MOSCOW BLOG: Russian SMEs hit by a tsunami of problems and bankruptcies

MOSCOW BLOG: Russian SMEs hit by a tsunami of problems and bankruptcies
Putin's war on Ukraine is doing massive damage to the Russian economy and anecdotal evidence suggests that many SMEs built up over years are already going to the wall. / wiki
By Ben Aris in Berlin March 20, 2022

Russian small and medium-sized enterprises (SMEs) have been hit by a tsunami of problems in just the first few weeks of the Kremlin's invasion of Ukraine and entrepreneurs that have spent years building up their business are already going to the wall thanks to the multiple shocks hitting the markets. 

Anecdotal evidence from conversations between bne IntelliNews and business people in the Russian capital is pouring in of widespread difficulties as the war in Ukraine goes into its fourth week. 

It is too early to be able to measure the impact on the economy from the sanctions, but some numbers are already appearing. The pullout of hundreds of western firms working in Russia, especially from the retail sector, has already led to an estimated 100,000 Russians losing their jobs almost overnight. The Ministry of Social Affairs is in the process of drawing up a support package to address the sudden spike in unemployment, and the anticipated deep economic contraction that will cause, and is due to release it soon. 

Unemployment is bound to rise sharply from here. During the 2020 coronacrisis unemployment spiked to a maximum of 6.4% of the population in August of that year, up from a post-Soviet low of the residual unemployment of 4.3%. There is always some unemployment in a society (pregnant mothers, long-term sick, students, etc) and there is a lower level that unemployment doesn't fall below. Russia was at that level before the war with Ukraine started. 

However, during the 2020 crisis an essentially functioning economy was simply put on pause during the lockdown, but partly thanks to quick government action, little actual damage was done to the Russian economy and it quickly bounced back once the lockdown was lifted. By September 2021 unemployment was back at the post-Soviet low of 4.3%. 

This crisis is very different. Massive economic damage has already been done to the economy, from which it will not recover for years. Unemployment will also certainly rise back to the 2020 peak and probably beyond, and stay high for an extended period as the Russian economy is anticipated to stagnate from here.  

The economy is expected to go from the 2.4% growth in 2022 forecast earlier this year to anything between an 8% to 15% contraction, with some analysts predicting the fall to be even greater. Inflation has already soared to an annualised 20% and the ruble has lost about a third of its value since the start of the year. 

But far more damaging is the widespread disruption of supply changes as the rest of the world simply shuts down business ties with Russia, which has become completely toxic. Afraid of more sanctions, western companies have stopped trading with Russia even if their business or products are not on a sanctions list. Imports are expected to collapse, as it has already become next to impossible to import goods from the EU due to the problems caused by the SWIFT sanctions that make it extremely difficult to transfer money or use dollars and euros. Most international banks have simply stopped making transfers to Russia at all, even if their customers are not on a sanction list or working in a sanctioned sector. 

A further problem is the fluid state of restrictions imposed by the Russian government to try to stem the exodus of foreign companies and their assets. 

“A friend of mine that imports chemicals from Germany then processes them here before exporting them back to Europe, he packed up one of his factories and put the equipment on trucks that he wanted to send to Moldova,” says one well-known expat entrepreneur that didn't want to be named. “But when they got to the border the border guards wouldn’t let the trucks cross, as the day before the rules were changed to prevent the export of equipment.” 

One of the most tragic victims of the current crisis will probably be the emerging light manufacturing sector. Russia skipped over the typical early Emerging Market stage of attracting foreign light manufacturing investment that tries to take advantage of cheap labour, but laid the foundation for a domestic manufacturing business as the ruble was overvalued in the 1990s.  

However, following deep devaluations in 1998, 2008 and 2014 the cost of labour had fallen to below the level of the Chinese. Light manufacturing began to flourish and the sector was catalysed by the e-commerce boom. Local merchants were increasingly sourcing cheap and improving quality goods from the multiple producers that had sprung up to cater to the burgeoning demand. These SMEs are in the firing line now and under pressure as consumer demand will be inevitably curtailed by high inflation, rising unemployment and falling real incomes.  

The entrepreneur was in the process of selling his popular online publishing platform to one of Russia’s internet giants. “The deal was already in the works before the war started and three weeks ago we were talking about $18mn,” he said. “Now we are talking about $2mn and I think it's a good deal.” 

Another story is of a Russian entrepreneur who has a corporate catering service, who delivers around 5,000 meals to companies a day. However, the supply chain disruptions mean that he is already having trouble sourcing enough products to make these pre-packaged lunches, and the entrepreneur spends most of his day scouring the city for the fresh produce he needs. 

And the supply chain disruptions have already become so bad that business people are reporting a shortage of paper for printers in Moscow, which is mostly imported from Finland, so they don't even have enough to print bills and receipts.

The breakdown of the food supply chains has also hit the general public. Social media is full of videos of crowds forming long queues outside supermarkets, which have run short of the basics. The shelves in one branch of the leading supermarket chain Magnit in Moscow were stripped bare of their goods on Friday (March 18)  and other footage shows a gaggle of babushki in a scrimmage to grab hard-to-find bags of sugar as soon as a shop assistant pushed a cart full of sugar into the stores. 

The currency deep devaluation is only adding to the caterer’s problems. Prices are already soaring and food prices are rising even faster. The caterer charges RUB350 (circa $3.5) for each lunch. 

“But I can’t raise the prices, as people just won’t buy them anymore. The margins are being squeezed down and down. I don't know what to do. I will just have to hang in there and hope something changes,” he told bne IntelliNews

An acquaintance of a bne IntelliNews correspondent in Moscow was a successful oil trader but gave up the business for a quieter life and started a successful business making bespoke spectacles to order. As this business relies heavily on imported high-quality inputs he has already had to shutter it and at the same time watch his savings, held in rubles, being slashed in value. 

Other entrepreneurs have been caught up in the crisis in other ways. A successful businesswoman who set up a flourishing tourist business and sold it for circa $1mn about three years ago followed a general trend of investing the proceeds into a Russian mutual fund (known as PIFs in Russia) as many small investors moved into the Russian stock market in recent years after a seven-year-long set of rate cuts mean the real return from deposits in banks had fallen to next to nothing. It was a savvy investment, as the stock market had returned over 30% in the last year until the reports of the Russian military build-up on Ukraine’s order started to appear at the end of October. 

Now she has lost everything, as the RTS has imploded from its high of just over 1,900 to 934 now, when trading was suspended at the start of the war. The market is expected to open on March 21 and the RTS is predicted to plummet again; state-owned gas giant Gazprom’s GDR shares crashed at the opening of trading on the London Stock Exchange (LSE) the day after the war started, losing 97% of their value in just a few hours. 

She has left the country with her family, and in her mid-50s is now faced with the prospect of completely rebuilding her life from scratch in a foreign country.