Crisis and Sanctions: Not Only Problems but Also New Opportunities!

Igor Saprykin PhD in Economics, Director of the Business and Marketing Centre of the Russian Presidential Academy of National Economy and Public Administration


Business will never be the same. Economic downturns have happened before, and we need to learn to take advantage of any changes. This article is about the implications of the crisis and about businesses’ adaptation to the new reality of sanctions


Businesses which were established in the 1990s and have survived the past crises are now confused: the crisis it’s ending, and the recovery doesn’t seem close. Market growth isn’t outstripping the inflation anymore, the demand has stalled, the profit growth dynamic is low, and any management errors are becoming increasingly sensible.

What if it’s not a structural ten-year crisis but a completely changed world in which nothing happens by itself and businesses need to be run in a completely different way?

Previously, during market growth, businesses were expanding their ranges, geographical presence, capacities and floor areas, but in stagnation range and cost management, and mergers and acquisitions are the absolute priorities.

Businesses need marketing and active sales. In the times of growing demand, few of them were engaged in marketing and consumer research. Profits were mainly growing due to new openings, while in old stores sales were gradually decreasing.

The recession only accelerated the arrival of a new stage in the development of businesses, demanded a change in the rules of the game for the stagnating market, and brand new approaches to production, marketing, sales, logistics, investment, etc.
One is sincerely sorry for those backwards entrepreneurs who will continue to reduce costs by reducing their staff, to open clearly loss-making offices, expand the range, and hopelessly wait for the crisis to end.

In the WTO they will be easily replaced by foreign companies, whose practices are different from those of many of Russian companies and which by paying attention to details, rules, instructions and procedures, are always particularly successful in competing for each percentage point of growth.

While Russian entrepreneurs oft en owe their success to their savvy and risk-taking, foreign entrepreneurs succeed through wellthought strategies, tactics, and precise calculation.
Business will never be the same. Past business experience is not as relevant as marketing management, sales techniques, strategic and operational planning, and optimisation of business processes. What is taught in MBA programmes turns out to be highly relevant.

Decreasing budget revenues, economic growth nearing zero, continued strong capital fl ight, dropping real income of the population in several regions, and as a consequence, reduction in government expenditure and adoption of a an austerity programme are all signs of Russia’s fi nancial weakening.

In the context of economic downturn the solvency of citizens and businesses reduces, and the quality of borrowers deteriorates. Banks, accustomed to working in constant personal income growth and growing appetites for loans and deposits, will now have to deal with impoverished population. Unfortunately, all the government’s attempts to slow down the growth of consumer lending so that banks would switch to real sector loans have been in vain. Big banks will continue to fi nance unrepayable infrastructural projects, plugging the holes in regional budgets.

In general, the ‘fat’ 2000s are over not only for Russians, most of whom have never felt that ‘fat’, but also for banks, which now have to actively fi ght for impoverished clients.

Moreover, the authorities’ call for ‘move away from the policy of maintaining employment at any cost, which would require changes of not only the job, but also the profession and place of residence’ is further exacerbating the current situation.

In this new reality, marketing will also be totally diff erent. For manufacturers it is important not to stop and take profi t, but to continue to evolve faster, to realistically assess the needs of people, taking into account their current strong trend of selectivity and cost savings, and the desire to get eco-friendly and economical products at aff ordable prices.

This will require extra eff orts from companies’ marketing specialists. The business in today’s environment vitally needs constant monitoring of the market situation, to detect changes in market segmentation and product positioning, identify free niches, explore new business opportunities, and conduct research to change manufacturing processes.

Product promotion will also require educating consumers regarding the benefi ts of the product proposed, with honest and detailed explanation of its signifi cant diff erences from similar products of competitors.

Thus, under new conditions, only businesses based on accurate calculations, honest and personalised marketing, individual work with staff and clients, and actively involving consumers in the process of creation, development and promotion of goods, will succeed.

Business leaders who primarily seek to get rid of marketing specialists, betting on high cost cuts or, vice versa, on thoughtless investing in mass sales, couldn’t be more wrong. Th is is a direct way to bankruptcy. At the same time, it’s always important to remember that a crisis means not only problems but also new opportunities. I am sure that all of us have something to think about and a lot to learn from each other.


About the consequences of sanctions imposed by the EU

It looks like the United States, Canada and the European Union not only want to limit us externally but also to ensure internal limitations, since we didn’t have time to prepare for import substitution. In the last decade there were more opportunities to invest in the development of our industries than now, but they were never used. It would be a pity if our import substitution had to be based only on bare patriotism and individual enthusiasm.

