready to receive money from Russia. Friendly countries, such as Turkey and the UAE, are helping in this regard; however, transactions involving their banks require fees which increases the expenses. Transferring funds in Russian rubles is not a great solution either due to losses incurred during conversion in foreign banks.

Russian citizens who wish to interact with foreign financial institutions are recommended to contact experts in the field of international financial transactions and risk management. It is also imperative to abide by the laws and requirements of the country where an account is opened or transactions are carried out.

Although yuan is a reliable currency and working with Chinese financial institutions is convenient, it is important to remember that opening accounts and carrying out transactions has become trickier in China. Some Chinese companies fear retaliatory actions and work under different names on the Russian and Chinese markets. Similarly, not all banks in Dubai are ready to deal with Russian businesspersons which sends a negative signal to any interested parties.

Package of problems and solutions

Our expertise is production of spare parts (sections and bars) for stators and rotors of electrical machinery. Currently, we are collaborating with manufacturers of electric motors and numerous large industrial enterprises in the fields of power production, metallurgy, mining, petrochemistry, etc. As a manufacturing company, we export our spare parts not only to the CIS states, but also to other countries.

We receive our raw materials from Russian enterprises: "Elinar" plant manufactures insulating materials, "Moskabel" and "Pskovkabel" plants manufacture winding wires.

Since the start of the special military operation, we had to rethink our foreign economic activities completely: from market channels to logistics routes and ways to receive money from our customers.

We suspended our partnership with Europe and the USA. And with that, we have redirected our attention to the markets of the Near East, North Africa, Iran, and Pakistan.

Currently, not a single Russian bank is able to guarantee money transfer to Russia from abroad; therefore, we had to open headquarters and accounts in other countries.

We have also faced challenges with delivering our products to the customers: air transportation has become much more complicated and expensive, new logistics "legs" had to be added. Transportation prices increased significantly: transportation of cargo used to cost 5 dollars per kilogram for customers in Latin America, nowadays the price can reach up to 13 dollars. All of this makes delivery even more costly. Nevertheless, if there were absolutely no export options for two months since the special military operation started, now there are new transit routes and some competition between transportation carriers. This allows for optimization of delivery routes. We are also using the opportunities offered by the government, in particular, subsidies which cover a big portion of logistics costs.

Future development of foreign economic activities

The current international situation required finding new ways to develop international business from Russian entrepreneurs. Data analysis and expert opinions state that Turkey, Cyprus, the UAE and Egypt became the most popular countries among Russian businesspersons. In 2024, we are focusing on developing supply and strengthening of ties with the following countries: Egypt, Iran, Saudi Arabia, Bahrain, the UAE, Morocco, Indonesia, and Latin American countries.

These countries are ready to cooperate and understand the benefits of working with Russian manufacturers, since we offer the highest quality products and services at much lower prices than those of European and American companies.

We also observe the potential in dealing with Belarus and former USSR republics (Kazakhstan, Uzbekistan, Azerbaijan).

The most important thing is that these countries also view us as future partners. And right now, we really need such financial instruments as guaranteed money transfer to Russia. Furthermore, if tourists can travel to Europe via Kazakhstan, Serbia, and Turkey, why shouldn't a logistics hub also exist in, say, Serbia, to ensure an unrestricted delivery route of goods from Russia to North Africa and Latin America?

Numerous industrial enterprises need our products since we offer competitive prices and high quality.

We are now researching new markets of Morocco and Indonesia and looking for alternative delivery routes.

Businesses are currently focused on bypassing sanctions, and western countries are trying to combat that. We do not know how it will end. We may depend on the countries willing to help us for some time. However, remembering the recent situation with friendly Kyrgyzstan that stopped accepting funds from Russia for a while, the processes can get even more complicated.

Conclusion

The Russian economy is actively adapting to the new circumstances that have arisen because of economic warfare carried out by the western countries. This adaptation will ensure growth in 2024.

The sanctions policy is aimed at limiting economic growth of the countries that the USA does not like. However, the sanctioned states obtain additional opportunities and growth. Such circumstances facilitate development of technological independence and infrastructure. Both the challenges and the multilateral cooperation in the name of economic development should be used to improve quality of life.

We should simply learn to live and work under such conditions by ourselves or with the help of friendly countries and our partners in the Near East.

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Sources:

1.??? Ye.N. Sokolova, I.L. Yakushev. Influence of western sanctions on the economy of the Russian Federation and forecasts its development for 2023/2024 / Autonomous Non-Commercial Organization for Higher Education "Russian New University". Online resource https://edrj.ru/wp-content/uploads/2023/10/EDRJ_10_2023-39-57.pdf

2.??? Irina Zabegaeva, Project Director of Step by Step Group of Companies / Market Overview: ELECTRICAL ENGINEERING MARKET OF RUSSIA 2023 RESULTS Online resource https://www.step-by-step.ru/publications/Energetika_2024-46-49.pdf

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