Scotland’s ‘No’ Vote Changes the UK’s Status Quo

On the night of September 18, Scotland voted to remain a part of the United Kingdom. The “no” camp had maintained a safe distance ahead for most of the 18-month campaign period, but the past few weeks have seen a strong resurgence of the “yes” campaign, leaving the election night results neck-in-neck. While the margin of victory for the “no” vote was larger than almost any formal prediction, 44.3% of voters preferred to separate from the United Kingdom. Therefore, although the form of the United Kingdom will remain the same, its political status quo has changed.

Scotland will receive more powers, albeit slowly

While support for independence is likely to wane, social and political discontent will not. The Scotland Act of 2012, which will come into effect in 2015, will allow Scotland’s parliament to set income tax rates in Scotland as of 2016. The Act will also allow Scotland to take on more debt, and will give Holyrood powers over air guns, drunk driving, speed limits, and land tax, among others. However, these marginal powers are unlikely to satisfy the large proportion of Scottish voters who preferred to go it alone. The UK is likely to be pressured slowly to cede more powers to the Scottish parliament. In the event of a “yes” vote, the Scottish government had promised a corporate tax of 3% less than that in the UK. Given additional powers, the Scottish government could reduce corporate taxes in this way to attract companies to the country despite the higher income taxes on its executives.

The UK will avoid crisis, but will have a tough bargain with the EU

The Kingdom is much better off remaining United with Scotland, avoiding a currency crisis and considerable political uncertainty. However, the government will need to address the democratic deficit triggering Scotland’s referendum, or it will face reduced bargaining power when re-negotiating more sovereignty within the EU.

Other secessions are less likely to gain ground

The Scottish “no” vote will help to keep  some smaller nationalist movements, such as that in Northern Italy, Transylvania (Romania), Flanders (Belgium), and Catalonia (Spain) from gaining momentum with their national governments. This in turn will help the EU to avoid a destabilizing series of political crisis.

The EU is more likely to stay together

Scotland is considerably more pro-European than its English neighbors. Only one of the country’s 59 members of parliament is conservative, making it a vital force for maintaining the UK’s EU membership. While the risk of a UK withdrawal from the EU still exists, businesses face considerably less short-term economic and financial market volatility as a result of Scotland’s “no” vote. However, the forces behind Scottish discontent — under-representation by its central government, low economic growth, growing socioeconomic differences, and high unemployment — are pervasive throughout Europe and will continue to cause considerable political uncertainty. Companies should thus be aggressively managing expectations for their Western European markets in the next 1-3 years, as Scotland’s close call is only one of many such disruptions to come.

FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portalNot a client? Contact us to learn more

The Ebola Scare – What Businesses Need to Know

Ebola has been dominating media coverage of Sub-Saharan Africa ever since a man stricken with the disease landed in Lagos in July. Despite the scary headlines, businesses must differentiate fact from fear in order to assess the virus’ potential impact on their West African operations. Here is what companies need to know:

Which countries are most affected by the disease?

Ebola particularly has affected small markets within West Africa. These include Guinea, Liberia, and Sierra Leone –poor economies whose governments have not been able to deal with the outbreak effectively. As of late August, about 2,000 deaths were reported in the three countries, and the WHO expects many more people to be infected with the virus.

To date, Senegal reported one death, and Nigeria reported seven deaths. Lagos State so far has proven to be quick and effective in its measures to contain the spread of the disease. In fact, various infected patients were released successfully after treatment. However, after Ebola has spread to River State in Nigeria and it remains to be seen how effective that state government will be in containing the outbreak.


  • Above: A map published in the BBC highlights affected areas. Most multinationals operating in the region are present in the three largest economies: Nigeria, Ghana, and Côte d’Ivoire. All countries are on high alert, but are not facing the epidemic to the same degree.

    What are the economic repercussions?

    On Sierra Leone, Liberia and Guinea: The African Development Bank expects a 4% reduction in Sierra Leone’s GDP, the economy is currently growing at 14% The Liberian government estimates it will lose up to US$30 million to fighting the disease. The worst-hit sectors in all three countries are agriculture, services, and mining.

