— Mr. Rodzianko, there is a crisis in Russia again. Political tension in relations with the West continues. It is hardly surprising that Western businessmen are worried: is this the right time to invest in Russia? Is business not a hostage of politics? Perhaps they have tightened the screws on Amcham in Moscow too, as they try to get their own back for the difficulties in relations with the USA?
— Like a coin, a crisis has two sides. On the one hand, we have sanctions against each other and a cooling in relations. On the other, the effect of sanctions, and particularly their effect on the price of oil, has been to reduce the exchange rate for the rouble very considerably. The policy of the US Federal Reserve system strengthens the dollar and weakens the euro. This has made the dollar a very strong currency. What does this mean?
It means that everything in Russia has become cheaper, including investments. A dollar now buys much more here than it did a year or two ago. And this is a considerable incentive to invest. As they teach in the business schools, buy when it’s cheap and sell when it’s dear. Or just buy cheap, sell dear. This is the fundamental logic of business, and it is particularly fundamental right now when applied to Russia. The main incentive for business is the need to feed one’s family. Good business means “making something people need” and obtaining a fair reward for it, which is expressed as a margin. And the margin depends on the difference between the production price and the sale price – the first must be less than the second. So you see, a unique situation has come about in Russia, when in a very short time, everything has become far cheaper for investors. And the margin here can be very good indeed.
Yes, the rhetoric about Russia from the West has become harsher. It does not call for investment. In America, no-one is advising businessmen to fly to Moscow, to take new technology there, to start up production. But cold calculation tells you the opposite. It tells you that it is very profitable to do such things now. And if you don’t seize the moment, someone else will…
It is important to keep an eye on what the Russian authorities are doing. I’m talking about whether they are getting their own back on AmCham. Nothing of the sort! I have not sensed any changes for the worse over this period. On the contrary, they on their part have been noticeably more polite, some have even expressed sympathy that the Chamber has landed in such a difficult situation, one which Russia certainly didn’t create. We have this sort of understanding from both the Russian and American governments. We are now being treated in something like the way the Red Cross is treated during a war.
Aleksey (Alexis) Rodzianko was born in 1951. He graduated from Dartmouth College (USA) in 1973 and worked as an interpreter. In 1990 he passed his MBA in the specialty of “Finances” at Columbia University (USA).
He became head of the American Chamber of Commerce in Russia in November 2013 after a ten-year career in banking in New York and Moscow, From 1995 6o 2013, he held leading positions in IFC Metropol, and in the banks Credit Suisse Moscow, Deutsche Bank and J.P. Morgan.
Alexis Rodzianko is the great-grandson of Mikhail Rodzyanko, who was Chairman of the Russian State Duma of the third and fourth convocations.
— So they understand that you have become hostages of the situation?
— Yes, they do. But even in these tense times, AmCham has an important part to play in supporting positive constructive relations.
— But propaganda has some effect! And when the ears of potential foreign investors are filled with a flood of negative information about Russia, you have to be bold to go against the flow.
— Yes, that’s true. And of course some people are listening to it. But if investors only take account of what is being said and done now, no-one will every invest sensibly. And the sensible thing is to invest against the wind, not with it! It’s easier to run with the wind, but more interesting to go against it.
— But all the same, this means taking a risk. Is such a risk justified in conditions of financial turbulence, the lowering of Russia’s investment rating and of the purchasing power of Russians?
— Yes, the risks are high. But the rise and fall of the economy is a cyclic thing, like the change in the price of oil. Russia has not lost its huge potential in this crisis. The people are still here and so are the natural and intellectual resources. All that is still here. And most importantly, there is a huge unsatisfied demand for development in all sorts of fields, from high-tech to household goods. We’re at one stage in the cycle now, tomorrow we’ll be somewhere else. Any businessman with any experience at all knows that. I would advise paying great attention to economic policy inside Russia: what guarantees are investors being given here, how easy is it to do business? This is much more significant in the long term view.
