Why multinationals are doubling down on russia

Russia has always been seen as a challenging place to do business, especially among Western multinationals. The definition of currency But despite perceptions of entrenched corruption, economic turbulence, and political risk, many big firms have invested and maintained a presence in the country. Definition of currency exchange And while two years of shrinking GDP growth, sanctions, and a volatile ruble have led some companies like GM to leave the market, there has not been a large-scale exodus of MNCs from Russia.

For multinational firms, Russia’s attractiveness lies primarily in the size and sophistication of its market. Foreign currency exposure definition It has the tenth-largest population in the world, of which 74% is urban. Currency policy definition And prior to the latest economic challenges, its middle class was estimated to account for as much as 60% of the total population. Single currency definition While the middle class has been eroded by currency depreciation and recession, the Russian consumer remains technologically savvy, interested in quality Western brands, and able to spend.

Russia’s industrialization also means that the market offers substantial opportunities in diverse B2B sectors such as mining, oil and gas, metallurgy, chemicals, light industry, and consumer durables. Currency exchange rate wiki In 2015, Russia’s government spending was still greater than India’s – at approximately $257 billion— despite the massive devaluation of the ruble.

The drop in oil prices has been the primary driver of Russia’s current recession—but it has also affected emerging markets from Saudi Arabia to Angola to Brazil. Foreign currency exchange rate definition This means that companies won’t be able to compensate for lacking growth in Russia just by tapping another market. Definition of currency depreciation Instead of pulling out or scaling down their Russia businesses, executives have to find new ways to ensure strong performance.

Experienced executives in this market have gone through at least two large crises over the past 20 years: in 1998 when the government defaulted on its debts, and in 2009 when Russia was infected by the global financial crisis. Definition of devaluation of currency From these, they learned to stay committed to the market, protect their margins, make some selective investments, and wait for the recovery. Currency depreciation definition economics This worked, because both crises were short-lived (lasting approximately 1-1.5 years) and were followed by rapid recoveries. Tradable currency definition Demand quickly bounced back.

Today’s crisis is different. Common currency definition Russia’s growth had already started slowing in 2012, even when oil prices were at $110 a barrel (compared to $40 a barrel today), because of inefficiencies in its economy. Currency converter definition It had a shrinking labor force, low labor productivity, low technological competitiveness of Russian exports, and excessive government meddling that constrained investment. Currency future definition The drastic drop in oil prices has obscured these issues, but they will continue to constrain growth even if oil prices recover.

The first mistake executives can make in the current environment is to try to sustain historic levels of revenue growth and profitability. Definition of currency appreciation This won’t be possible for most firms, because of shrinking demand across many industries and the impact of ruble depreciation on revenue depreciation. Currency valuation definition Multinational leadership teams should instead clarify their long-term objectives in the market – for example, whether they want to focus on maintaining margins or growing market share – and align execution accordingly.

Because purchasing power has changed substantially across all customer segments, from consumers to regional governments, MNCs may have to redefine their target markets. Denominated currency definition It’s time companies ask themselves: Who can actually afford our products now? How has that group changed over the past year? Are there pockets of opportunity we are not capturing yet but could be?

For example, one consumer goods company we work with recently held a full-day strategy workshop with its local Russian team and partners to revamp their assumptions about the Russian customer, understand how demand and preferences are evolving, and figure out what this means for their strategy in terms of pricing, product portfolio, and channel.

Once companies hone in on their target market, they can consider which customer segments to prioritize based on which offers the most growth/profitability for their business. Economic definition of currency This will guide how they align sales, marketing, and product strategies.

Another firm we work with, for instance, is focusing just on the high end and low end of their customer segments. What is currency exchange definition The consumers of their premium products are willing to bear significant price increases, which generate profits that can subsidize lower prices and greater geographic expansion for the firm’s budget brands, which then help it win market share against competitors.

Russia is going through a credit crunch that is causing significant retail sector consolidation and putting distributors under substantial pressure. Currency exchange market definition Because of the size of the market, most multinationals will need to continue relying on distributors, but they must now prioritize which distributors are true strategic partners as opposed to mere resellers with limited capability and sometimes willingness to shape a new approach to customers in the current environment, and provide them with support to maintain performance despite economic challenges.

One B2B firm client of ours has started to offer substantially longer payment terms to distributors to stimulate them to continue carrying inventory even as banks have cut working capital loans for the distributor.

Russian executives have experienced multiple crises and high volatility, as well as returns to strong growth. Foreign currency transaction definition This could mean that they approach the current crisis in the same way they did the ones before, which may not work given differences between crises discussed above. Currency volatility definition Senior leaders at multinationals should ensure that their local team is equipped to succeed in the current environment, and demonstrate loyalty to the Russian team as a way to retain top talent.

To keep its sales people motivated despite the sharp ups and downs of the market, one technology company we spoke with shifted a greater proportion of its sales team’s compensation from variable to fixed pay. Definition of currency crisis This provided some financial stability to its staff and kept up motivation given the abrupt drop in purchasing power their employees are facing.

Invest for the future. Definition of functional currency It is notoriously difficult to plan for more than 6 to 12 months for Russia right now, but that does not mean businesses shouldn’t try. Fx exposure definition Executives should consider investment opportunities that can help them scale and improve profitability, such as acquiring partners, localizing manufacturing, and attracting excellent talent. Legal definition of currency A large local presence – particularly in manufacturing — can help insulate the business from the worst of the depreciation.

Several firms we work with across various industries are accelerating plans to localize their manufacturing in the country, because of the crisis, not despite it. Currency definition economics Their goal is to lower product prices to gain market share away from competitors who import into the country.

While Russia will always maintain a certain level of uncertainty and unpredictability, it is within executives’ power to make the market work for them once again. Us currency definition The firms that take advantage of this fleeting opportunity will be the ones to reap the rewards as growth recovers.

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