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Russia – Switzerland: Diversifying Economic Relations and the Role of Localization

May 29, 2017, 20:10 UTC+3
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Swiss companies are already benefiting from being part of the transformation in the Russian economy. For them, import substitution is a competitive edge rather than a handicap as Switzerlands economy has been unaffected by Russias counter sanctions. This means vibrant expansion into Russia being cascaded from the Swiss-based global majors down to small and medium-sized businesses.

Among Russia’s European partners, Switzerland is the one that stands out. A non-EU member state that nevertheless did join the sanctions against Russia, it was not targeted by the counter-sanctions introduced by Russia in response.

The 2016 trade between Russia and Switzerland shows that the relations between the two countries are progressing nicely.

  • In 2015, the total trade between Russia and Switzerland declined to USD 4.6 billion compared to USD 13.5 billion in 2012, with the declining hydrocarbon prices as the major contributing factor. However, in 2016 that figure recovered by 10.1%, and the trend remains positive: over the first quarter of 2017, the increase totalled 53.6% year-on-year.
  • Russian exports to Switzerland are moving towards greater diversification. While precious metals and stones, along with oil and oil products, accounted for 50.73% and 18.04% as recently as last year, today the shares are almost balanced out at 28.44% and 26.82% respectively. There was a sharp rise in nickel and nickel-based products, which went up from 7.86% in 2015 to 25.45% in 2016. These trends remained around in the first quarter of 2017.
  • The structure of Swiss imports remains virtually unchanged: 24.86% (2015: 24.07%) comes from pharmaceuticals, 15.52% (17.17%) from nuclear reactors, boilers, equipment, etc., and 9.86% (8.89%) from tools and optics. The only category that has seen a contraction in volumes is watches, which stood at 10.01% in 2015, 8% in 2016, and 6.92% in Q1 2017.

Russia’s import substitution policy is hardly a cause for concern for Swiss exporters:

  • Branded products, such as watches and high end optics, are unrivalled even without localised manufacturing.
  • Moreover, many companies are looking to localise their products in the target country, as this makes more economic sense.
  • Examples include Nestle, which has 11 facilities in Russia, ABB with its seven production sites (including two that opened in the crisis-hit year of 2015), and Coca-Cola Hellenic Bottling, currently operating ten Russian plants.
  • Swiss pharmaceuticals enjoy a traditionally large share in Russia’s pharma imports. With a lot of unique developments under the belt, Swiss producers can expect their monopolised standing to continue. Still, even the undisputed industry mammoths such as Novartis и Ferring are aware of the benefits offered by localisation. In 2015, Novartis launched Novartis Neva, a full-cycle plant in St. Petersburg, to produce over 40 drug products at an annual capacity of 1.5 billion pills. The investments totalled RUB 4.5 billion (USD 138 million).
  • In August 2016, Ferring Pharmaceuticals agreed to localise production of innovative reproductive health medicines at Pharmstandart-UfaVITA’s plant in Ufa.

After localization, Swiss companies intend to market their products worldwide rather than focus on the Russian marketplace only. Other businesses seem ready to follow the lead:

  • In March 2017, Schindler, one of the global leaders in making elevators and escalators, announced plans for localization in Russia. The governments of Moscow and St. Petersburg are competing for the right to absorb USD 30–50 million in potential investments.

There are also Swiss SMEs that are considering localization projects in Russia.

  • In April 2017, the Government of the Moscow Region held a meeting with Swiss Ambassador to Russia Yves Rossier to discuss, among other matters, the possibility for localised manufacturing of Switzerland’s unique cheeses.

The company that has been countering the Swiss trend for greater focus on Russia is Glencore. In 2015–2016, it divested 40% of its agricultural business despite enjoying the position of the second largest exporter of Russian grains in 2014 and 2015. However, the move was due to Glencore’s business issues rather than the situation in Russia.

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