    In Nigeria, the panic over the Ebola outbreak is estimated to cost the country US$2 billion in Q3. Aviation, hospitality, and tourism, and trade will be most impacted. Restaurant visits in Lagos are likely to decline by 50% this quarter as people avoid crowded places. If the crisis extends into Q4, the economic loss could reach US$3.5 billion.

    The government closed Côte d’Ivoire’s borders with Liberia and Guinea. The western part of the country is one of the most fertile regions for cocoa, Côte d’Ivoire’s primary export. Border closures restrict the movement of international cocoa exporters and statisticians who calculate output forecasts for the upcoming October harvest. As a result, traders and exporters will not have accurate forecasts to predict the current cocoa crop, which could adversely impact exports and weigh on Côte d’Ivoire’s GDP growth.

    In Ghana, the impact of the disease is less direct but still felt by businesses. As the local representative of an international organization put it:

    “A lot of businesses and embassies in Accra are devoting a LOT more time to Ebola. ‘Freaking out’ would be a good way to put it. While they are not changing strategies, they are definitely losing productivity as they’re putting all kinds of people just on monitoring what’s going on in neighboring countries, having daily briefings on Ebola news, etc. As an example of what I’m talking about, a friend at a Western European embassy in Accra whose portfolio is legal and justice advisory was spending 12 hours a day just sending reports back to his home capital on Ebola news.”

    What does this mean for businesses?

    Multinationals should expect commercial activity to be marginally subdued this quarter and next as business and consumer demand slows because of the restricted movement of goods and people.

    However, as in all crises, some sectors of the economy also benefit. On the one hand, governments across West Africa are spending a larger than planned part of their 2014/2015 budgets on healthcare, and on reactive and preventive measures to contain the disease.  Companies selling materials used for the screening and treatment of the disease will see a spike in sales. Companies selling products widely perceived to protect from potential infection, such as hand sanitizers and antibacterial soap, will also benefit.

    The sectors directly related to the fight against Ebola are not the only ones that will benefit from the crisis. E-commerce, already increasing in popularity in the last three years in Nigeria, has received a real boost as people avoid public places.

    What should I expect?

    It is very difficult to predict if the disease will spread further and companies need to monitor the situation closely.

    However, FSG believes that a further spread is unlikely as governments have implemented tough measures to try and contain the disease. We expect the health crisis to begin to subside towards the end of the year as these measures take effect. The economic repercussion nonetheless will be felt in 2015, particularly in Sierra Leone, Guinea, and Liberia.

    Should the crisis worsen, governments are likely to pass tougher measures that will hamper logistics and productivity further.

    What should businesses do next?

    • Outline a contingency plan: A contingency plan allows companies operating in the area to manage risks and seize opportunities as they materialize. A contingency plan helps, for example, to define alternative work locations for employees, outline strategies to deal with transport disruptions, and position marketing strategies to respond to the changing environment. For example, businesses can adapt packaging for consumption at home rather than in public places
    • Educate staff, both local and international: Given that this is a health crisis, MNCs need to articulate time and over again the need for washing hands and being vigilant health-wise to their local partners. Local staff should implement simple measures to protect themselves, while international staff should be educated about the disease and the relative difficulty of infection. It is important that employees travelling to the region are not stigmatized within the company, as this will lower productivity and decrease employees’ willingness to work in the region, thus impacting long-term plans for West Africa
    • Don’t generalize: Companies should monitor the situation closely on the WHO website, differentiate clearly the risks by country, region, and city, and reduce travel to affected areas. For example, while it is unwise to travel to quarantined areas in Sierra Leone at the moment, visiting Ghana and large parts of Nigeria is very low risk
    • Adopt a wait-and-see approach, but don’t change your plans: Most multinationals operating in the region have adopted a wait-and-see mode until the crisis subsides, but are not changing their investment strategies as the opportunity in the region’s larger economies is too big to ignore. In fact, companies should take advantage of the current uncertainty to position their business for growth once normality returns to the markets
    • Highlight your commitment to countries, despite the crisis. Healthcare companies can take the current outbreak as an opportunity to gain customer loyalty and market share by providing help and support where it is most needed
    • Prepare for trends that are here to last. The popularity of E-commerce has been enhanced by Ebola and is here to stay. Plan your e-commerce strategy for Nigeria now

For our latest research on Africa and the EMEA region, FSG clients can visit the client portal. Not a client? Contact us to learn how we can support your business planning in emerging markets.

