Finnish companies have doubts about the Russian market, although risks could be managed through credit insurance
One thing is in common among the Finnish companies which have invested in Russia recently: experience. Almost without exception, the companies already have solid competence in trade in Russia and are known in the Russian market. In order to maintain their market share in Russia, many companies have been forced to partially transfer their production there. By contrast, new start-ups often skip Russia when they go international and only target the Western markets.
“The fluctuating business conditions in Russia and the uncertainty around the sanctions, for example, are not appealing to new companies considering entering the country. It is disconcerting that no new Finnish export companies are entering the Russian market, even though the risks could be managed by means of credit insurance,” Timo Pietiläinen, Head of Finnvera’s Representative Office in St. Petersburg, says.
Western provider of financing have partially withdrawn from the Russian market. The public providers of financing that still exist for companies pursuing the Russian market are Finnvera and the Nordic Environment Finance Corporation (Nefco). Nefco helps Finnish companies finance their production-related investment projects.
“With regard to Finnvera, the demand for short-term trade finance is still fairly high. As market risks increase and financing options decrease, companies still want to secure their export receivables. Finnvera, as the responsible provider of risk financing, works to secure, for its part, export by Finnish companies to Russia,” Pietiläinen says.
Despite challenges, there are export opportunities in the forest sector and in recycling competence, for example
Russia is again experiencing a stagnation phase, and Russian companies must carefully consider what they can or should purchase from abroad. In addition to the weak ruble, foreign imports are reduced by the counter-sanctions imposed by Russia and the import substitution policy that has been in effect for approximately five years. The public sector and state-owned companies are obligated to primarily purchase Russian-made products and equipment in their own procurement. The economic sanctions imposed by Western countries also have an impact on Russia’s foreign trade, but less on export to Russia by Finnish companies.
Despite the slight economic growth in Russia, export to Russia by Finnish companies decreased by 3 per cent in 2018, compared to the previous year. According to the Finnish-Russian Chamber of Commerce’s barometer on trade to Russia, the declining trend in trade to Russia will continue for Finnish companies. However, a few new sectors may open up interesting horizons for Finnish companies in the Russian market.
“Russia has 20% of the world’s forest area but not much competence in the manufacture of forest machines. Therefore, Finnish manufacturers of forest machines continue to make good profits in Russia. Corresponding competitive edge is also there for Finnish mining technology manufacturers as well as exporters of food industry technology and agricultural machines. Wood processing technology also continues to offer export opportunities,” Pietiläinen says.
A new sector in which Finnish companies can seek business opportunities in export is waste management technology and equipment. In Finland, approximately 40 per cent of municipal waste is recycled, about 60 per cent is converted into heat or electrical energy, and only 1 per cent is disposed of in landfills. By contrast, in Russia 4 per cent of municipal waste is recycled and the rest is buried in landfills for the future generations to worry about.
“In recent years, the pension age rise as well as waste management problems have resulted in people demonstrating from time to time. Exporting waste management competence is a considerable opportunity to improve Finland’s trade balance with Russia.
Opportunities are also created for Finnish exporters by the fact that private Russian companies are still allowed to purchase the technology and equipment they need from wherever they want, which also often still means Finland. Buyers in the private sector consider the quality and price of the product to be decisive factors, not the domestic origin. Finnish products are known to have a good reputation in Russia.
Establishing business in Russia as a way to stay in the market there
Some of the export companies engaging in trade to Russia have already transferred part of their production to Russia or are considering doing so in the near future. Initially, this may include transferring an assembly line to Russia, which will offer the Finnish company a competitive edge since they are considered to be a local producer. The company may be able to have an equal standing with Russian companies in competitive bidding organised by the public sector and by state-owned companies.
“The news has covered the factory investment of Vilakone, a Wihuri Group company, in St. Petersburg in spring 2019, for example. The Wille machines for environmental management and maintenance, assembled in rented facilities, compete for public sector purchases with local manufacturers in Russia. Without the assembly taking place locally, the Wille machines would no longer be sold in Russia. Corresponding examples of partial transfers of production can also be found in many other sectors and, in particular, in the construction products industry. In addition, Finnish companies mainly operating in wood processing and with established operations in the Karelia region have made successful investments in Russia and are able to operate profitably in the challenging operating environment.”
Timo Pietiläinen, Head of Finnvera’s Representative Office in St. Petersburg, tel. mobile Russia + 7 921 0969 304
mobile Finland +358 40 5088 956