Cancellation Issues

Russian President Vladimir Putin  had stated his position on the cancellation of sanctions back at the start of the warming of relations between Moscow and Washington. In his speech at the Future technology Forum in late February he proposed to pay very close attention to the process, “so that the overall industry and the economy of our country keep their acquired potential”. The process of return of foreign companies shall be regulated by the government of the RF, its task being to preserve benefits, extended to the domestic enterprises.

Dmitry Peskov, Press-Secretary of the head of state, in his turn emphasized that any return of Western brands could only happen on competitive  basis. According to him, such competition “should be in the interests of consumers”.

But the Russians expressed different views. According to a poll by Weber sociology agency, 24% of Russian citizens believe that returning Western brands would bring equal harm and good for the economy, and 27% of those polled saw more good in this process, and 19% of respondents expected more harm.

The Russian Union of Industrialists and Entrepreneurs (RUIE) has set up a working group to discuss conditions for return of foreign companies to our country. The goal of the group is to develop a legal basis for their return and limitations for their activities, so that the local business does not take a hit after this “comeback”.

The Western business is displaying a mixed reaction. For example, in February it was reported that South Korean automotive corporations had been assessing losses from their exit from the country. As we can recall, for instance, Hyundai Motor Company sold its Russian assets for a token amount, however, it had made arrangements to be able to return in two years. The automotive concern, however, has not made any direct comments on the matter.

Moreover, allegedly the Japanese Uniqlo company expressed its desire to go back to Russia in its private chatroom. But the corporation remains silent in its official messaging.

In late February the Russian Council of Shopping Centres (RCSC) called on the Inditex Group (the owner of Pull&Bear, Zara and Massimo Dutti brands), Uniqlo and H&M to return to the country, but at least the latter company never expressed any understanding.

H&M, a Swedish clothing retail chain, which had left Russian malls in 2022, rushed to make a statement that it had no plans to return to Russia. The press assume that the Swedish position on the Ukrainian conflict also does not allow for resumption of IKEA operations anytime soon. But American PepsiCo, Coca-Cola and McDonald's may come back to our country as soon as the end of this year, if there is no resistance from domestic manufacturers. And this scenario is quite plausible, in any case, for the soda pop makers.

Some Telegram channels have already reported that domestic soda pop manufacturers are prepared to establish a union against the American giants in order to prevent the Western companies, looking to come back to the Russian market, from getting a share of it. And representatives of the US Chamber of Commerce believe that a third of American companies will not be able to return to the country, because new business owners would stand in their way.

For example, Ruslan Alisultanov, the owner of Health&Nutrition, a former Russian division of Danone, which is currently an independent company, has already reported, that the French corporation has completely lost control over its assets, and the new company “has successfully adapted to its operations”. Today the company owns 12 factories, which used to supply products under Prostokvashino, ActiBio and Danissimo brands.

Payment Subtleties

The State Duma voiced an assumption that Visa and MasterCard international payment systems, which used to have the lion’s share of the Russian market, might want to come back to Russia. The Russian Central Bank, though, noted that it is too early to speak of this possibility. According to Elvira Nabiullina, head of the regulator, these payment systems have not contacted the Bank of Russia on the issue of their possible return to the domestic market.

According to Sofya Glavina, assistant professor at the RUDN economy department, the return of such financial companies as Visa and Mastercard to Russia will depend on the political situation and on conditions, offered for such operations. If the sanctions are lifted or eased up, it could open the doors for their return, impacting the domestic market and improving the access of residents to international payment systems, increasing competition. This in turn could lead to lower service prices and improved service quality. Visa and MasterCard are by all means very convenient tools, especially when it comes to making payments in those countries that do not accept Mir cards by the NSPK. But this convenience would come at a price.

Many people are unaware that the use of these cards makes Russian retailers share a part of their profits with banks and the payment brands. This adds up several percent to the price of goods and correspondingly, has an effect on the overall inflation. The Mir card, in this regard, seems more attractive, because its commission fees are lower.

Moreover, this poses the question: why Visa and MasterCard can operate in Russia, but Mir is still banned in a number of countries, where these American brands operate?

But it should be also kept in mind that our country has yet to see a resolution of the situation with $300 billion of Russian sovereign assets abroad. The West has officially recognized that these assets were stolen.

This issue needs to be settled for good, and it just cannot be ignored. Otherwise, it would signal to the West that they could steal again with no consequences, Sofya Glavina warned.

“The mechanism of unprecedented sanctions against Russia is protected against fast cancellation thereof, — the discussion is continued by Ivan Petrov, industry market department professor of the Financial University. — Our country, just like the USA, has had restrictions in place for foreign financial organizations, and quite a few protective measures were adopted after the sanctions had been implemented. Since the policy of Donald Trump and his administration is focused on the American business interests, these will be selective measures for individual projects, permitting financial operations for their companies in Russia and negotiations with our administrative authorities to obtain relevant permits. No large-scale return of American financial companies to Russia should be expected over the next three years”.

Meanwhile, during the period of absence of Visa and Mastercard from Russia, a quite resilient alternative infrastructure on the basis of the Mir national payment system has been developed in Russia. Russian banks have significantly developed their technology solutions and the population has adapted to the new conditions. “In this regard, even if the international situation were to improve, hypothetically, a full-scale return of these payment systems seems very unlikely”, — pointed out Venera Shaidullina,  assistant professor at the Plekhanov Russian University of Economics, Department of global financial markets and financial technologies. She believes that a more realistic scenario would feature a partial return through partner programs with Russian banks or a limited presence format.

