2020/05/06

Pandemic, Oil Price Crash, and Ruble Decline

Detecon projects in Russia continue despite the Corona crisis

An Interview with Johannes Eigenseer, Managing Consultant bei Detecon in Moskau

On 3 May, the news spread like wildfire: for the first time, Russia reported more than 10,000 new cases in one day. Despite massive lockdown measures, the pandemic seems to be gaining the upper hand over the country. Moreover, the economy is struggling with historically low oil and gas prices and a weak exchange rate for the ruble. The Russians use the price of oil to calculate their national budget. The current budget was based on a price of $42. At the moment, however, prices for oil of the European type are about half that. Despite all the warnings from the business community, Russian President Putin extended the “coronavirus vacation” ordered by the government to 11 May.

Mr. Eigenseer, companies in Germany would strongly resist the use of the term “vacation” when speaking about the pandemic. But it really appears to be a vacation in Russia.  

Johannes Eigenseer: All employees have been required to stay home with full pay since the end of March. Of course, this does not apply to companies and employees in critical infrastructure facilities such as hospitals or energy utilities. But there are almost no businesses that can afford to pay full wages and salaries during this “work-free time.” As a result, companies are starting to protest loudly or seeking to weaken the regulations for their own operations. This includes the German companies that have factories here in Russia. Very little is still in operation. Some German industrial companies operating in Russia speak of the need to reduce wages and of dismissals of up to 25 percent of the workforce.

No working from home, either?

Working from home is not a common practice in Russia as a whole. This is in no small part because work in Russian companies in general is more strongly characterized by control. Employees are not always trusted to work effectively from home. However, a recent survey by the Russian market and opinion research company WZIOM indicates that around 54 per cent of employers in Russia have switched their employees to remote working and another 16 per cent intend to permit working from home at least to some degree. Only seven percent of companies do not allow their employees to work from home.

But the oil and gas production industry continues to operate normally, doesn’t it?

They are continuing to produce. But production volumes have been throttled parallel to the fall in oil and gas prices. This decline in prices is causing Russia additional headaches. Oil and gas exports represent the largest source of revenue for the Russians. In contrast, the country must import many consumer goods. If the value of the ruble falls as well, the country finds itself in an extremely precarious situation. The exchange rate for the ruble appears to have stabilized to some extent. But it had fallen by around 20 percent at the beginning of the crisis.

Does this make itself felt in daily consumption? Are there any shortages?

No, the grocery stores are full. I have not been able to determine so far that anything is lacking. But owing to the fall in the value of the ruble, people initially bought considerably more white goods – refrigerators, televisions, or other household appliances – even cars. People are afraid that the rubles they have saved will soon become worthless. Previous currency crises demonstrated that imported goods very quickly cost significantly more when the ruble declines.           

What about the Detecon projects in Russia? Is everything on hold?

Fortunately not. Although new acquisitions are difficult, our current projects are largely continuing as normal. However, the poor ruble exchange rate is affecting our competitiveness on the Russian market. Although our internal calculations are in euros, we sell our services in rubles. This will make us (like many other international consulting companies) more expensive on the market. But we have nevertheless been able to acquire additional components in the projects. There are strategy projects in which we simulate technological scenarios of how the coronavirus crisis could affect the company and what parameters need to be adjusted. Since almost all of our clients come from the telecommunications industry, which is considered a critical infrastructure, the effects of the lockdown on them are limited. This is one case where the employees continue to work, but now from home.

What are the specific projects?

They concern the establishment and expansion of telecommunications infrastructure. For example, we are currently working on a project for the procurement of technical infrastructure. This project must continue because a telecommunications company cannot be content with continued operation in the current crisis; it must also adapt to future technological developments. Such projects cannot be postponed as they involve strategic decisions that will have an impact on the next three to five years. Anyone who shut down this part of its operation would have massive problems in only a few years.

But is the shutdown affecting the Detecon team in Russia?

I've been in Russia for over eight years, usually commuting between Moscow and St. Petersburg and mostly spending only the weekends with my family in a suburb of St. Petersburg. Now I work from home all the time, and my family, of course, thinks this is great. Normally, I see my wife and our two small children significantly less often. In this respect, the current situation also has some advantages for us. We usually spend our vacations in Germany, but this year, we will probably have to cancel those plans.

But the Detecon office is in Moscow.

Most colleagues work in the capital. Now from home, too. One employee was a little unlucky, however. He was in Kuwait for project support in early March when Kuwait imposed a lockdown and most flights were cancelled. He was lucky enough to get a flight to Frankfurt after two weeks, but has been stuck there ever since. So he has not seen his family in Moscow for more than two months. Sometimes there are cargo planes from Moscow to Frankfurt that take along a few passengers. But the cargo planes are not carrying any passengers on the return flights at the moment, only the freight.          

How is the Russian government helping the companies? To be more precise: is the government helping at all?

There are a few less extensive actions providing support for companies – tax reductions, for example. But these measures are restricted in their scope and cannot fully compensate for the effects of the critical situation. The German-Russian Chamber of Foreign Trade reports on such measures. For instance, at the beginning of May, Moscow authorities put 150 properties up for lease by small and midsized companies at a favorable rate for ten years. Or companies that supply goods or provide services for government requirements can now receive up to 50 percent of the contract price as an advance payment. And the Russian government has defined criteria under which systemically relevant companies can claim government aid in 2020. There is also a national welfare fund that has been endowed with around €160 billion. There are now plans to use these funds to support the economy. So a lot of announcements are being made, but the effects of the measures are trickling down very slowly. Much is relativized and delayed by bureaucracy.

But Putin’s appearances on government-owned television always seem optimistic.

Putin did not make his first public appearance to talk about the pandemic until the end of March. When he had good news, of course. That was much as it always is. That is why the majority of the population in Russia does not blame him for the current situation. Any dissatisfaction that is expressed is aimed more at the system as a whole. At the end of March, he announced the week of vacations and government support for affected businesses as well as socially disadvantaged people and families. How exactly this was to be implemented remained open. As usual. Putin’s appearances generally leave questions unanswered. He announces something. Then everyone wonders what he meant. Is the announced “work-free time” to be seen more as a public holiday or as a vacation day? Several days go by until precise procedures for implementation are described. Then it turned out, for example, that the companies that had been working remotely at that time could continue to work remotely. Russia is not necessarily famous for transparent communication, and nothing has changed in that respect even now.

What are your hopes for the coming weeks?

I hope that Russia will gain control over pandemic. The latest figures are not very encouraging. Especially if the price of oil remains in the basement. For the sake of our employees and their families, I hope that everyone stays healthy because the health care system here in Russia is not really well prepared, either. All in all, I am concerned, yes, but I remain optimistic.

 

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