"RUSSIA CAN'T BE ISOLATED"

The economic crisis in Russia and the geopolitical crisis over Ukraine are forcing European companies doing business in Russia to increase their scheduled payback periods of business and to anticipate a further reduction in investments. This is the outcome of a recent survey carried out for the eighth year running by the Association of European Business (AEB) in Russia, with the support of the Gfk company. Five per cent of the companies that took part in the survey say they came directly under the EU and US sanctions and 16 per cent partially. At the same time, 70 per cent of the respondents reported a negative impact of the sanctions. Two per cent of companies were directly affected by Russia's retaliatory measures and 7 per cent partially, whereas 38 per cent of all companies experienced an adverse effect from them. The most negative effect on the business of European companies in Russia, according to 81 per cent of the respondents, was the devaluation of the rouble.

In an interview for R+ the chairman of the board of the AEB, Philippe Pegorier, admitted things were difficult for western businesses in Russia at the moment, but nobody wants to leave.

- Some experts believe that the economic crisis in Russia began not as a result of the fall in energy prices and economic sanctions but because it is of a systemic nature, which means that it could continue for some time yet. What, in your view, are the main risks for developing business in Russia?

- First of all, I don't altogether agree with these experts. There were various factors behind the slump in Russia's GDP, but one of the main reasons was the fall in oil and gas prices. Then came the economic sanctions and there has also been insufficient funding of the modernization of the infrastructure in recent years.

As far as western business is concerned, you will be aware that the European countries accounted for 75 per cent of direct investments in the Russian economy in recent years. This is about 170bn euros in the last 20-25 years. Virtually all the leading European companies have invested in Russia. After all, Russia is a country where you must have big companies. That's why we are continuing to work here. Of course, we are adjusting our activities - cutting down on costs and replacing ex-pats (foreign employees) with Russian personnel. But no-one is closing anything down because they believe that in a year or two's time the country's economy will return to normal. So we are suffering the crisis here on a par with our Russian partners.

In my view, one of the main problems for European companies at the moment is the lack of orders. Another obstacle has been the laws which are tightening control over business activities, e.g. the law on the protection of personal data, which came into force on 1 September (the law obliges Russian and foreign companies to store the personal data of Russians on servers located within the country - Ed.)

- By the way, you raised the problem of the implementation of the law on the protection of personal data during your meeting with Russian President Vladimir Putin at the recent St. Petersburg International Economic Forum. And the Russian president ordered this matter to be sorted out…

- That's right. A few days after this meeting, I was invited to a conference at the president's administration. Representatives of all the ministries and departments who took part in preparing this law were there. The conference was conducted by the Russian president's aide, Andrey Belousov. There's no denying he himself was surprised when it was revealed that the implementation of this law was creating difficulties not just for western, but also local businesses. It was felt that the Ministry of Telecom and Mass Communications should provide fuller and more detailed information to the business community about the precise and correct implementation of this law. The president's aide asked Roskomnadzor [Federal Service for Supervision in the sphere of Telecom, Information Technology and Mass Communica-tions] to provide recommendations where necessary during first inspections. And to penalize companies only if they fail to abide by these recommendations. Besides this, Mr Belousov asked for a list to be drawn up of companies which by the specific nature of their work are unable to implement this law, e.g. airlines. So, it was already too late to change this law, but the conditions of its implementation were clarified. It was evident that the president's apparatus has done everything possible to help business. And that's just one example. The fact that the president is listening to requests from representatives of foreign business is a good sign as far as we are concerned.

- You talked about the investments of leading western companies in the Russian economy. But since last year a lot of companies have been reducing their investment plans and even abandoning their business.

- There haven't been any reductions. There has been a slump in investments but it has nothing to do with any reassessment of their value caused by the fall in the exchange rate of the rouble. Businesses are not closing down.

- What about the General Motors plant in St. Petersburg?

- That's an American company. As far as European companies are concerned, all they are doing is reassessing their investments and cutting costs. But I don't know of a single major European company that would think of closing down its business in Russia. They are waiting for the time when orders start coming in again.

- But the integrated index compiled annually by AEB with GfK which reflects the moods and expectations of European companies doing business in Russia has been reduced appreciably compared with 2014 and is virtually close to negative expectation territory. How would you describe the mood of people from Europe doing business in Russia?

- The mood in business cannot be good if there are no orders. Companies are here in order to manufacture something, but for the time being we have to wait. Although we are cutting costs, we don't know yet when they will be recovered.

- The lifting of sanctions is still a political decision and depends on the situation in Ukraine. A complete breakdown in political and economic relations suits neither Europe nor Russia. In this context, both sides should listen to what the AEB has to say. Is this actually happening?

- First of all, I have to say that although sanctions are not being lifted, at least new ones are not being imposed. Second, we can see that the situation in the eastern part of Ukraine is stabilizing. Possibly, the term "improving" cannot yet be applied, but at least it has become calmer. The negotiations process has been launched and the Minsk agreements are starting to be implemented. The result is that senior official delegations from the EU countries have started coming to Moscow more often. For example, the French agricultural minister recently arrived there and that country's economic and energy ministers are also expected to visit. You can't isolate Russia.

Of course, the question of sanctions - when to lift them, fully or partially - must be resolved by the heads of the European states. You know, of course, that the sanctions are divided between those that were imposed because of Crimea and those that followed the events in East Ukraine. The first, of course, are for the long haul, but the second should be lifted. That's what we are recommending and, apparently, French President Francois Hollande is also inclined towards this opinion. We are trying to convey our opinion to European politicians.

- But there are, I think, countries with whom it is difficult to work. For example, Poland is in favour of tough measures against Russia.

- There are countries that are categorically against sanctions, but there are also those who are categorically against lifting them. But when everyone gathers in Brussels the main thing is to reach a consensus. A compromise must and will be found. Of course, it won't be the lifting of all sanctions but there will be a decision.

- In one interview you said that the AEB had already warned the EU about a change in work strategy in Russia towards increasing local production. Which western companies are taking part in import substitution in the Russian market?

- The majority of our companies long before this were involved in local production by virtue of acquiring the shares of existing enterprises and building new ones. For example, leading European companies like Alstom, Schneider Electric and Siemens have business in Russia and produce output jointly with Russian companies like Transmashkholding, Elektroshchit, Sinara, and so on.

The members of our association are primarily Russian corporate bodies. That is why the companies are in the first instance subject to Russian legislation. In the current economic situation many of our companies are extending their localization, particularly as the sharp fall in the rouble against the euro and the dollar is conducive to this. Russian industry is manufacturing a lot of competitive goods, and its potential is even greater, and we are thinking about developing our export-oriented production.

- At the same forum in St. Petersburg you submitted a proposal to sign a declaration on intensifying relations between the EU and the EAEU [Eurasian Economic Union]. In your opinion, this should help overcome the current lack of understanding between Russia and the members of the European Union. Did they support you?

- Inasmuch as we are virtually local producers, with the emergence of the EAEU, the market has become bigger for us. It benefits us a great deal to support this economic alliance. And we are working here, in Moscow, and in Brussels to develop contacts with the EU. I realize that relations between the EU and Russia are not the best at the moment, but this is an additional opportunity for the future. I even think that this could be a good solution to a way out of the crisis.

- For Russia?

- For Russia and the EU! It is a positive solution for everyone. That's how I see it. We must give Brussels a concept for a new agenda.

- But they're still not responding.

- No, no - they are. [German Chancellor] Angela Merkel has spoken about this. But they are making it clear that there will be a dialogue only when the current political crisis is over.