Russian business dreams of devaluation

01.04.2013 — News

Sverdlovsk manufacturers offered the federal government to devalue the ruble and decrease the value of money in Russia. They argue that business is not able to compete on international markets when the exchange rate of the ruble is overvalued and the interest rates charged on loans are exorbitant. However, as the columnist of RusBusinessNews has found it out, the expensive resources are not the only problem: If the financial and industrial policy remains unchanged, the country will lose not only its target markets, but also its taxpayers who will prefer to register their companies in the states with more favorable business climate.

At the meeting of the Committee of the Union for Industry and Interaction with Natural Monopolies, Marina Vshivtseva, the Executive Vice President of the Sverdlovsk Regional Union of Industrialists and Entrepreneurs, informed that the regional medium-sized business stays clueless: Over the last three years, the prices for energy and transport have gone up substantially, while the markets have shrunk considerably. For example, the manufacturers of building materials have been virtually ousted from the Far North where the Sverdlovsk Region’s companies traditionally supplied structural steel, reinforced concrete and crushed stone.

Ural manufacturers were "tripped up" by their competitors from the Novosibirsk and Omsk Regions, as they could offer more attractive prices due to the delivery of materials by water, along the Irtysh and Ob Rivers. In contrast to inland waterway carriers, the railway today brings bitter disappointment to entrepreneurs: It takes cargoes 30 days to travel the distances of 3,000 kilometers. Anatoly Sysoyev, the chairman of the Committee of the Union for Industry and Interaction with Natural Monopolies, notes that manufacturers cannot expect any satisfactory economic performance with such delivery schedules. Sverdlovsk entrepreneurs cannot count on truck transport: Heavy haul trucks carry only half of the load due to the recently introduced axle load limits, thus contributing to a further increase in manufacturers’ expenses.

Manufacturers are all in a tangle, as it turned out that they are not ready to tap new markets, since they have never assessed market conditions and have never estimated alternative options of product delivery. Today, business people turned to the government authorities, asking for a special-purpose department that would coordinate production plans and would be operating under supervision of the Plenipotentiary Representative of the Russian President in the Ural Federal District, for trade agreements to be entered into by and between the regions, for incentives to be granted to certain manufacturers, etc.

Sverdlovsk manufacturers, in A. Sysoyev’s opinion, are losing their markets mainly because of the financial policy of the government authorities. The main problem facing the economy is shortage of money: The ratio of the money supply to the gross domestic product is only 52% in Russia, while in Japan it is 340%, in China – 185%, and in Great Britain – 150%. The second problem is very expensive loans caused by the policy of the Central Bank that keeps the refinancing rate at 8.25%. In Europe, it is 0.75% and in the USA – 0.25%, thus resulting in the lower value of money in these countries. Furthermore, since the 1990s, the exchange rate of the dollar and the euro has been misaligned with the real inflation rates: Today the European currency must be at the level of 58 rubles rather than 40-41 rubles.

A. Sysoyev believes that immediately after the ruble is devalued and its rate is adjusted to the real inflation rate in the country, Russian manufacturing will start growing vigorously, as it was after the default of 1998. In the meantime, when the money supply is limited and the ruble is strong, it can hardly be expected that Russian manufacturers will be able to conquer any markets. The expert thinks that there will be no economic growth in the country, if the financial policy remains unchanged.

Alexander Trakhtenberg, the Deputy General Director for Strategic Development at Lorry, OJSC, thinks that the underlying problem of all the manufacturers is poor management rather than expensive money. He points out that the Russian economy lost its Soviet scale a long time ago; therefore, it cannot expect its presence on all the markets at a time. The priority should be given to selected business areas. The entrepreneur says: "I think that there is no sense in developing the light or local industry in the Sverdlovsk Region. These industries have never played a crucial role here. What’s the use of wasting time on them? Historically, the region has always focused on metallurgy and machine-building. So, these labor-intensive high-tech products should be the products to enter foreign markets. However, the region has no program for export development, no business analysis for the machine-building sector, no support that would be offered to particular manufacturers."

Vladimir Nechitailov, the Deputy General Director for Energy Projects at the Ural Mining and Metallurgical Company, says that today even a rusty bucket cannot be sold to foreign companies, if it does not have a valid certificate. In the meantime, the Sverdlovsk Region manufacturing transformers, boilers, turbines and other electrical equipment does not have any electrical engineering testing center. There were two of them during the times of the Soviet Union: at the Uralelectrotyazhmash and at the Ural Technical Institute (now the Ural Federal University). Today, their sites accommodate commercial markets selling Chinese products. China, by the way, is building three testing centers at the moment.

One testing center is scheduled for construction in Russia – though it will be built in St. Petersburg. It means that the Sverdlovsk Region should probably give up any export prospects.

Vladimir Terletsky