Mike Josypenko, Director of Special Projects, Institute of Export

Exporting to Russia – the top five tips for UK businesses

Director of Special Projects | Institute of Export

A year on from the outbreak of the conflict in Ukraine and the imposition of sanctions by the EU and USA against Russia, the outlook remains uncertain for British companies who currently export there – and for those businesses that are seeking to expand into the country.

Following the start of hostilities, EU trade sanctions were imposed in 2014 against sales of military and dual use goods to Russia, and goods and services for oil and shale oil exploration and production.  At the same time financial measures were imposed against Russian financial institutions, preventing them from gaining access to finance, as well as trading in bonds, equity or other financial instruments.

More recently, as a consequence of Russia’s annexation of Crimea and Sevastopol, the EU has imposed a prohibition on imports from those areas, as well as investment, tourist activities and some export activity with those regions.

In return, Russia announced a number of counter measures against EU products, particularly foodstuffs.

Alongside the sanctions, the worldwide fall in the price of oil at the end of 2014 had a profound effect on the Russian economy.  The rouble has fallen by around 30% against both sterling and the US dollar over the last 12 months, prices for many food items have increased, and the economy has suffered – all impacting heavily on Russian consumers.

The country's Prime Minister, Dimitri Medvedev, recently warned that a 2% contraction in the first quarter of this year may indicate the start of a deep recession.  An emergency hike at the end of 2014 has been followed by three key interest rate cuts in a bid to lift the economy out of recession.

Remaining defiant, President Vladimir Putin has insisted that the country will recover, even going as far as to suggest that the sanctions have been beneficial in limiting Russia’s heavy reliance on oil exports – an argument that few outsiders believe.

The Russian retaliatory measures against sanctions, including the food bans, have undoubtedly hit EU exporters hard, because Russia was the EU's second-biggest food export market after the US.  Indeed, according to the European Commission, EU food exports to Russia in 2013 were worth £11.8 billion / €9 billion.

Nevertheless, the EU's Europa website (http://ec.europa.eu/agriculture/russian-import-ban/index_en.htm) reported that EU agri-food product exports worldwide increased by 2.3% in the first seven months following the Russian ban compared to the previous year, fuelled by strong growth in other markets.

When EU economic sanctions were first imposed many British exporters complained about a lack of clarity and information regarding which sectors and products were affected.  Several months on, the situation has become somewhat clearer; however political and economic events, and the situation ‘on the ground’, remain volatile.

This volatility, coupled with the potential for future sudden changes, creates further problems for UK exporters.  For example, what is permissible today may not be allowed next week or next month, which is particularly problematic for manufacturers who have to produce goods with a lead time between receipt of order and shipment.

Where goods are produced to client-specific requirements or specifications, firms can be left unable to sell them elsewhere if sudden changes in sanctions and other measures prevent them from completing the sale to their original Russian buyer.  Similarly, cancelled orders because of economic conditions will impact negatively on exporters, particularly in consumer goods sectors.

Below are the top five points that UK companies who currently trade with - or who are seeking to trade - with Russia need to understand:

  1. Have a robust business plan and compliance process in place.  Do your research and make sure that you understand the implications of the sanctions and restrictions, and any effect on you particularly if you are active in any of the sectors affected by economic sanctions.  What effect will this have on trade cost and timings?  Have you received enquiries from embargoed individuals or organisations?  Do you have a clear contract drawn up?  Have you researched all potential issues associated with the transportation of goods and have you checked that your insurance covers you to trade in Russia in the current economic situation?
  2. Pay due diligence to all financial matters.  The current sanctions include monetary restrictions on organisations known to be affiliated with the Russian government, whilst the fluctuation in the Russian currency has exposed everyone engaged in foreign trade – both importers and exporters – to increased risk.  Many Russian importers, particularly small importers, make payments in advance for goods.  Carefully check payment facilities and beneficiary details before making a payment to, or receiving a payment from, Russia, and seek advice from a banking expert if you are in any doubt.
  3. Take the time to build relationships with your Russian counterparts.  Determine who the key influencers are that you need to be aware of and facilitate introductions.  Russians have a particular approach to doing business – exporters are advised to take time to understand this mentality, to accept that absolutely everything is documented and to accept that trade in Russia requires patience.
  4. Check regularly with UK government departments, commercial and business support organisations, to stay abreast of any changes in regulations, sanctions or other requirements.  In particular, the following organisations and their website are all relevant:
    • Export Control Organisation
    • UK Export Finance
    • UK Trade & Investment
    • High street banks
  5. Translation difficulties can create a huge problem for businesses that trade in Russia.  The language is complex and few Russians speak English. The best advice to avoid issues is to use a translator.

How long this current situation will continue is anyone’s guess.  In the meantime exporters remain in a state of uncertainty.  Until such time as a resolution can be found, businesses are advised to approach all trade opportunities in Russia cautiously, and to seek expert guidance and advice before entering into any trade agreements.

Institute of Export