Even Good Monetary Policy Cannot Solve Europe’s Problems

Mario Draghi, European Central Bank President Photograph: Mario Vedder/AP
Mario Draghi, ECB President (Image: Mario Vedder/AP)

After the European Central Bank (ECB) cut interest rates into negative territory in June, we asserted that central banks act when expectations miss to the downside. Once again, today was the rule and not the exception. The ECB cut interest rates further, notably lowering the interest rate on the deposit facility to -0.20%. In addition, it announced purchases of private sector asset-backed securities (ABS) and covered bonds. In the midst of markedly below-target inflation, downward revisions to eurozone real GDP growth, and geopolitical tensions in Ukraine, Europe desperately needs a boost. While these measures will help to hold the euro to a more competitive value, they confirm that the eurozone’s growth will not impress in the next 1-3 years.

Is this quantitative easing (QE)?

Any outright central bank purchase of assets, whether government or private sector, constitutes quantitative easing. However, the size and nature of the monetary policy tools announced today will not make up a similar program to that introduced by the United States Federal Reserve in 2012. While the size of the program remains undetermined, ECB President Mario Draghi stated that the central bank’s intention is to restore its balance sheet back up to 2012 levels. This would suggest a ballpark of € 1 trillion in monetary fusions, about half of which could be ABS and bond purchases. Other estimates suggest a much smaller program of around € 100 billion. Compared to monetary infusions of US$ 13 trillion, this program is much more modest, particularly considering that only a small portion of available ABS is built from loans made to the SMEs that constitute the core of European growth.

Why asset purchases?

The ECB is attacking precisely the right eurozone problem: contracting credit. Outright asset purchases, along with the ECB’s previously announced targeted long-term refinancing operations (TLTROs), are intended to improve the flow of credit from banks to the private sector. This year’s rate cuts are designed to encourage banks’ participation in the TLTRO program right away, as opposed to holding out in hopes of further cuts. Within the eurozone’s still fragmented banking sector, this new channel of funding to the private sector is meant to open a new channel of funding to households and businesses, improving their ability to invest in additional capacity, hire more workers, and boost eurozone growth as a whole.

Will this monetary policy work?

The ECB has gone about as far as it can go within the confines of European monetary policy, and it is too little too late. There is no hope for repeating a US-like quantitative easing program, as political opposition to pan-European sovereign bonds is too high. Draghi’s statements today asserted that there is no scope for further rate cuts. And, where further purchases are concerned, the ECB is limited to the highest quality debt, the European market for which is comparatively small and illiquid.

Therefore, although the ECB has taken the right measures, Draghi’s statements encouraging fiscal activity confirm this point: monetary policy in Europe has reached its limits, and it is too little too late. Japan’s failure to act quickly or sufficiently to ease monetary policy during its 1990s recession is a staunch example of what is to come for the eurozone. Deflation is taking a strong hold in many countries, which will cause companies to struggle improving profitability or investing in additional capacity. Demand for products throughout EMEA will remain muted as a result, failing to compensate for a slowdown in major emerging markets such as China and Brazil. We thus are urging our clients actively to manage expectations for growth, which will not improve notably for the next 1-3 years.

If you wish to read more about the increasing financial risk in the eurozone FSG clients can read our latest report: Eurozone Financial Weakness.  Not a client? Contact us for more information.

[Video] Who is Best Positioned as Iran Sanctions Near End?

