Life with sanctions

9. 2. 2015 | Source: BusinessInfo.cz

motiv článku - Life with sanctions Czech exporters have since last summer been getting to grips with the limitations that have befallen trading with the Russian Federation. Half a year after sanctions were imposed on Russia, Czech businesses claim they have learned to live with them.

When protests against Ukraine’s former pro-Russian government broke out in November 2013 on Kiev’s Independence Square, no-one at Czech dairy company Interlacto could have possibly fathomed the gravity of the consequences that would later impact on their business. “Our exports dropped by about 30 to 40 percent, so in financial terms we lost tens of millions of crowns,” says Oldřich Gojiš, CEO of Interlacto.

The exports slump was not the only aftershock caused by the ensuing sanctions. “A subsequent oversupply of dairy products has led to a decline in global commodity prices that has depressed real prices to a level where the purchase price of raw milk stands at between CZK 5.50 and CZK 5.70 per litre. But milk is still being purchased for CZK 8.60 to CZK 8.80 per litre. Therefore a drop in the price of raw cow milk must follow soon,” adds Gojiš. The dairy firm is striving to replace the lost income from Russia with exports to other territories.

More markets, better sleep

The dairy business is not the only industry that has been hit by the sanctions imposed on Russia. The mechanical engineering industry is another sphere that has had to adjust, with the country previously having served as a happy hunting ground.

“There has certainly been a decline in sales to the Russian Federation and we estimate it at tens of millions of crowns. We have hit the wall with a certain type of spark plugs, in relation to the curbed imports of cars from the EU,” notes Mojmír Čapka, Board Chairman at Brisk Tábor. Just like the dairy firm, the engineering company is working hard to recover lost revenues through sales in other countries.

Kovosvit MAS, based in Sezimovo Ústí, says it has not been hit too hard by the sanctions. The machine tool manufacturer has been saved from more substantial damage mainly thanks to objections raised and successfully pursued by the Czech government during negotiations last summer over the second, more stringent round of sanctions imposed by the EU.

“We have seen active collaboration and assistance namely from the Ministry of Industry and Trade. Working with the ministry, licence administrators and the trade unions, we supported the PM in negotiating relief from the EU sanctions for Czech engineering companies. Our primary goal was to maintain production and the existing level of employment. And we succeeded,” says Iva Ruskovská, spokesperson for Kovosvit MAS, heaping praise on the government’s cooperative approach.

Other businesses, however, have seen little benefit from government efforts. “We have had no information yet regarding any targeted assistance from the government. We can say that efforts at finding a solution for this problematic issue here are considerably trailing the efforts of other [EU] member states, such as the Baltic countries and Finland,” says Interlacto’s Gojiš.

A key achievement is, however, identified by entrepreneurs’ organisations when it comes to the success of the government in objecting to the scope of the anti-Russia sanctions. Thanks to the endeavours, relief from coercive measures was granted to some industries that were set to suffer difficulties that would hurt the Czech economy.

Still in single digits

The overall impacts of the sanctions on domestic firms are rather difficult to express in numbers. According to Ministry of Industry and Trade [MPO] data, exports to the Russian Federation expressed in Czech crowns have dropped by 2.5 percent in 11 months. Any direct shocks have so far remained rather limited but there are still fears of secondary impacts hitting home in the future. Those could involve tremors felt by big manufacturers, supplied by Czech businesses, who have lost major Russian customers.

Consulting company PwC Czech Republic has already attempted to create a picture of the sanctions’ impacts as part of its regular survey of Czech CEOs. The survey included 150 Czech company bosses. Some 12 percent of them said they felt significant effects of the crisis in Ukraine and the associated sanctions against Russia. Six percent referred to a marked loss of revenue last year, and four percent cited a significant drop in orders for the upcoming period. Some 27 percent of businesses expected not exactly significant but still some tangible reduction in revenues for the last year, while 23 percent expected a decrease in the number of orders for business ahead. In general, companies were anxious that poor exports to Russia were to be expected over the long term.