Dedollarization And Moscow Exchange

Some political signals suggest that sooner or later the American sanctions would be lifted, at least from the Moscow Exchange. “Specifically, a representative of the American delegation at the Riyadh talks openly stated that this would be necessary, if a peace treaty is made between Russia and Ukraine, — says Vladimir Chernov, analyst at Freedom Finance Global. — If the sanctions are lifted from the National Clearing Center (NCC), trades in US dollar will resume at the Moscow Exchange, slowing down the dedollarization process in the Russian economy. Russia has almost completely transitioned to national currency settlements with Iran, a high share of such settlements has been achieved with China and even with India, that’s why I do not expect the process to stop altogether, but it will definitely slow down”.

It is important to emphasize that the process of dedollarization of the Russian economy has become systemic and is a part of a long-term government strategy. Many Russia’s trade partners have already switched over to national currency settlements, and this trend is likely to persist even if the sanctions were eased.

“The sanctions against the Moscow Exchange have hurt American nationals too, this is why restrictions on some operations and assets will be partially lifted based on bilateral decisions by American and Russian financial regulators, — says Ivan Petrov, expert. — And dedollarization is a headache for Trump. He intends to stop this process, and his administration will be lifting the sanctions on the dollar use in our country. What about the economy dedollarization then, which everyone was so happy about? The measures to shift to national currency settlements in foreign trade will remain in place. But both dollars and euros will forever be a toxic resource. These will no longer be used in the system of gold and foreign currency reserves and banking savings”.

But there is a different opinion. Investment advisor Yulia Kuznetsova says that all of the so-called “brand comebacks” will only be possible after the end of the SMO, only after Russia’s demands will be stated and satisfied. Till this time, any talks of lifting sanctions and “thawing relations” would be out of the question.

“I believe many domestic manufacturers will be unhappy with strong brands returning, and many will leave the market, — the expert forecasts. — Sanctions could also be lifted from the Moscow Exchange, and I would also expect assets to be released in a year after the end of the SMO. This would apply to assets of Russian nationals in the form of frozen securities too”.

SWIFT And Oil-And-Gas Prospects

There are a lot of expert discussions around the SWIFT situation. Some say that a complete restoration of Russia’s access to the system is highly unlikely in the short term.

“Over the period of sanctions the Russian financial messaging system (SPFS) has significantly expanded its international presence and improved cooperation with payment systems of many countries, — reminded Venera Shaidullina. — Partial access to SWIFT may be possible for some Russian banks, especially those participating in critically important international settlements. But this would not cause the same effect it once had on the Russian economy”.

Other analysts insist that everything will depend on the political situation. “Representatives of the Russian and the US delegations at their meeting in Saudi Arabia agreed to restore economic cooperation, which one way or another means ramping up foreign trade volumes between the countries, and this would be next to impossible when Russian banks are banned from the SWIFT cross-border money transfer system, — noted Vladimir Chernov. — For this reason I expect that sanctions will be lifted from these banks in the longer term, probably only in part at first”.

Lifting the SWIFT ban will take the shackles off importers and cut their extra costs to bypass the sanctions, which should have a positive impact on the domestic Russian market in terms of inflationary pressure. However, with this in mind, volumes of imports to the RF should also go up, increasing demand for foreign currency and causing its rate growth, and this would be a pro-inflation driver, offsetting lower currency transfer costs for importers, warned the expert.

Analysts also argue about the energy market prospects. According to Venera Shaidullina, the most likely scenario in the oil-and-gas sphere provides for a gradual easing of sanctions, in line with the interest of Western countries, particularly the USA, in stabilizing the global energy market. High energy price volatility adversely effects the global economy.

But there is a different opinion. “The oil-and-gas sector sanctions will be lifted selectively (under specific targets) only for those projects that are beneficial for the USA, meaning those projects involving funds of American corporations or supplying cheaper oil products to American consumers, — says Ivan Petrov. — Overall, the sanctions in this sector will remain in place”.

Trade Marks, Catering And Other Delights

Those foreign brands that targeted mass consumption, have left under threats, and not due to a bad situation in their Russian offices. It is little wonder that many of them are hinting at being ready to return. But in this case these should be carefully considered with best interests of Russians in mind.

“As for consumer choices, it is important to keep in mind that consumer incomes depend on the development of domestic production, and not on any foreign brands, — pointed out Sofya Glavina. — Russia should support its manufacturers and take its time to open doors to foreign companies”. The mistakes of 1990s, when foreign business had priority, and the Russian business stood on the sidelines, should never be made again. It should be remembered that back then foreign businesses had significant advantages, and this should be altogether avoided, underlined the expert.

But there is a different opinion. According to Chernov, a return of manufacturers of beverages and other groceries to the Russian market will increase competition, which would likely be positive for the economy, because the higher the level of competition, the lower the price of similar products, resulting in lower inflation rates across the country. But for domestic makers of similar products a return of their competitors to the market will increase the risk of plunging sales and profit volumes, which cannot be viewed in a positive light, warned the analyst.

“The return will be selective, —Venera Shaidullina joined the discussion. — many niches are already occupied by Russian companies or brands from friendly countries. For example, the place of McDonald's is taken by a domestic brand, local beverage manufacturers are developing. This means that American brands will have a hard time competing under the changed conditions in the Russian economy”.

No drastic changes should be expected, since over the period of the sanctions new economic ties and mechanisms have developed and proved their sustainability.

Moreover, many Russian companies and financial institutions have adapted to operating under tough conditions and built alternative business processes, which they will not change in a rush even under improved international conditions, says the scholar. And the majority of the Russian expert community agrees with him.

Anna SOLNTSEVA