FSG’s MENA Practice Leader, Matthew Spivack, sat down with the hosts of Bloomberg’s “Countdown” Monday morning to talk risks, opportunities, and who will profit from a potential lifting of economic sanctions against Iran. View the video below and read more on investment opportunity in a post-sanctions Iran here.

Erdogan victory shouldn’t overshadow MNC priorities in Turkey

On Sunday, Turkey completed the second of the three milestone elections on the country’s political agenda between 2014 and 2015. Recep Tayyip Erdogan’s victory did not surprise anyone and is not likely to have a major impact on the Turkish market. In the meantime, currency volatility and persistent inflation are emerging as the real sources of concern for companies operating in Turkey. So, what should executives do?

1. Don’t count on political stability until the parliamentary election in June 2015. Erdogan’s victory supports stability for now, but political tensions could rise leading up to the June 2015 Parliamentary Election. Companies should keep track of three factors to anticipate whether the business climate will be hurt by political instability: 1) Who the Prime Minister will be, 2) Whether Erdogan will try to change the constitution before the June 2015 elections, and 3) What the new AKP and the new government in June 2015 will look like.

  • Watch who the new PM will be to anticipate the balance of power between the cabinet and the president: If Abdullah Gul makes a strong claim to the AKP and challenges Erdogan’s desires to control the party from afar, this could lead to a political crisis. If a passive member of the AKP is brought to the head, this may mean that Erdogan will continue to retain authority over the party.
  • Monitor how quickly Erdogan will move to increase his powers: Executives need to be aware that rapid and bold efforts may lead to heightened instability before the parliamentary elections. Currently, the AKP does not have the majority in parliament to change the constitution and expand the powers of the president. While the leading opposition parties CHP and MHP will oppose an Erdogan power grab, monitor whether Erdogan is able to gain support from pro-Kurdish parties in parliament to make amendments to the constitution.
  • Understand that the upcoming parliamentary elections have two implications for businesses: 1) Erdogan will be able to consolidate his power easier if AKP wins majority seat in parliament, which is required to change the constitution; and 2) New policies may be implemented as the AKP will replace 70 MPs including well respected Deputy PM for economy Ali Babacan.  Companies may be faced with opportunities for establishing fresh relations with the government or with new challenges.

2. Focus on what really matters to your business.

  • Plan for continued volatility in the Turkish Lira: Due to its dependency on foreign capital inflows, especially short term portfolio investments to finance its growing trade deficit, Turkey is especially susceptible to currency volatility. Domestic developments such as the December 17 corruption probe or the March 2014 local elections have proven that the lira can rapidly fluctuate with each event that alters perceptions of political stability in the country.  Executives must also watch regional developments especially in Iraq and Ukraine, as the Turkish lira has been highly reactive to the events in those countries. On August 6th, Turkey’s currency depreciated to reach TRY 2,17 against the USD, its highest since March 2014, when aversion over Ukraine increased risk perceptions in emerging markets including Turkey. Meanwhile, the Turkish Lira had depreciated by 1% on June 11th when Islamic State militants kidnapped 49 Turkish citizens in Iraq.

Suggested actions: 1) Prepare for fluctuations in costs due to weaker lira  when importing intermediary goods to Turkey, and 2) Expect a fall in the demand for final imports as the currency depreciates in the short term

  • Expect persistent inflation and high interest rates: Persistent inflation is a leading concern for economists and businessmen as July’s annual consumer price index (CPI) reached 9.32%. After a peak of 9.38% in April, the central bank has been expecting a downward trend from June onwards, to culminate in a 7.6% end of year inflation. However, the July CPI defied the downward trend of May and June, increasing worries of sustained inflation in the Turkish market.  As the high price of food and basic goods put pressure on household budgets, consumer spending levels may show slight decreases. MNCs can expect high borrowing costs and a slight slowdown in consumer demand as interest rates are likely to stay high in the next few months to combat persistently high inflation.

