What will crisis cost?

Businesses are right to be concerned about the long-term consquences of Russia’s actions in Ukraine, argues Katerina Levkovska

For five months now, the Russian-Ukrainian crisis has been a global hot topic in media, political and business circles, as well as amongst the general public.

A lot has changed in a short time and it seems probable that things will never be the same again. It was well said by one Western journalist that Russia’s aggression towards Ukraine was a wake-up call for the world.

As an international trade expert and a Ukrainian living in Estonia, I’ve been discussing developments in my home country with my clients and with business partners active in the region. The main question that worries them is how this situation will resolve itself and what impact it will have on their business in Central and Eastern Europe?

Without a doubt, there will be damage to businesses in Ukraine and Russia. How much damage will depend on how far Russia will be allowed to go with its threats and plans to invade Eastern Ukraine – hopefully not far.

It is already obvious that Russia’s own economy is weakening, as evidenced by the need for its central bank to intervene in foreign exchange markets and to increase interest rates.
The country’s foreign investment outlook has been downgraded to “negative” and the S&P ratings agency estimates $60 billion in capital outflows from Russia in the first quarter. Even the Russian Ministry of Economics has acknowledged that “the impact on the Russian economy is bigger than expected”. Thus, there is hope that these signs of damage, and possible further sanctions, will scale back Russia’s imperialistic ambitions.

As for Ukraine, with its uncertain future, mounting prices and the decreasing value of the national currency, it need hardly be said that the country is undergoing difficult times. Obviously, the impact on foreign investors is negative. According to local FDI experts, the main concern of investors now is not where to invest but how to get their money back.

However, if the situation stabilises and the country continues its integration efforts with the European Union, investors will come flocking back, which will revive the economy.
In the case of Russia the situation is different – the country will have to win back investors’ trust which will not be easy while President Putin remains in power.

Both Ukraine and Russia are major export markets to many Baltic businesses and it is becoming evident that the Ukrainian crisis will hit export activities in this region. Meanwhile, the “Don’t Buy Russian!” campaign is starting to gain popularity. The public boycott of Russian goods is in protest at the Russian military-led annexation of Crimea and invasion of Eastern Ukraine. Unfortunately it is very likely that many foreign-owned businesses based in Russia, who work with Ukraine, will also suffer.

Thus, a friend of mine, an Estonian who runs a Moscow-based construction company, also became a “victim” of the boycott. His Russian company requested a proposal from one of their Ukrainian partners and was told “Sorry, we do not co-operate with invaders”. A number of my own company’s clients have refrained from developing their market entry plans with regards to Russia and Ukraine until the situation normalises. However, there are a number of our European clients within the food and drinks sector who have supplied products to Ukrainian and Russian consumers.

These companies continue working with the countries as usual. In the meantime, Russia is starting to stipulate limits for product imports from the EU, the US and other countries.
Based on what we’ve been hearing from our clients for whom the Russian market is an important export destination, they are preparing for possible losses but are confident that they will survive as there are still other markets in Eastern Europe.

Also, Russia is unable to refuse all imports from Europe, as across many of its economic sectors imported goods prevail. Last week I came across an interesting article in an Estonian newspaper, where there was a discussion about how much it would cost for Estonia to refuse all Russian imports. The figure was around $1billion.

Would Estonia be ready to pay this price? A similar question can be addressed to Europe and the US: are they willing to intervene to stop this conflict? If yes, how much are they willing to lose?

On the question of whether Russia’s aggression can be considered as a real threat to Baltic development and growth, I do not believe that this threat is real. But it is possible that Russia will try to make a move in the Baltics.

What worries me is the fact that the majority of the Russian population supports Putin and in order to retain this support and remain in charge of the country he will need to continue his plan of “building the Russian world”.

NATO’s increased number of air patrols, the five warships that will be based in the Baltic Sea and the presence of added troops in each Baltic nation, just in case, are tangible confirmation that this is a real problem for collective security.

Although I found Putin’s statements regarding his “concern about discrimination against the Russian-speaking population in Estonia” very disturbing I do not think his plan “to protect them” would have the same effect in Estonia as in Ukraine for a number of reasons.

First of all, Russia is not as powerful as many Russians like to think. Also the Baltics are members of the EU and NATO and Russian language issues are not of supreme importance to the Russian-speaking population here anymore. Besides, Estonia already has experience in handling Russian-backed riots, anti-Estonian propaganda and cyber attacks.

I remember Russia’s 2007 campaign against Estonia very clearly. It was linked to a decision to relocate the Bronze Soldier, a Soviet monument to the victory over Nazi Germany. At that time my company had a long term project in Moscow and my Estonian partner and I were based there almost permanently. Staying there then was not very pleasant for an Estonian as many Russians seemed literally to hate Estonians. It is unbelievable what effects a propaganda war can have! I saw signs in some Moscow stores reading “Dogs and Estonians are not allowed” and other such nonsense.

During that anti-Estonian hysteria the same “they are fascists” message, supported by fake news reports, were used by Russian media. Later there was Bronze Night – when Russia was accused of backing an outbreak of rioting and protests followed by looting.

The Estonian Government seemed to me to handle this situation very well showing its maturity and capability to deal with such problems. Europe almost ignored these first warning signs. In the light of recent events, it now seems likely that Putin’s plans for invading neighbouring territories were hatched a long time ago and this small operation, along with other “projects” were a test of a bigger plan.

Now that we have all seen the Kremlin’s true face, it is natural for the Baltic States (and other Eastern European countries) to be concerned about their national security. There is even talk of investors being worried about the implications for the Baltics, but these rumours have not translated into real actions.

As for business sentiment in the Baltics, the three countries remain an attractive target market to foreign investors and companies who wish to enter the market with their products or services. My own firm, EMR, is currently involved in a number of projects for clients who are considering significant investments. Also, during one of our recent projects in the Baltic States, we investigated investment activity within the major industrial sectors. Based on our findings, it was evident that a number of large-scale projects are currently being implemented and more are at the planning stage. For example, Estonia’s energy company Eesti Energia is currently realising different investment projects valued at almost $1.7bn.

Where will the Russian-Ukranian crisis end? There are many different views and scenarios.

In my opinion, the impact of Russian aggression towards Ukraine on business sentiment in the Baltic States will depend on how the crisis is resolved, not only by Ukraine but also by the international community. In the meantime, let’s all stay calm and support Ukraine. n

Kateryna Levkovska is a Managing Partner of EMR – an international market research and export promotion consultancy that operates in the Baltics, Ukraine, Russia and other countries of the CEE region.