AmCham is a non-governmental, non-commercial organization representing the interests of more than 600 companies including major American corporations operating in Russia, and also many European and Russian companies developing their businesses on the international markets. It has been operating in Russia for more than 20 years now. It has its headquarters in Moscow and a regional office in St. Petersburg.
— Can one say today that Russia is not only turning towards its Asian partners, not only actively replacing imports, but is still seeking Western investors?
— I would not divide investors into Western and Eastern. There are investors and there is money. It is better to attract those investors who have not only money but also advanced technologies. Such investors more often produce a positive effect. But any investments should be attracted and supported, whether they are Russian, Chinese, American or European. If there is a good investment climate, all investors will turn towards Russia. And that is just what is needed.
— How is this climate today?
— There is no one answer to that. Some of the Russian government’s steps are clearly directed towards improving it, some are not. In this respect, inside Russia one can see a sort of push-pull effect, or a situation in which there are several tendencies at the same time. Therefore how it will all be solved in the long term is very important.
AmCham members, for example, are not delighted by the proposed amendment to the Russian law on personal data. Their adoption will make it a lot more expensive for foreign companies to do business in Russia and will make it less interesting to invest here. Yes, this could potentially improve security, but it could scare some foreign investors away. Similar bills have been considered in China and India, but these ideas have been given up there. Businessmen consider that due to the adoption of such harsh laws, the economic efficiency of the high-tech companies, companies connected to the Internet, will be sharply reduced. I understand the justified interest in protecting personal data in Russia, but in my view, this matter needs to be settled in a way that does not scare off investors. That is, you should not make your own county uncompetitive in the international arena.
— Have any AmCham members already wound up their activities in Russia?
— Some of the smaller entrepreneurs may have quit the game, but the big companies forming the core of the Chamber have stayed in Russia. They are of course now thinking about how to proceed with their business without harming their prospects on the Russian market.
We say to everyone: do not on any account wind up your activities! You have to wait it out, and thereby demonstrate your loyalty to your clients and subcontractors. Companies, including state ones, individual purchasers and the Russian public at large need a sign that we are not just here for the sake of being here. We are staying in this country in its good and bad times, for better or for worse. This is very important. The second thing is the need to look at your business not from the viewpoint of this very minute, but aiming at tomorrow. And if you invest in the country at a difficult time for it, in future this will be remembered and appreciated. This is also an important factor.
And finally, don’t forget that if your business is in Russia, you need to live here too. And you must work actively with the government, including through our Chamber, and with those who regulate business here and compile the laws. And you really must be sure they receive advice from you directed towards improving the investment climate. You should be polite but persistent.
— So Russia has become cheaper. Buying makes sense. But buying what? Which investments have the best prospects?
— For example, Russian oil companies are much cheaper because the price of oil has fallen. It’s worth analysing how profitable it is to buy shares in these companies right now. And if the price really has reached the floor, such investments are more than justified. It might make sense to invest in Russian currency, the Russian banking system and Russian state bonds. The rouble is much more closely tied to the price of oil than to the sanctions being applied against Russia. And while it is weak, before the price of oil rises, these investments could be interesting. The annual yield from rouble investments in Russian banks is around 15 percent. And in some banks you can get even more. You only get 0.25 percent on dollar investments in the West, which means virtually no income at all. And if the rouble rate stabilizes, and the rate is so high, why not think about such investments?
This is in fact a temporary combination of circumstances, but it is still possible to make use of it. And after the market factors, economic factors begin to have their effect, though with a certain time lag. Therefore the first thing to look at today is liquid assets, which have become very much cheaper.
— But what about direct investments in an actual sector of the economy?
— An actual sector of the economy will also rectify itself with a time lag. So you have to look at what reacts faster to a change in the situation, for example in real estate. In Moscow it has become considerably cheaper. And real estate is also very sensitive to the cycle. For example, AmCham concluded an agreement on renting an office in the centre of Moscow up to the end of 2015. We have to decide whether to stay in our present office or move. Previously it seemed to us that it was too expensive to rent an office of the level we have now. However, the present market price is considerably different, and we have the potential to make use of this opportunity. So if someone has some spare cash, a good quality building can be bought for a price which would only have covered one of much lower standard a year or two ago. Furthermore, the rate is very likely to rise in the future.