Suggested actions: 1) Consider lower priced products and services as consumers face lower purchasing power of the lira and higher interest rates, and 2) Track the effects of inflation on business demand, as the failure of lower interest rates to manage inflation in the last two months may be a sign of higher production costs

Pre-election coverage was detailed in our Turkey Quarterly Market Review, available on the client portal. Not a client? Contact us for more information.

Côte d’Ivoire: an Elephantine Opportunity

Cote d'Ivoire Elephant Crest
Côte d’Ivoire is Francophone West Africa’s largest economy.

Côte d’Ivoire is once again open for business. After a brief civil war in 2010-2011 that all but halted the economy, the country is witnessing a large stream of FDI targeted at a wide variety of sectors. The government is pushing Côte d’Ivoire, and especially its economic capital Abidjan, to become a hub for the wider French-speaking region.  Côte d’Ivoire was once Francophone West Africa’s most prosperous country, and it is poised to reclaim its title as the region’s economic powerhouse. This is due to a variety of reasons:

  • GDP Growth: Côte d’Ivoire is one of Sub-Saharan Africa’s fastest-growing economies, with GDP growth expected to reach 8.5% YOY in 2014. Its strong economic performance is driven by infrastructure developments, exploration in the mining, oil, and gas sectors, and growth in the telecom, banking, and consumer goods industries.
  • Stable macroeconomic environment: Unlike many Sub-Saharan African countries, Côte d’Ivoire displays low inflation, relatively low interest rates, and little currency volatility. The CFA Franc, also used in seven other French-speaking West African countries, is pegged to the euro and partially held in the French treasury. Companies therefore benefit from low exchange rate risk and transactions costs.
  • Business reforms: The government is aggressively promoting Côte d’Ivoire as a preferred destination for investment in West Africa. It has passed a series of reforms that increase transparency, decrease bureaucratic delays, digitize registries, and improve accessibility to relevant information. Moreover, major infrastructure projects will further open up the country to trade and promote new distribution channels as private consumption increases.

Although the country is on the right track to reconstruction, it still faces several challenges to reaching its goal of becoming an emerging economy with a robust middle class and an open market by 2030:

The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
  • Political risk: Society in Côte d’Ivoire remains divided in the wake of the 2010-2011 civil war, which erupted when then-president Lauren Gbagbo refused to concede to president-elect and current incumbent Alassane Ouattara. The conflict around Gbagbo’s refusal to give power was the culmination of years of tensions between adherents to opposing political parties and the legal status of Ivoirians of foreign descent. Now that Gbagbo is indicted at the ICC and Ouattara is expected to re-run for president, uncertainty prevails over the security situation ahead of the October 2015 presidential election. The common sentiment on the ground is to avoid war at all costs, but the process of reconciliation has been slow, old wounds remain, and skirmishes are likely.
  • Wealth gap: Poverty is acute and the gap between wealthy and poor is very wide. The middle class remains small and concentrated in Abidjan. Government policies that target small and medium enterprises (SMEs), the agriculture sector, and value-added industries are vital to bridging the wealth gap and encouraging inclusive growth.

As such, Côte d’Ivoire is most attractive when taken in context. It is part of the West African Economic and Monetary Union (WAEMU), a common monetary, legal, and interbank market of eight French-speaking countries: Mali, Niger, Benin, Togo, Burkina Faso, Guinea Bissau, Senegal and Côte d’Ivoire. As the wealthiest, most developed country in this group, Côte d’Ivoire is an attractive hub for companies seeking to tap into less accessible, yet rapidly growing Francophone countries.  As more companies such as Standard Bank, Carrefour, and Accor Hotels enter Abidjan, a wider range of business infrastructure will become available and boost Abidjan’s attractiveness.

Côte d’Ivoire is a long-term game. While wealth is not widespread and politics are sensitive, Côte d’Ivoire has the macroeconomic fundamentals, business reforms, and infrastructure projects to become the first stop for companies entering Francophone West Africa.

FSG clients can access our full report, “Market Spotlight: Cote D’Ivoire,” on the client portal.  Not a client? Contact us for more information.

