When Swiss fragrance producer Luzi entered Russia at the start of last year, prospects in the developing market smelled rosy. The recent Ukraine conflict, Western sanctions on Russia and a depreciating ruble have since created something of a stink.
While the company says it has so far managed to meet business targets, it is now battling a range of problems, from the difficulty of getting paid by Ukrainian clients to Russian customs agents sniffing around shipments.
Russia is one of the top five markets for cosmetics and perfumes, according to Luzi sales manager Mike Rohner, and the only country in the top category that is not already fully developed and saturated with competitors’ products.
For Luzi, forging distribution partnerships with companies in Russia, Ukraine and Belarus that could use their fragrance compounds to produce local finished products has resulted in swifter than expected dividends.
But one partner in Crimea soon faced problems sending payments when banks turned their backs on the disputed territory when it was annexed by Russia in March.
Money flows also became difficult in Ukraine’s capital Kiev, although the company - based in Dietlikon, canton Zurich - found a way around the obstacles. Then came United States and European Union sanctions and the Russian retaliation of restricting food imports from these countries.
“We are only indirectly affected by these measures,” Rohner explained to swissinfo.ch. “One of our distribution partners in St Petersburg has been under surveillance by the Russian authorities because he also imports food flavours from Europe.”
“Our products are on the same shipment so this can create delays and complications.”
Switzerland Global Enterprise, the government agency that advises Swiss companies on doing business abroad, said that other firms are also feeling the pinch in Russia.
Swiss exports to Russia fell 3.5% in the first four months of this year to CHF843 million. The Swiss embassy in Moscow says the decline nearly doubled to -6.3% by the end of June.
Imports from Russia to Switzerland plunged 46% to CHF231 million from January to the end of April, according to official statistics.
Switzerland was the 12th largest direct investor in Russia at the end of 2012 (latest statistics), investing CHF12.5 billion.
Russian investments into Switzerland stood at $50.7 billion at the end of 2012.
Around 200 Swiss firms operate on Russian soil.
In July, the International Monetary Fund (IMF) slashed its GDP growth forecast for Russia from 1.3% this year to 0.2%.end of infobox
“Speaking to Swiss companies, we hear that it’s less the sanctions themselves that affect them than the increasing general uncertainty regarding future developments in the region,” s-ge said in a written statement.” A few that we are in touch with have postponed or cancelled export projects.”
Switzerland has so far refused to impose the same range of sanctions as the US and EU. In fact, some Swiss cheese and meat producers have witnessed increased demand as Russia searches for supply from non-EU states in the trade war.
But they have to tread carefully as Switzerland is anxious not to become an EU sanctions-busting conduit for EU products to Russia. Another indirect problem of the trade war is that EU food prices have become depressed by the restriction of exports to Russia.
The Swiss Fruit Association is worried that this might affect its exports to Europe while the Meat Association warned that this could increase the trend of Swiss consumers nipping over the borders of neighbouring countries to buy cheaper products than in Swiss shops.
The tourism industry is also bracing for negative consequences of Russian antagonism with the West. “Fewer Russians are coming and we should reckon on reduced numbers in the peak season at the New Year,” Guglielmo Brentel, head of the Swiss Hotels Association, told Swiss public television, SRF.
Hans Hess, president of Swissmem which represents the Swiss engineering, electric manufacturing and precision instruments sectors, said the Ukraine conflict and subsequent sanctions has already had a direct effect on some members as EU firms start to cut back on investments.
Swiss exports to Ukraine fell 8.5% in the first four months of this year to CHF202 million.
Imports from Ukraine to Switzerland plunged 37.5% to CHF41.4 million, according to official statistics.
Swiss direct investments in Ukraine stood at $1.3 billion at the end of 2013 (up 6.7% from 2012).
There are no official statistics for Ukrainian direct investments in Switzerland.
The IMF predicts that Ukraine’s GDP will contract by 6.5% this year.end of infobox
“We have seen economic growth come to a standstill in the second quarter because of the Ukraine conflict,” he told SRF. “This conflict is dangerous for us because it could cause economic disruption, not just in Europe, but worldwide.”
Swiss exports to Russia fell 6.3% in the first half of this year, according to the Swiss embassy in Moscow, but this could have as much to do with the rapidly falling value of the ruble as the Ukraine crisis, it said in a statement. According to official Swiss statistics, exports to Ukraine fell 8.5% from January to May.
Big Swiss businesses with a physical presence in Russia, such as Swatch, Sulzer, Holcim and Nestlé, said they are monitoring the situation closely but have not experienced disruptions to business.
Sanctions are only one part of Russia’s problem, according to Frank Schauff, chief executive of the Moscow-based Association of European Businesses representing European enterprises in Russia.
The economy was already faltering mainly as a result of over-reliance on its oil and gas industries, under-investment in other crucial sectors and low productivity.
“The general economic climate had already begun to deteriorate towards the end of last year with the ruble losing value against other currencies, making imports of foreign goods more expensive, and consumer demand tailing off,” he told swissinfo.ch. “Economic conditions have worsened at a faster rate since the Ukraine situation began to escalate.”
But there may be a silver lining for companies that are smart and fast enough to pounce on imbalances in Russia.
“Russian consumers may have less money in their pockets but they will continue to buy personal care products, particularly Russian women buying fragrances,” Luzi’s Rohner said. “If they can’t afford L’Oréal anymore they will switch to local brands which our clients are producing.”
Business consultant Michael Derrer, who advises Swiss firms on Russian market entry, also sees fresh opportunities. “In the next few years Russia will continue to cut ties with the West and invest more in its own production capacities,” he said. “If a company is willing to take the risk of investing directly in the country rather than just exporting, will be able to do more business.”
In the short-term, Derrer sees another chink of light for opportunistic Swiss companies. “The Russian reaction to sanctions has been focused mainly on US companies. US brand names with symbolic value, such as McDonalds [which has been forced to close branches in Russia], will feel this political pressure,” he said. “Unaffected firms could seize new opportunities.”