It would be great а the government had thought it all out and included on the import substitution list only the products which can be substituted and those in which there is no urgent need. It is clear that manufacturers will seek resources to expand and increase production only aft er the authorities send them a clear message that their products are in demand. But for that, we will need drastic procurement system changes, simplifi cation of procurement rules, and making them comprehensible and transparent. Alas, it’s still hard to believe that wholesalers will drive around cities and villages purchasing their stock.

Being engaged in business education of domestic entrepreneurs, I know the real situation, and I am always proud of the achievements of the best. It will be good if the support of the government eventually grows, loan rates become more aff ordable, bureaucratic barriers are lift ed, and the mechanisms of procurement and access to regional and metropolitan markets become clear. For many years farmers have been trying to enter the Moscow market, but, unfortunately, their success has been insignifi cant. Even accessing weekend fairs is still diffi cult; they still sell products from fruit and vegetable depots, the control of which leaves much to be desired.

The replacement of suppliers, of course, will also aff ect product prices. Economic laws are not to be disregarded. Expensive raw materials, electricity, transport and administrative costs, high lease payments, and low market demand will put upward pressure on their COGS, and man-in-the-middle factor will increase the sales price. Pubic monitoring is unlikely to help here.

The transition period would be very diffi cult. Major retailers, which, in the absence of wholesale suppliers, will fi nd it diffi cult to purchase large shipments in Russia. They have to increase the volume of imports from China and the CIS countries, including, perhaps, European foods. The shortfall in some product categories will be substantial for a while.

Today, it’s necessary to try and avoid the overconfi dent rhetoric about the instant success of import substitution – as if we had tens of thousands of businesses across the country, with modern equipment and highly professional specialists who have been sitting and waiting for the government to make the decision. It is obvious that, in order to upgrade the existing plants and build new ones, substantial resources and time will be required. Meanwhile, the market needs products today – such is the reality not to be disregarded. And the necessary changes never happened in the past decade, with its better conditions and investment opportunities. We must think why.


About seriousness of risks for domestic importing enterprises in connection with Russian countersanctions


Quite a few Russian companies originally bet on the import and European integration, and now it turns out they lost. Their owners had saved 44 for many years, dreaming of opening their own businesses to import the world’s best products.
Many wanted to live in a ‘house united’, believed in global integration and labour diff erentiation. They established companies, built relationships, picked the best foreign goods, entered into agreements, took out loans, and regularly paid for deliveries to Russia. Now it turns out that they were mistaken and just unlucky, they were overly optimistic and miscalculated the risks.

Most of them, of course, will be able to regroup and quickly arrange deliveries from countries outside the European Union. but some will learn the hard way, through bankruptcy.

These business leaders could be invited to start all over again and maybe even go to business schools to learn to think strategically, assess risks, and thoroughly develop and successfully implement business plans for the creation and development of businesses oriented towards the Russian market.


The consequences of Russia’s countersanctions


One can even jokingly ask oneself what did Russia actually do: impose sanctions against Europe or go on a hunger strike?

Well, hunger strike is, of course, too pessimistic. Yet there is some concern that the restrictions on the import of foreign products will leave most of the people with low incomes on the brink of survival. 

The media talk more and more about banning imported products for the premium segment, but cheap products enter Russia not only from China but also from countries which fell under our sanctions.

In some categories, particularly mass-market ones, substituting half of the range will be a challenge.

It would be good if our market quickly started receiving cheap goods from Belarus and the countries of Latin America. Besides, Belarus will probably organise supplies of processed or repackaged European goods. Bypass schemes will start working too, and this will ease the diffi cult situation a little. 

But so far, we can’t expect low prices from Russian manufacturers, taking into account the pervasive corruption, expensive loans, high taxes, serious problems with logistics, as well as the lack of domestic research, technologies, seeds, fertilisers, and pesticides.

One cannot ignore the unhealthy greed of some of our entrepreneurs, shamelessly taking advantage of the consumer in any way possible.

I have to say that the eff orts of our business schools training Russian business leaders and specialists, working earnestly and according to the rules, are, of course, essential and give results.

But effective legislative measures to promote the development of SMEs, which have long been talked about, are now as relevant as ever.

Besides, without the eff orts of regulatory bodies, which are still more interested in the political quality of imported products, the shortage of cheap and quality products will only increase.

Sanctions for Europe are, of course, a great chance to lift our economy, but without creating appropriate conditions on the part of the government, it can be easily missed, which should not be allowed.


So who else can help Russia in this situation other than itself?

