Impending cash flow problem for Russian importers and retail
One of the first problems for Russian traders is the shift of trade from European exporters to others in, for example, South America. While trade with Europe, in many cases, provides credit for a few weeks, Russian traders must now switch to a system with mostly prepayments and a transit time 20 days longer. This leads to cash flow problems, as it is compulsory to pay now for products that are to be sold in a few weeks, while with credit the exporter could be paid after the products had been brought into the Russian market.
There is another problem: prices in Russia fluctuate a lot. For Russian importers it is therefore safer to buy directly from European traders than to do business with South American exporters. During the time that the products are on the way, prices may change so much that it poses risks.
Inflation and falling share prices
In the field of finance there is still a bigger problem: Russia’s financial resources are limited. Due to sanctions from the EU on Russian financial institutions, investments are withdrawn, stopping the flow of money into Russia. Because money is drawn by foreign investors from the Russian economy, inflation grows.
BNP Paribas expects consumer prices for 2014/15 to increase by 1.8%. That puts extra pressure on, for instance, supermarkets, where the margins are not wide. The share prices of two major retailers, Magnit and X5, show a decline since early July.
To curb inflation, the Russian central bank has already increased the interest rates, with the intention to keep more money in Russia. To avoid price speculation with the boycotted products and hence to curb inflation, the Russian government held discussions with domestic producers to reach agreements on prices. It is also worth noting that the state of Russia’s economy was already not so good to begin with.
Uncertainty amongst clients
The solution for Russian traders lies in the building up of a rotation, whereby a healthy cash flow is created. But exporters in, for example, South America, should be willing to cooperate. Trade with Russian importers, given the financial situation, entails a high risk for exporters.
Trade on the basis of contracts is not attractive to the exporter. Russian importers, including retail chains, demand large volumes. At this time, the Russians are still ready to pay, say, 80% ahead, but the question is whether that will still be so in a few months. If the Russians then step out of the agreement, the exporter would be left with a large unsold volume.
Russians shooting themselves in the foot
From a strategic standpoint, Russia is additionally not an attractive trading partner for Latin American exporters. "South American exporters have no problems to ship their products, anyway, because there is much demand for the fruit. They consequently choose to ship to regular customers or clients that provide stability in the long term, something which Russia is not currently able to provide," says the fruit and vegetable trader.
Only the spot market is then left for Russian importers. The problem is that there is little fruit available in South America; as soon as importers enter the spot market, demand grows and thus prices increase, which for the Russians is like shooting themselves in the foot.