Western Firms Investing in Capital-Starved Russia

Even before the US presidential election raised hopes of warmer ties with the Kremlin, some big western companies were betting Russia’s economy will soon come out of the deep freeze.

Big retailers like Sweden’s Ikea Group and France’s Leroy Merlin SA have begun pumping billions of dollars in new stores and factories, counting on Russia’s consumers to start emerging from hibernation after two years of recession, Bloomberg reported.

Ikea is putting $1.6 billion into new stores over the next five years or so. Leroy Merlin in September announced a €2 billion ($2.12 billion) plan to more than double the number of outlets in Russia over the same period. Pfizer Inc. is building a new drug factory, while Mars Inc. is expanding plants for chewing gum and pet food.

“This is the moment for investment,” said Walter Kadnar, country head for Ikea, which last launched a new store in Russia five years ago but this fall opened a $60 million furniture factory near St. Petersburg and acquired land for a third Mega mall near the city. “I strongly believe in the potential of the Russian market long-term.”

 Situation Changing

Foreign investment all but ground to a halt as the country sunk into recession and conflict with the West over the last two years. Companies including General Motors Co. slashed local operations. For many of those who stayed, now is the time to reopen their wallets to get a jump on rivals. The ruble’s plunge, though it decimated the value of local earnings in dollars and euros, has driven production costs in Russia down sharply. By some estimates, they’re now lower than those in China.

“The last 2-3 years have been a disaster,” said Frank Schauff, head of the Association of European Businesses in Moscow. “Now, the situation is changing as the ruble exchange rate has stabilized and the Russian economy is forecast to return to growth soon.”

The government said its annual meeting of foreign investors in September drew the most top executives in a decade. Foreign direct investment surged to $8.3 billion in the first nine months of this year, more than the $5.9 billion reported for all of 2015, according to central bank data.

That’s still far below the levels seen before the Ukraine crisis, which together with US and European Union sanctions and the plunge in oil prices and the ruble made many big companies reconsider investing.

 room for improvement

Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said geopolitical tensions have been a big deterrent for potential foreign investors.

The election of Donald Trump, who praised President Vladimir Putin and questioned the sanctions during the campaign, could change that. “Trump has a more open mind regarding the US-Russia relationship,” Rodzianko said. “It’s clear there is room for improvement and that in itself is hopeful.”

For those companies not put off by the chilly political winds, adapting to the plunge in the ruble’s value—it’s down about 50% since the crisis began in early 2014—and the drop in Russians’ incomes has required some ingenuity.

Ford Motor Co. said this month it sees signs of a rebound in car sales, which had been hit especially hard by the recession.

French do-it-yourself retailer Leroy Merlin says its same-store sales are up 5% in ruble terms as Russians turn to its low-cost products.

 Long-Term Approach

“We are taking a long-term approach, economic growth is set to return, and we are already seeing some improvement,” said country head Vincent Gentil.

Foreign companies are also increasing local production to capitalize on the ruble’s drop. Ikea aims to bring the share of Russian-produced goods to 80% in the next few years and is already exporting Russian-made folding beds to China and linen curtains and wood furniture to Europe.

Of course, the legendary local bureaucracy remains a problem for many investors. Although Russia has moved up in international rankings for ease of doing business, big foreign players often seem to be targeted.