The glory and pitfalls of the Nigerian entrepreneurial spirit

The streets of Nigeria’s business capital, Lagos, buzz with activity. Vendors making their way through cars stuck in traffic sell everything from newspapers to chewing gum to light bulbs. Shop owners are lovingly displaying products in front of their little stalls. In the city’s vast markets, one could walk for hours among the different sections dedicated to pharmaceutical products, cosmetics, alcoholic beverages, or fabrics. When visiting the city’s various business districts, Nigerians in sharp suits are busy closing the next deal. Everyone is selling something. Or as my driver put it, they are “chasing the money.”

Market in Lagos, Nigeria
Market in Lagos, Nigeria | Wikimedia Commons

The dynamic commercial activity is living evidence of the country’s vast consumer opportunity. It seems that for every person who is selling, there are several others buying. Rarely in any western country would one see 20 to 30 Mercedes Benz trucks, newly purchased by a local business, driving in line to reach their final destination.

At the heart of all this lies Nigerians’ desire for upward social mobility, the driving force of Nigeria’s entrepreneurial spirit.

Never Satisfied

Never Satisfied

The “Never Satisfied” docked on Victoria Island, Nigeria

From what I have learned and seen on the ground, Nigerians are tremendously positive about the future. Many strive to become the country’s next Aliko Dangote – Africa’s richest man. Dangote’s wealth is visible when passing his large yacht docking on Victoria Island. A slightly smaller, but still considerably sized, boat in close proximity is called Never Satisfied. The name, in my opinion, summarizes the Nigerian desire for success.

This eagerness for more is reflected in the priorities of Nigerian workers – be they employees or entrepreneurs. Generating as much money as possible is a top priority.

“Contrary to other African countries, employees are less motivated by non-financial incentives such as private healthcare. They will always much rather opt for a higher salary,” a local recruiter explains. “This comes down to the fact that people are used to fending for themselves. They don’t expect social services from the government. Because, even when social services are provided, they are frequently insufficient and of low quality.”

For example, most Nigerians with which I spoke agree that since the government introduced free education, the educational system has deteriorated dramatically.

Social Responsibility

The Nigerian search for money is not only about increasing individual wealth, but it also stems from a broader sense of responsibility to the wider family and community.

“I have to provide for about 30–40 people,” the CEO of one of the country’s largest investment firms points out.

When Dangote sets up a new cement plant in a small town, the company will make sure that those living there will be employed at the factory or receive training. Other companies have given ownership shares to local leaders, not only to engage the community, but also as a way to protect their investment.

Displaying Success

The fact that a few strong members of society take responsibility for others also means they are proud of their achievements and eager to share them – something that is both socially accepted and expected of them. This tendency can be observed, for example, in the offices of successful local business people. Pictures of a company’s leader shaking hands with influential politicians from around the world typically decorate waiting rooms. Magazine covers featuring the leader, whether male or female, are prominently displayed, as are entire books containing tribute after tribute to the person.

“When I first walked into the office of a local official, I was greeted by a life-sized photograph of him sporting a full uniform and a pair of very cool sunglasses,” a European diplomat told me.

The Importance of Vision

As eager as Nigerians are to succeed here and now, they also understand that their labour could take years to bear fruit as the country’s development accelerates.

“The opportunity is long term. Often western businesses don’t understand that. Yes, we have many opportunities, but they will only be materialized once we solve our problems with power supply or invest in the entire agricultural supply chain, for example. But these things will take decades to evolve,” a business owner in the industrial sector explains.

As Nigeria’s entrepreneurs build their business empires, their lack of satisfaction with the current state of the country will be a driving force for Nigeria’s development. What Nigeria needs is not merely an entrepreneurial spirit. It needs leaders with a long-term vision that reflects the country’s development requirements. And most importantly, it needs leaders who will never be satisfied with less, not just in terms of the size of their boats, but in relation to upward social mobility for their communities and their country.