There is a joke about the starving Africa, Middle East, and Latin America helping the well-fed Russia. And there is a grain of truth Crisis and Sanctions: Not Only Problems but Also New Opportunities! 45 Igor Saprykin to it. In particular, on the instructions of the government, the Ministry of Agriculture is actively engaged in the search for new importers from Egypt, Turkey, Iran, Israel, Morocco, Argentina, Brazil, and Peru.

This is understandable, as the authorities are aware of all the diffi culties of our manufacturers and aren’t ready to fi nance them, reduce lending rates or taxes, or address the problems of logistics, connection to electricity grids, road construction, etc. As before, governmental eff orts will likely be restricted to the design of a new business development programme for decades to come.

Apparently, nobody still wants to confront local dealers buying up cheap products from manufacturers in the regions (for example, 1  kg of pork for 20  roubles) and ruthlessly oppressing any farmer who tries to take their produce to the city by themselves.

In such circumstances, hardly any of the major wholesalers will ride around the country and buy their products at decent prices. Nobody wants to get involved and deal with criminals controlling markets and fruit and vegetable depots.

Indeed, it’s easier to replace some suppliers with others, by concluding agreements with African, Middle Eastern, and Latin American countries on the supply of weapons in exchange for food supplies. By the way, it will even be more profi table to lock all deliveries to pocket agents, preventing trade networks from importing anything directly.

It is assumed that the Customs Union will eventually be fully operational and will be strengthened by new members  – so far undecided countries of the CIS, also ready to increase shipments of their products to the market left by the westerners.
Today one may say that the European countries which are under the Russian sanctions have actually permanently lost their former markets.

But domestic consumers should brace for higher prices because of increased transport legs, complications of the logistics of product supplies (not from Europe as before, but from overseas), and new transport schemes.

Inspectors’ control over rising prices in chains will also create additional diffi culties and will force chains to search and import the cheapest and therefore the lowest-quality products.

In addition, replacing market regulation with state regulation has never led to positive results. And this time I would really like to be mistaken.


The outlook, or how this could end for both opponents


Sanction World Cup: shall the most imposing party win?

Hardly anyone doubted that the EU and the United States would respond to the Russian sanctions. It happened, and our countermeasures may now concern Japanese car imports (primarily, used ones) and light industry products.

But the European Union, the United States and Canada have a more extensive list of what Russia needed, needs, and will need. These are industrial robots, special technologies, specialised equipment, fertilizers, seeds, pesticides, components and industrial products without which some sectors of our economy will simply not survive.

But most importantly, the psychological component of the sanctions has been increasing: companies of other countries of the world simply refrain from interacting with Russia, to avoid possible risks.

It should be admitted that we are unable to quickly substitute modern specialised equipment produced many decades ONLY in specifi c technologically advanced countries.

We OURSELVES are unable to quickly create high-quality modern production facilities for manufacturing ALL THE GOODS that have ALWAYS been purchased abroad.

If sanctions are to last for many years, it’s likely that we will have to limit ourselves to products whose manufacturing was established in Soviet times, and settle for poor quality consumer goods from developing countries.

Of course, there is a faint hope that soon the cold days will come, and the Russian gas will warm up our relations with the EU, and then, perhaps, the sanctions will be reduced or ended. But until then our challenge is to do what we haven’t succeeded in for decades, within the shortest period possible.

The first signs of loss from sanctions are already appreciable. Rosneft has already asked the government to redeem their bonds for 1.5 billion rubles from the National Wealth Fund. Russian companies in the West should start buying back their debt. The Ministry of Finance is asking for a sales tax. Suppliers and retailers report an increase of purchasing prices due to the increase in advance payments and logistics costs. Banks are ready to increase rates, etc. And the main thing is that foreign exchange rates are increasing considerably.

All this causes infl ation. And with a decline in the cooperation with the Western countries, reduction in the purchasing power of the population and decrease in the demand for domestic goods, we are looking at mass business bankruptcies and considerable growth of unemployment.

This is a serious test not only for Russia, but for Europe and the world. And hardly anyone needs a victory in the war of injunctions, self-restraints, and unrealised personal ambitions, which hinder the economic development and make common people suff er the most.

The future belongs to broader international cooperation, global integration and international labour diff erentiation, and we will defi - nitely return on this track!


About the author:

Igor Victorovich Saprykin graduated from the Bauman MSTU, Department for Instrumentation Engineering (mechanical engineer) and RANEPA, Department for Finance and Credit (Economist). He holds a PhD in Economics. 

For many years he worked as a top manager in a commercial bank. 

He has worked in business education for the past 15 years. 

Currently, Igor Saprykin is the head of a leading Russian marketing training centre. 


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