Russian business leaders fear Kremlin pressure will tighten

Russian businesses have had a record-breaking 2021, but owner frustration remains high, optimism for the future is scarce, and fears of Kremlin intervention are growing.

Business revenues grew by at least a third in 2021, and the turnover of large and medium-sized enterprises is expected to reach their upper ever levels this year. At the same time, for the third year in a row, 87% of CEOs say it is difficult to do business in Russia, according to a recent study survey of business leaders by PwC consultants.

The mood among Russian companies is akin to the lyrics of the popular Soviet song “Moscow Nights”, said Igor Lotakov, Managing Partner of PwC Moscow: “The river moves and does not move. “

In other words, in Russian companies profits may increase, but the fundamental challenges remain the same.

Analysts say the paradox – rising profits and widespread pessimism – can be largely attributed to the strained relationship between the Russian corporate sector and the Kremlin. The government is regularly accused of treating companies as an outstretched arm of the state, pushing up employment levels, paying taxes and investing in its priority areas before innovating, increasing productivity or to increase profits.

“The government does not focus at all on the performance of companies. This is not the government’s priority, ”said Russian analyst Madina Khrustaleva of TS Lombard consultants in London.

This dynamic was fully visible in 2021 – and business owners fear the government’s anti-business turn will only intensify in 2022, especially with economic growth expected to fall back to its sluggish pre-coronavirus trends. .

More than half of the 1,000 CEOs in the PwC survey said they did not trust the government to take the views of business owners into account when making policy.

Corporate responsibility

For many, the coronavirus pandemic marked the start of a more overt government-versus-business turn, both through the modest levels of support offered to businesses and through a shift in policy and rhetoric aimed at pushing businesses to contribute more. to the Russian budget.

The metals sector – booming from soaring world prices – has been to hit with an exceptional tax of $ 2 billion on exports, and pledges to revise tax laws to drive more of their superprofits into government coffers.

Prime Minister Mikhail Mishustin said that “the companies greedWas behind the spike in food prices, imposed price controls and called on federal agencies to increase inspections of supermarket chains to ensure prices stay under control.

The message to businesses was clear: profits come second.

Khrustaleva believes this position enjoys broad support from the Russian public, allowing the Kremlin to target companies more aggressively in the coming year.

“The legislative elections of 2021 showed that there is a very strong feeling of the left in the population. Of households and the electorate, there are pressure for more measures such as price controls and to improve living standards. In this situation, the government will have to take a larger share of corporate profits, ”she said.

As Russia’s political cycle now heads towards the presidential elections of 2024, and after eight years of stagnate living standards and wages as Russian households have largely paid the price for the Kremlin’s ultra-conservative economic policies, this pressure is set to back decisively against the corporate sector in the years to come.

Experts expected the Kremlin to use two key methods to ensure that companies make a larger financial contribution.

First, more taxes on windfall profits, such as those levied on the metals sector. This is seen as a more favorable instrument than the cruder option of price caps or overt export quotas, which have been criticized by economists and are fiercely opposed by the Central Bank.

Second, tax adjustments targeting “Russia’s largest cash-generating and dividend-paying private companies … to encourage them to invest more in public projects,” said Artem Zaigrin of Sova Capital.

All of this is likely to make 2022 difficult for Russia’s giant metallurgical and mining companies, which generate huge profits and have already been politically targeted for what the Kremlin sees as an insufficient tax contribution. They should also come under the crosshairs of the government’s new energy to, at least modestly, green the economy and clean up industrial cities affected by smog.

The government’s ambitious plans to invest in the country’s infrastructure and build many new roads, houses and railroads would also put more pressure on the country’s important metals sector, as it would become an even larger buyer of theirs. building goods while refusing to pay high prices.

hurry

Even when government does not intervene directly, companies will face upward pressure on their bottom line.

Unemployment in Russia is at historic lows and the country has yet to replace most millions migrant workers who left at the start of the pandemic. Combined with long-standing demographic challenges exacerbated by the coronavirus, competition for workers is going to be intense in 2022.

Most worrying, Khrustaleva said, is that the country’s unemployment rate has not increased at the end of the agricultural harvest season, as it usually does.

“It’s going to be a problem, especially in the spring when there is the next big increase in demand for labor. In addition, the government will launch new investment programs, as will state-owned companies like Gazprom and Rosneft, all of which will stimulate demand for labor, but there is hardly any.

Two in three CEOs polled by PwC said they couldn’t find skilled workers, second only to many complaining about high tax rates.

One sector likely to counter these broader trends in 2022 – not least due to an expected increase in government support and subsidies – is Russia’s vital hydrocarbon sector.

The industry will gradually increase production over the next year in accordance with the OPEC + agreement and is also expected to benefit from high energy prices. Zaigrin of Sova Capital estimated that half of the growth of the Russian economy in 2022 will come from the oil and gas sector.

For Russia, the need to tap its vast oil and gas resources now, while demand for fossil fuels is still strong, means other sectors are likely to fall on the priority list.

In particular, the tax breaks awarded to Rosneft for its Arctic oil investment program will further increase the sector’s competitiveness – pushing workers and resources away from other parts of the economy, analysts predict.

For Russian companies that are not in selected sectors or industries likely to receive significant government support, 2021 could prove to have been their peak.

“The high margins are not going to continue. From now on, it will only tighten up, ”Khrustaleva said.

“Things are really bad for business. “


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