Perfect Storm in Russia Continues

Biting sanctions and mass exodus of Western companies from the Russian market keep hampering the country’s coating industry.

Russia is turning to China, Iran and Latin America in a bid to replace Western companies that curtailed operations in the country, a research conducted by the Russian Expert Institute of Social Studies showed.

However, the current problems look extremely difficult to overcome easily.

The Russian chemical complex faced a mix of problems due to Western sanctions, Maria Ivanova, vice president of the Russian Union of Chemical Complex Companies, told the researchers.

“The first block of problems is associated with financial difficulties, caused by an absence or insufficiency of turnover funds to purchase raw materials, components and spare parts,” she said, explaining that some products ordered in Europe have never been delivered to their Russian customers, plus the financial difficulties were also caused by restrictions on the Russian exports and sharp Russian currency exchange fluctuations.

“The financial block of issues affected all companies without exception and influenced their strategic development vision and understanding of their current priorities,” she said.

In addition, European countries have restricted supplies of raw materials to Russian clients. Basically, the Russian companies have experienced what is called “Cancelled Culture,” according to Ivanova. Russia suffers immensely because the ties with the Western world are essentially broken.

“Construction partnership based on the harmonized principles of sustainable development and dialog was established for decades. Now, we see a strong backdrop in all fields of knowledge, technology and production, from which everybody loses,” Ivanova said.

Russian Imports Collapse

A Yale University study published last month reported that Russian imports have “largely collapsed,” with Moscow now facing challenges in securing inputs, parts and technology from increasingly jittery trade partners and, as a result, seeing widespread supply shortages in its domestic economy.

“Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst,” the report said.

“As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base,” the report added.

Ivanova agreed that Russia currently faces a lack of Western equipment and technologies.

She added that there are a few examples of successful import replacement initiatives in this field, but these trends need to be scaled up.

“Every company solves the problems with supplies in a different way. The easiest and fastest way is to find alternative suppliers in the domestic and export markets,” Ivanova said, admitting that this does not always look possible, and Russian businesses also mulls establishing localized production capacities with support from the state.

However, in the Russian chemical industry’s low- and middle-tonnage segments, prospects for the import-replacement look vague, she noted.

Expensive Raw Materials Hamper Russian Producers

Not only a long list of Western coatings producers have suspended operations in Russia, but also a large number of foreign suppliers from the countries the Russian authorities now deem as unfriendly have stopped selling raw materials to Russian clients. Gennady Averyanov, director of the Russian association of coatings producers Centrlack, believes that in this background, the Russian authorities need to revise import policy, considering duty-free imports of raw materials.

“Raw material cooperation is a common thing for all coating companies all over the world. The Russian government has built its tariff and customs policy in such a way that it is not profitable to produce high-tech coatings in Russia. Better [to produce them] abroad,” Averyanov said in a statement published on the Centrlack’s website.

He explained that the Russian authorities set import duties on raw materials, while import duties on coatings are either absent or minimal.

“There are no duties for raw materials in the EU, Serbia or Asia-Pacific countries. Raw materials account for 70% to 80% of the coating price,” Averyanov said, noting that in the current conditions, Russian coatings companies are at a disadvantage compared to imports. “Foreign producers have access to commodity markets, convenient logistics, large consumption volumes and raw materials not subjected to import duties.”

Centrlack estimated that currently, Russian coating producers source raw materials at a price on average of 15% to 20% higher compared to leading global companies. The zero import duty also hampers Russian raw materials suppliers.

“Despite these negative factors, the raw materials produced by Russian manufacturers are competitive in quality and have competitive prices in all segments. We understand that this is achieved through a reduction in the producers’ margins and, as a result, a downsizing of their investments in development,” Averyanov said.

A New Dependence

Russia has laid out large-scale import-replacement ambitions in response to Western efforts to isolate the country.

To improve the situation, the Russian authorities now push forward a strategy described as technological sovereignty that involves achieving self-sufficiency on goods and technologies where possible. However, the current raw materials issue could push the Russian coatings industry into dependence on other foreign suppliers.

“Personally, my assessment is not very optimistic. In the short term, [coating] companies will reduce their output. Raw material destabilization – another shock therapy – complicates the life of Russian manufacturers. It will take time to heal. A year or two depending on the company,” Averyanov said.

Averyanov said that this is the strategic perspective based on the tariff regulation. There are no signs it is likely to be changed any time soon.

“Russia’s import dependence in the segment of high-tech coatings will switch to Turkey, Serbia, and China instead of the EU countries. The government and our economy will develop industrial production of coatings in other countries to the detriment of development in their own country. Who benefits from this approach? Probably, those who supply oil and gas to these markets for the production of high-margin products out there,”
Averyanov said.

To improve the situation, Centrlack has called on the government to revise its approach to developing the ‘Russian Product’ label introduced by the authorities in 2020.

The original idea of that project was to encourage the demand for coatings with a high localization level, with most raw materials sourced in the Russian market. However, Averyanov observed that the project failed to provide any meaningful help to the Russian coatings companies for the past two years.

Centrlack appealed to the Russian Finance Ministry to adjust the project in 2020, but the final decision is still pending, even though reportedly new criteria have already been put together.