Ivan Fedyakov: "The situation in the Russian economy is comparable to the 1998 crisis"

Ivan Fedyakov

So far, no one sees the big picture, because now a monstrous experiment is taking place, which has no analogues in the modern world. In relation to Russia, a stricter sanctions regime is being introduced than in relation to Cuba and Iran. This has never happened anywhere! Therefore, the consequences can be completely unpredictable. If we talk about trade, then in the near future we will begin to receive the first signals about the shortage of goods. Usually, suppliers keep goods in warehouses for at least 2-3 weeks, someone - for 2-3 months. But items will sell out faster due to increased demand.

Now there is a lot of talk about the fact that we do not need European goods, we will buy in China. China and some other countries are really ready to continue trading with us, because they have not yet entered the history of sanctions. But the problem is that suppliers face a problem in logistics - the goods cannot be taken out. Most large logistics operators do not want to deal with cargo that comes from or to Russia. Maersk officially announced this on March 1, other companies are ending their cooperation without loud statements. And this will be a serious problem - there were already difficulties with the logistics associated with the pandemic, and now no one wants their plane or ship to be arrested on suspicion of transporting sanctioned goods. Cargoes to Russia are becoming toxic. Adequate companies will not want to work with us. Or you will have to pay a lot for it.

Currency volatility is built into the cost of consumer goods by both suppliers and retailers. We see the recalculation of prices during the round of growth in the exchange rate and the absence of any reaction when the ruble strengthens. So all the movement goes in one direction, which will exacerbate inflation. Without exception, suppliers are switching to prepayment mode, and given the increased key rate and future interest rates on loans, we will see an additional impact on the inflation component. The economy will face severe inflation, above the 20-25% rate in the early 2000s. I am almost sure that Monday was not the last increase in the key rate, and in March the Central Bank will make several more similar decisions.

The current situation can hardly be compared with the beginning of the pandemic, with the crises in 2014 or 2008. But in terms of the depth of consequences for the economy, it is more expedient to draw parallels with 1998, when there was a default on ruble bonds. In my understanding, by all indications, we are seeing a pre-default state in the country. But if you compare the current situation with 1998, you need to understand that there were no sanctions then. We could continue to work and, having sunk to the bottom, we could push off from it. And now we will be held at the bottom by sanctions pressure, which no one will cancel until the Russian troops leave the territory of Ukraine and until all disputes with its government are resolved.

As for the next forced import substitution, by and large it doesn’t matter to retailers - what they will sell, they will buy. Yes, retail would like to sell Chanel and Prada, but will sell "Belarusian knitwear" - the need for clothing will not go anywhere. A similar story will affect food and other goods - retail chains have no other options. But they will also have their own problems - a decline in real incomes of the population and a drop in purchasing power. And no indexation of salaries and pensions will keep pace with inflation, which means that this will lead to the impoverishment of the population. The main problems will lie in the production and supply of goods - imported components and expensive complex logistics. As you know, if the package says Made in Russia, this does not mean at all that the product is 100% made from everything domestic. But retail will also be affected. For example, retail chains with a large share of private label products in their assortment will face certain difficulties.

Domestic producers who have completely localized production will now have a great advantage and will occupy the entire vacated market. If we talk about food products, we can switch to packaging produced in Russia, restructure business processes, at worst change the recipe and assortment, and win to some extent. But we will talk about survival, and not about full-fledged income and big profits. As I said, purchasing power, which has not been particularly high, will only decline. The huge inflation that will overwhelm us now may lead to bankruptcy of the population on loans, and a number of Russians will have financial problems. We still have not recovered from the 2014 crisis and the pandemic. Even a relatively prosperous 2021 did not allow a return to pre-crisis levels.

I see that the heads of our retail companies with whom we communicate are still in a state of shock. Professionals working in international companies are seriously considering whether they can continue their activities there. Large global concerns are demonstratively withdrawing from the Russian economy, for example, automakers. And what will Aidi and BMW showrooms sell? Let's not rename their showrooms to AvtoVAZ, shall we? Yes, you don't need that many. This means that we are waiting for the closure of a large segment of the auto dealer business in the country.

And this is just one example, and there will be many. No amount of financial interests and the attractiveness of the large Russian market are now capable of keeping European companies in Russia. Humanitarian values overlap financial interests. We, to my great regret, are becoming or have already become a toxic country and no one wants to work with Russia. Because no business wants to be in a situation where consumers from other countries will boycott its products for continuing to cooperate with a militaristic country.

I am afraid that international retail chains may also consider leaving the Russian market. For European retailers, which have been doing business in Russia for a long time, this decision may come easier. The decision of the rest will depend on the scenario of the development of the conflict in Ukraine. On March 1, on the screens of the whole world, you could see how we bombed the TV tower in Kyiv. Cruise missiles fly over the heads of the townspeople, which for many years lay in an unknown place and in unknown conditions. And God forbid any of these iron ingots will fly into a densely populated residential area, can you imagine what consequences this will turn out to us? I pray that at least this doesn't happen.

In connection with the latest geopolitical events, INFOLine launches anti-crisis business support - the link here.