The Russo-British Chamber of Commerce has been successfully promoting business relations and investments of the two countries. On the sidelines of RussiaTALK Investment Forum in Moscow arranged by the Chamber, Invest Foresight had a chance to discuss a variety of economic matters – including implications of the approaching Brexit – with Alf Torrents, RBCC Executive Director.
Speaking of Brexit, everything is totally unpredictable. Nobody knows what Brexit is going to look like and anybody who says he does is probably a fool. Once Brexit happens, the UK will obviously be looking to forge trade agreements with countries outside the EU and hopefully Russia will be one of those countries as there are lots of reasons why it should; its relative geographical proximity, it is part of Europe and obviously has a big market, the biggest single market in Europe by population. Even taking it in isolation, ignoring the Eurasian Economic Union of Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan, it is a significant and big market and certainly the sort of a market the UK should be interested in.
The Russo-British Chamber of Commerce is a non-political organization, but politics do matter, and if relations were better the UK government would be looking more towards Russia as a potential export market, but that is not the reality of the moment. Yet Russia is a good place to invest – in fact the UK does more trade with Russia than with South Africa, for instance, or with Brazil – two BRICS countries. What especially surprises people is that the UK does more trade with Russia than South Africa, given the UK’s long and deep association with that country.
After the sanctions were imposed in 2014, the volume of bilateral trade fell considerably. But there is a clear delineation between goods and services. Goods suffered significantly, falling from just under £6 bln to just under £ 3bln while services were less affected. Both are now increasing and though they are not yet back to the pre-sanctions levels, since 2015 they have been creeping steadily upwards. At the moment when the sanctions were imposed, businesses were very cautious about Russia, because they did not want to fall foul of the sanctions regime. It is hard to say precisely how many businesses were affected by the sanctions, but I would hazard a guess that less than 15% of business would have been affected. So initially there was a big decrease and then companies started to understand the new regime and hence the volume of trade started creeping upwards again.
When the UK businesses started to look at the Russian market again, they found out that the vast majority of businesses were not affected by the sanctions. Of those that are, they are in the main involved in offshore and arctic drilling or some very hi-end engineering. But that is not the core of our Chamber’s interests, so it is hard to say whether they are lobbying to be able to trade or not. 85% of business was not affected.
The number of members in the Chamber over the last five years has changed. In the pre-economic-crisis years of 2004 and 2005 many companies wanted to be associated with Russia and hence it was easier to attract them as members to the Chamber as well as raising sponsorship for specific events. The Russo-British Chamber of Commerce is a not-for-profit organization and its funding comes through these two main streams; membership and sponsorship. So in those days it was very easy to attract sponsorship and new members. It has become much more difficult, in this respect, yet this year we are finding an increase in people wanting to join, which is a cause for some cautious optimism. Still, the sanctions affect certain sectors more than others, as mentioned before, and the financial industry is one of those sectors. So if I was a body purely representing the financial industry we would probably be having a slightly different conversation. But from a more general perspective, we see that increased number of companies want to join.
As for UK investments in Russia, UK FDI has remained surprisingly stable. The most obvious companies investing are those such as BP which is probably the biggest foreign investor in Russia full stop. But there are other significant investors such as Shell who are either Dutch or British (as we both claim it!) but are certainly big investors, or JCB who are doing extremely well in Ekaterinburg, or Aggreko.
As for other sizeable investments in technologies, we are always optimistic. I am aware of couple of potential investments, but the uncertainty over Brexit is making the companies more cautious.
As a Chamber of Commerce, we are constrained by the fact we are a bilateral organization and our geographical markets are defined by our Charter, so our focus can only be on the UK and Russia. Our ambition and focus as the Russo-British Chamber will be very much to continue to represent the interests of our members. That is the top priority. Obviously, representing both Russian and UK companies we very much rely on the support of both governments. Businesses like operating under the umbrella of their respective governments. When we work in Russia, we look to represent the interests of our members as best we can and work closely with the British Embassy in Moscow. The reverse is also true, in London we work closely with the Russian Embassy. The RBCC’s Chairman Roger Munnings and I regularly talk to both Embassies to make sure they support our mission. One of the RBCC’s main strengths is that it is seen as an honest and neutral business organization even when the political climate is challenging. We are very careful in ensuring that we have the support of both governments as without this support we basically cannot do our job.
