Israel’s surprise election results indicate that the population is much more interested in the immediate need to stabilize the economy than in the country’s ongoing problems with Iran. This decreases the risk of an Israeli attack on Iran in 2013, and increases the risk facing Russia’s economy. The connection between the two? Predictably, oil prices, which are artificially high due to a political risk premium related to a potential Israeli attack on Iran.
For Russia, reduced oil prices mean significant economic as well as political risk. Sources as diverse as ratings agency Standard&Poor’s and the Russian Ministry of Economics point out that at US$80/bbl Russia’s economy will, at best, slow to a shallow recession. This will be accompanied with rapid and deep currency depreciation, rising inflation, and plummeting consumer spending and business investment. Frontier Strategy Group estimates that there is a 25% chance that this scenario could play out as early as this year, particularly after the Israeli election results.
Surprisingly, few multinationals operating in Russia have plans in place to respond to this scenario. Executives responsible for Russia are, of course, aware of the theoretical possibility of an oil price crash and its potential impact on the economy, but, as with any long-standing risk, they can become gradually de-sensitized to it, focusing instead on more short-term priorities such as growing their business’ presence in Russia’s regions, setting up local manufacturing, or forging new local partnerships. This approach, however, increases their business’ exposure to the market and their potential losses when a macroeconomic shock does materialize. Even if executives get everything right in their business strategy in Russia, an economic crisis could obliterate their success and throw off the most carefully-constructed plans. At the same time, an economic crisis could create unique opportunities to pursue M&A, capture talent, and take market share away from struggling competitors. Companies that are caught by surprise by a sudden change in the economic environment will struggle to both mitigate the risks and take advantage of opportunities created.
This context calls for careful contingency planning. However, contingency planning is frequently done on the corporate level and building a contingency plan for just one, often non-core, market, like Russia, is rarely a corporate priority. The organizations with the biggest stake in preparing such a plan – an EMEA or CEE division, and the local Russia team, frequently lack the resources and the expertise to build a sophisticated contingency plan. More often than not, bridging this gap requires regional organizations to reach out to corporate for support and guidance and to then take the initiative to build the plan in collaboration with their Russian team.
Not only does this process create an “insurance” for the organization when the risk of an oil price decrease does eventually materialize, but the planning process itself frequently yields actions that can be taken now, outside of the context of a crisis, to strengthen the company’s competitive position in the market.
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