— In the new conditions, international companies already operating in Russia inevitably have to consider localizing production here. How profitable and interesting is this for potential foreign investors?
— The Russian market is very big and very interesting for business. Any member of our Chamber will tell you so. But how can an international company be successful in Russia, and what should be the reaction to the concern of the Russian authorities about matters of reliably obtaining services and technologies from outside? In Russia, they think of it roughly like this: this company is needed here, its technologies are good and its services are in demand, but there is a risk that it would only take a phone call from some capital city or other simply to forbid it to work here. And in reply to this concern and risk, even if it is illusory, many international companies are localizing their business in Russia. This means that legally and economically, they become independent on the Russian market.
The most shining example is McDonald’s. This company’s image is very American, but actually it localized in Russia a long time ago. It provides services here which are greatly in demand, it pays a lot in taxes and creates a lot of jobs. The greater part of what McDonald’s sells in Russia is produced right here. Legally, Russian McDonald’s has no connection with the States apart from a branding agreement under which Russian McDonald’s pays the parent American company a certain amount in rent.
— As I recall, last year some of the restaurants in McDonald’s chain in Russia were closed on the pretext of failing to meet hygiene standards. Many people took this to be little short of a political attack.
— It was more like a symbolic public whipping. If it had really been an attack, it would have done more harm to Russia itself. The taxes it receives from McDonald’s would make it ignore the political background even if there were one. The most revealing aspect was the behaviour of the McDonald’s company itself. which in spite of what had happened, continued to invest in Russia and expand its restaurant chain. In 2015, the company plans to open a further 50 new enterprises, which will create about 7000 new jobs.
— In recent years, Russia has produced a generation of managers who can work no worse than their foreign colleagues. But since they are paid in roubles, has that made them cheaper too?
— Yes, and this is something else investors should take into account. This factor could create a demand for Russian specialists, and not only in Russia itself. Although any ex-pat who moves abroad acquires an apartment and a car, he also has extra expenses, for which the company usually pays compensation. Therefore even on equal salaries, a local specialist always comes cheaper than an ex-pat.
The new generation of managers here came into being because Russia opened itself up to the world. It gave its population the opportunity to travel and to work and study abroad, which the USSR had not done. Thanks to this policy, there arose a whole generation of managers who feel confident everywhere, and who can work no worse than their colleagues abroad. It is important not to lose all this.
— They have set a course for import replacement in Russia. Can foreign investors make use of this trend by offering the Russian authorities higher rates of localizing production on their territory?
— They certainly can. To produce a competitive product in Russia which is no worse in quality than similar ones worldwide, technologies and equipment are needed, some of which are purchased abroad. But there is no product in Germany, America, France or Russia which is made entirely in the home country. There are always some components or some raw materials from outside. Agriculture is being actively developed in Russia now. However, to produce new sorts of grain, good seeds not produced in Russia are required. If you don’t buy them, your product will be second-rate. This is just one example. I am confident that there are such components or raw materials in virtually every field. And Russia too has unique technologies and materials, without which Boeing, for example, would not be able to build its aircraft.
— And what about the notorious sanctions?
— You have to learn how to conduct business under sanctions. International companies already operating in Russia understand this very well. The most difficult moment is when sanctions have just been declared, but it is not known what they mean, what they restrict and what they permit. As you know, business likes stable rules of the game. But if one part of the field has been restricted, it’s nothing to worry about, you just play in the part where it is permitted. Take for example the trade turnover between the USA and Russia. Last year, it did not fall because of sanctions; it increased by more than five percent. So trading is possible in spite of sanctions. And this possibility should be used.
— Remembering the cyclic nature of economic development, you have to believe that at some time, the crisis will end and growth will begin, including in Russia, where in general, all the conditions for it exist.
— That is why it is important not to miss the opportunities offered by such a crisis. The one who is capable of understanding this and explaining it to the management or owners of a business is a potential winner. This must always be remembered. Seize the moment!