“There is one impact that is as significant as it is immeasurable. That is the break in communication, the loss of mutual trust and the resulting suspension or even termination of negotiations regarding future collaborations, future contracts. Even if the crisis ended tomorrow, its impacts would reverberate for years to come,” observed Filip Matys, a member of the MPO press department. Another spanner in the works of business relationships with the Russian Federation is the prevalent uncertainty and difficulties in financing. Many Czech companies and their Russian partners have put their strategic plans on hold and investors have dampened their activities.

“Consequences are seen in the slumping rouble, great difficulties in recovering receivables and issues for the investment policies of Czech business in Russia. Mistrust towards Russian partners begins to creep in with apprehensions over their ability to honour their obligations. That’s another reason to keep a level head, to avoid panicking. It is prudent to seek safeguards but it is at least as important to keep trading,” says Karel Havlíček, Chair of the Association of Small and Medium Sized Enterprises and Self-employed Entrepreneurs of the Czech Republic (AMSP ČR). According to Havlíček, future contracts in Russia could also be affected to a significant degree by the utterances of domestic politicians. “The state’s official approach to Russia should be objective, in line with EU decisions but certainly not destructive. It would be very foolish to rejoice at the sight of Russia heading for recession,” he says.

The MPO has adopted a similar stance. “Our first priority is to maintain exports to Russia. Export diversification is certainly desirable but it must be pursued with the humble understanding that it is a time-consuming and costly affair. That is why it is so important to be able to stay on the Russian market,” says Jan Mládek, Minister of Industry and Trade.

Despite falling sales on the Russian market, the overall outlook for the Czech economy remains positive. Consulting group Deloitte forecasts that the Czech economy will grow by an annual average of 1.7 percent over the next five years. In 2020, the Czech Republic is expected to reach 85 to 86 percent of the EU average GDP level. However, any escalation of the crisis in the East could easily mean a recalculation of the promising forecast.

How will the Russia crisis impact the Czech Republic?

The Russian economy is losing steam not only because of the sanctions. It was becoming visibly winded even before they were introduced. The impacts of the sanctions, the crisis across the border with Ukraine and slumping oil prices combined to aggravate the difficulties posed for the Russian economy. “Apprehensive of possible further developments in the political and economic spheres in Russia, investors have withdrawn capital from the Russian market to the tune of USD 102 billion over the past 12 months,” says David Marek, an analyst at Deloitte.

The Czech Republic ranks 16th on the list of exporters to Russia, with a share of 1.8 percent. Where Russian imports to the Czech Republic are concerned, the country is considerably dependent on raw fuel supplies. The Czech Republic meets 41 percent of its annual oil demand with imports from Russia. In the case of gas, the ratio is even higher. Russia supplies as much as 74 percent of gas consumed in the Czech Republic yearly.

As a result of EU-imposed sanctions and the deteriorating economic situation in Russia, exports from the Czech Republic to Russia dropped by 18.5 percent year-on-year last October. “Given the extent of business ties between the Czech Republic and Russia and the import demands associated with Czech export production, it is estimated that a 20-percent slump in exports to Russia will cause a dip of 0.15 percent in Czech GDP. A halving of Czech exports to Russia would set back Czech GDP by some 0.38 percent,” estimates Marek.

Another factor that needs taking into account are indirect impacts through other affected countries. When the whole of the EU is taken into account, exports to Russia make up 6.9 percent of total EU exports, while Russia is the fourth most important business partner of the EU, after the US, Switzerland and China.

Bearing in mind both the direct and indirect effects of the Russia crisis developments on the Czech economy, it can be estimated that a shrinkage of exports to Russia measured at 20 percent would mean a reduction of 0.2 percent in GDP, while a 50-percent drop would shave about 0.5 percent off GDP.


Originally published in E15 weekly, economic and business newsmagazine. Author: Dalibor Dostál

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