Many in the West may
have missed the fact that Russia has opted out of Recession and has
entered a weak, economic growth phase. It has
decoupled from Sanctions and has partially decoupled from the price of
oil, with an economy based on manufacturing that is continuing to
diversify. As a matter of fact, resource based economics makes up roughly 19% of the Russian GDP. This is the situation that brings us to this topic.
Sanctions, like war, bite and often bite the hand that unleashes them. A large part of Russia’s uplift has been based on over a score of major infrastructural and industrial mega projects that had previously been put off or the need for which had not been apparent as well as import substitution with various degrees of government assistance, something that was all but lacking in the pre Cold War 2.0 era.
To that end, the Russian government has taken a series of projects to economically expand the Far East and create the needed energy infrastructure to develop the Asian market away from Europe. Four greenfield projects, in the $2-4 Billion range are in the works for the Amur River area, specifically the Amurskaya Oblast. The first is entering its third and final stage of construction.
So how are sanctions biting?
On these and other government funded projects, American suppliers, unless working specifically through European/Asian or Russian subsidiaries and manufacturing in Russia, Europe or Asia, are banned from the projects, as politically unreliable suppliers. Yes, the Russian government has heard the US Congress’ continuous drum beat of economic, financial and political warfare and has shot back and as usual, while the US Congress gets fat off of special interest donations, US workers will suffer lost opportunities. The only exception to this is when unique technologies are at stake, but this is a rare exception.
Equally US companies, like Exxon, have lost their place in the various artic projects. Just in one light sweet crude oil patch in the Kara Sea, Exxon, who had a 10% stake, has lost an estimated $100 billion over a 10 year period. No, that was not a mistake in the number of zeros.
However, Europeans and Asians should not feel too relieved, as this position is not the only new force in play.
Going into effect on 1 January 2017 was a new decree signed by President Putin that specified a preference for local, Russian manufacturing. It works as follows: whenever a tender is launched, and everything now requires a full tender, and a foreign company is competing against a Russian company, the Russian company’s bid is automatically counted as 15% cheaper. In the event that the foreign company still wins, they are then forced to automatically lower their last bid offer by a further 15% or be disqualified.
Considering that 38% of the Russian economy is manufacturing based, with huge inflows in investment over the past 36 months, most everything needed for these projects can be found in country, either from Russian or foreign manufacturers. And that makes sense, considering that Russia has the lowest utility costs, some of the lowest taxes, lowest wage rates and low cost raw resources.
Due to sanctions, four automobile engine plants were built over the past 5 years. Compare that to zero for the proceeding 24 years. Nissan now builds cars in Russia for export to Mexico, South America and SE Asia. Half a year ago, Mercedes opened a new manufacturing plant, just west of Moscow. The state of the art plant employees some 1.500 employees for full cycle assembly.
What does not make sense is the raw fear of many medium and small Western companies to manufacture in Russia, where companies can sue and win against the government, as opposed to many countries where these corporations do manufacture. Russia ranks 28 in the World Bank’s list of countries in the Ease of Doing Business Index, moving up over 92 positions in 7 years. To put this in perspective, Japan is 29, China 31, France 32, Netherlands 42, Belgium 46, Italy 58, India 63, Brazil 124.
Since major reforms and extremely pro-business economic conditions have not been enough to fight against the Western yellow journalism, the government has decided to make a more pointed approach to forcing localization. Since Russia is one of the few countries running well over a dozen major mega projects in an otherwise recessionary global economy, they have the leverage to do so.
Sanctions, like war, bite and often bite the hand that unleashes them. A large part of Russia’s uplift has been based on over a score of major infrastructural and industrial mega projects that had previously been put off or the need for which had not been apparent as well as import substitution with various degrees of government assistance, something that was all but lacking in the pre Cold War 2.0 era.
To that end, the Russian government has taken a series of projects to economically expand the Far East and create the needed energy infrastructure to develop the Asian market away from Europe. Four greenfield projects, in the $2-4 Billion range are in the works for the Amur River area, specifically the Amurskaya Oblast. The first is entering its third and final stage of construction.
So how are sanctions biting?
On these and other government funded projects, American suppliers, unless working specifically through European/Asian or Russian subsidiaries and manufacturing in Russia, Europe or Asia, are banned from the projects, as politically unreliable suppliers. Yes, the Russian government has heard the US Congress’ continuous drum beat of economic, financial and political warfare and has shot back and as usual, while the US Congress gets fat off of special interest donations, US workers will suffer lost opportunities. The only exception to this is when unique technologies are at stake, but this is a rare exception.
Equally US companies, like Exxon, have lost their place in the various artic projects. Just in one light sweet crude oil patch in the Kara Sea, Exxon, who had a 10% stake, has lost an estimated $100 billion over a 10 year period. No, that was not a mistake in the number of zeros.
However, Europeans and Asians should not feel too relieved, as this position is not the only new force in play.
Going into effect on 1 January 2017 was a new decree signed by President Putin that specified a preference for local, Russian manufacturing. It works as follows: whenever a tender is launched, and everything now requires a full tender, and a foreign company is competing against a Russian company, the Russian company’s bid is automatically counted as 15% cheaper. In the event that the foreign company still wins, they are then forced to automatically lower their last bid offer by a further 15% or be disqualified.
Considering that 38% of the Russian economy is manufacturing based, with huge inflows in investment over the past 36 months, most everything needed for these projects can be found in country, either from Russian or foreign manufacturers. And that makes sense, considering that Russia has the lowest utility costs, some of the lowest taxes, lowest wage rates and low cost raw resources.
Due to sanctions, four automobile engine plants were built over the past 5 years. Compare that to zero for the proceeding 24 years. Nissan now builds cars in Russia for export to Mexico, South America and SE Asia. Half a year ago, Mercedes opened a new manufacturing plant, just west of Moscow. The state of the art plant employees some 1.500 employees for full cycle assembly.
What does not make sense is the raw fear of many medium and small Western companies to manufacture in Russia, where companies can sue and win against the government, as opposed to many countries where these corporations do manufacture. Russia ranks 28 in the World Bank’s list of countries in the Ease of Doing Business Index, moving up over 92 positions in 7 years. To put this in perspective, Japan is 29, China 31, France 32, Netherlands 42, Belgium 46, Italy 58, India 63, Brazil 124.
Since major reforms and extremely pro-business economic conditions have not been enough to fight against the Western yellow journalism, the government has decided to make a more pointed approach to forcing localization. Since Russia is one of the few countries running well over a dozen major mega projects in an otherwise recessionary global economy, they have the leverage to do so.
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