Our Chamber is a bilateral organization and one half of our job is helping Russian business in the UK. We see lots of Russian entrepreneurs who are coming to the market, whom we try to help and add value with our network of influence. We can help in terms of contacts or potential partners – at our core we are a networking organization. At the other end of the spectrum En+, for example, is listed on the London Stock Exchange, and if you look through the companies listed there, you would see a fair number of Russian companies. True, for companies of that size and importance the involvement with the Chamber is more a corporate social responsibility exercise as they clearly do not need our help to list on the Stock Exchange. Yet as we are a recognized and respected organization they occasionally talk to us and as members they speak at our events. So in a way we do work with them but they certainly do not need our help to list.
The UK is a very open and welcoming market. If a business is sanctions-compliant, there are no blocks to investing in the UK, while advantages in the sense of tax incentives for foreign businesses depend on scale. This type of activity is outside of our remit as our core members are small and medium-sized enterprises who are basically competing on a level playing field. In the UK small and medium businesses are considered the backbone of the economy, and there is a lot of emphasis on that. The UK Department of International Trade is increasingly focused on the opportunities for small and medium businesses abroad.
It is somewhat different in Russia from the UK perspective. From what I can see financial backing can be difficult for Russian SMEs to secure. There is also a cultural issue of failure. If a Russian entrepreneur fails, it can be fatal to his CV, while in the UK, and even more so in the US, one is only considered a successful businessman if you have failed 3 times before triumphing. I believe that a fear of failure is an impediment to the entrepreneurial spirit.
From the Chamber’s point of view, Russia’s investment and legislative climate is definitely getting better. If one looks at the Ease of Doing Business index, Russia’s position has improved significantly – its position was 31st in 2018 – ahead of France and just behind Spain, quite remarkable compared to five years ago. Yet there remain some issues, and finance is probably the major one. Corruption is still a concern. A comment one can often get from mainly Russian entrepreneurs in the UK is that there can be a risk someone will grab their business once it gets over a certain size.
As for the UK investment, Russia’s labor force makes it a very attractive market. Obviously, it is a very well-educated and sophisticated labour force due to Russia’s emphasis and competence in the sciences. On a trade mission to Innopolis in Tatarstan last year, UK companies were looking for Russian partners and talent in the labour force. So it is well recognized that Russian labour force has a lot to offer in that respect.
Closer to Moscow we have been developing a partnership with the Skolkovo Foundation which is an innovation and start up generator, and we had a conference with them in February this year and we are looking to organize a follow up conference at Cambridge University in 2020. The potential of Russia’s labor force is huge and some of our members see that as a great opportunity for setting up businesses here.
From the UK perspective, engagement with Russia in technology is to some extent theoretical, but in fact the reality is always more complex and the picture is always more nuanced than you would think. There are already a number of UK businesses who are exploring these types of opportunities. For example I know of a specific UK company that is working on building data centers in Moscow which it has found to be a perfect place to do that. It has raised a significant amount of money here and is now already setting up a second data center. So the theoretical side has some real examples and that is what RBCC is trying to help increase.
As far as the prospects of bilateral relations are concerned, one has to be an optimist to do the job of promoting them. I certainly do not want to overstate the case, but many of our members who are operating here have very good business. It is a hard market, but every market is hard and Russia is no exception. Yet overall I am optimistic, Brexit, in whatever form the UK adopts, will encourage UK companies to look outside of EU for trading partners and Russia, with its large market, relative geographic proximity and educated and sophisticated workforce, is in many ways a natural choice of trading and investment partner.