Interviews, INVESTMENT CLIMATE

Ernesto Ferlenghi: “Chinese companies are getting more aggressive”

The relationships between Russian and European – and particularly Italian – businesses see the beginning of a new era. The companies that used to specialize on exporting their products to Russia, now have to launch their production facilities in the Russian Federation – due to country’s policies of imports phase-out and localization. Invest Foresight discussed the subject with Ernesto Ferlenghi, President of Confindustria Russia, branch of Confindustria Italia in Russia.

– Anti-Russian sanctions are much discussed, but do Italian companies really face hardships caused by political turmoil?

– The sanctions are in fact of a sectoral nature. They do affect certain sectors such as mineral resources prospecting and extraction, oil and gas projects. Some impacts thereof are certainly felt in the financial sector. But I would say that to some extent that is stimulating Russia’s new technology strategy development which has already started to produce some results. One of such results is localization. A lot is dependent not on sanctions per se, but on a declining demand. Solution to the problem rests within the national market growth. There undoubtedly are prospects for that. At the moment, Russia’s GDP grows at 1.7% and inflation rate is stabilizing. It is essential that all foreign investment funds are back to Russia.

Our companies realize that the previous scheme of the products being manufactured in Italy and then exported to Russia may no longer be the foundation of a long-term strategy. Confindustria Italia strives to explain it to Italian companies and help them in their search for partners, markets and contracts in Russia. From a political perspective, Russia is possibly the most stable country in the world. In World Bank’s Doing Business economy rankings, within six years’ time, Russia has moved from the 120th position in 2011 to the 35th now. That is a very impressive shift. With that in mind, no single company, whether Italian, French or German may be ready to lose Russian market. Especially since we sense that Chinese companies are getting more and more aggressive and competitive in Russia. And Russia is right in leaving its market open, as there should be niche for all.

We try to convince everyone that they should move fast, should not waste any time, and must appreciate that at the moment Russian market offers unique opportunities in various respects, including taxation. An investment contract is a truly significant instrument for covering some risks. I therefore believe one should not be hesitant about entering Russia. I am sure that even the current sanctions will not damage our strategic cooperation.

– What shifts in Russia’s investment attractiveness may be noted?

– To some degree, thinking patterns of a business are similar, be it in Russia, Europe or America. Business prefers stability and predictability. Regretfully, now the situation is controversial. Business would like to keep moving forward, whereas political decisions generate a sort of a potential hazard for that. Nevertheless, we are confident that Russian market is still attractive. According to the Doing Business rankings, Russia is 12th in the world as far as signed contracts performance is concerned. That is why not a single company has left Russian market. Even those who thought about it, still have not left, since they realized that leaving this market means losing it completely.

– Do you share the view that Russian manufacturing facilities may be used for exports to third countries?

– That is perfectly right. Labor costs are fairly low here, but taxation is most important. Russian taxes are among the lowest in Europe. And that is indicative of the interest Russian authorities have in attracting investors. The prospects of expanding into the Eurasian markets are quite evident. Exports from Russia to Belarus, Kazakhstan and Kyrgyzstan can flow without any restrictions and customs duties. That is essential. We already witness examples of Italian companies launching joint production in Russia for exporting the products. Russian production facilities have indeed become exporters. The unique support joint ventures get from the Russian fund should be noted.

– What Russian markets and industries are of prime interest to Italian businesses?

– A number of joint projects may be mentioned. Such companies as Termomeccanica, Konar and Transneft have set a joint venture. Italy’s Termomeccanica used to produce pumps in Italy and export them to Russia. Now, the entire pumps production is taking place in Russia’s Chelyabinsk. Transneft owns a bit over 50% of the business, the rest is shared by Konar and Termomeccanica. Another joint venture was set by Konar and Italy’s Cimolai to manufacture steel structures which are now supplied to implement a number of projects in Russia, including a sporting stadium. One more Russian-Italian venture is BVK steelmaker which produces steel bodies for tools and equipment.

Italian companies have interest in any projects involving machinery, oil and gas equipment, pharmaceuticals and food. I have named the industries where at least 90% of Italian exports to Russia fall. Unfortunately, it should be admitted that Italian exports to Russia have gone from € 10 billion down to € 4.5 billion. That means, over € 5 billion was lost. Still, over the first eight months of 2017 Italy’s exports to Russia went up by 21%, whereas Russian exports to Italy grew by 17%, as compared to the 2016 figures. So, we can observe a rather positive trend here. In this context, I should note that the Central Bank of Russia has done a great job to stabilize the national finances.

By Konstantin Frumkin

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