In the meantime, western brands catering to the expensive tastes of Nigeria’s elite will be the main benefactors of the country’s desire for more.

Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

Four things MNC executives need to know about the latest sanctions against Russia

In what has been the harshest Western response to Russia’s involvement in the Ukraine crisis, the EU today imposed broad – so called Level 3 – sanctions against Russia. The US is likely to follow suit shortly.

European Parliament in Brussels (Image: Reuters)
European Parliament in Brussels (Image: Reuters)
Four things MNCs need to know about the implications of these sanctions:

1. Credit costs will increase considerably and lending will become more restricted.

The sanctions will restrict the ability of majority state-owned Russian banks to conduct long-term borrowing on European financial markets. Russia’s biggest banks – Sberbank and VTB – will both be affected, in addition to a host of smaller banks, including ones already targeted by US sanctions. Sberbank alone holds 29.0% of Russian banking sector assets and accounts for 50.0% of retail and 32.0% of commercial lending. Shut out of EU and (likely) US financial markets, these banks will see their funding costs increase considerably. In response, they are likely to reduce new lending to both businesses and consumers and increase interest rates. Importantly, however, these banks will be able to continue processing financial transactions in US dollars and euro.

2. Sanctions will have a considerable impact on investment.

Investment in Russia is already contracting – it decreased by close to 5.0% in Q1 2014. Faced with weaker demand, higher financing costs, and political uncertainty, businesses in Russia will be more likely to postpone investments and put long-term plans on hold until the situation stabilizes.

3. The Russian government may create operational problems for Western MNCs.

Russian government discussions about import substitution and re-orienting trade toward Asia have been going on since the annexation of Crimea earlier this year. The new sanctions give proponents of such ideas a strong argument for more aggressive measures to restrict Western MNCs from the market, particularly companies that sell to the government. MNCs should be prepared for a range of Russian government responses, from slightly more onerous inspections to the outright expropriation of foreign assets, although the latter is not highly likely.

4. Companies should have a plan in place that accounts for a deteriorating operating environment:

Most MNCs’s Russia plans built in 2013 or even early 2014 are likely no longer reflective of the reality on the ground. Companies need to reassess the regulatory, operational, and economic environment in which their business will be operating in the coming months and prepare their business accordingly. FSG clients can read suggested actions on building such a plan here.

Nigeria: Insecurity and its impact on business

Despite ongoing violence in Nigeria, opinions about the country’s security challenges and what they mean for investors differ widely among local entrepreneurs and international business leaders.

Some executives, whether in Lagos or other commercial centers like Abuja or Port Harcourt, say they aren’t concerned. They believe business will continue as usual and that the threat from militant group Boko Haram will subside after the elections in February next year.

Boko Haram is generally believed to be sponsored by a few political forces who are keen on influencing election results. The group’s terrorist activity has increased dramatically since the election of President Goodluck Jonathan, the country’s first Southern and Christian president, and some believe that Boko Haram was able to emerge because traditional power structures were disrupted in many of the northern states when the central power shifted to the South.

Other business leaders are deeply troubled, not only by the rising violence but by its underlying dynamics.

“We don’t understand why Nigerians are blowing themselves up for a cause. It simply isn’t part of the Nigerian psyche,” a senior manager of a consumer goods company told me.

The head of marketing at a Nigerian bank echoed these sentiments, before adding: “The dynamics here are changing. Everything is getting more expensive because most of our food comes from the north, prices have been going up and what the average Nigerian earns is simply not enough anymore. I fear this may impact the balance here in Lagos, particularly as we get more refugees from the north. Our infrastructure can’t cope with it.”

Business Impact

The volatile state of Nigerian security has also lead to varied experiences among business leaders. As the owner of a distribution company explained: “In our annual sales meetings, one of our local representatives stood up and pronounced huge losses due to the instability in the North. In response, another representative exclaimed that his major customer sits in Borno state!”

Consumer goods companies tend to be the businesses that suffer most, selling low value, high volume products in the populous yet poor northern states. State-imposed curfews mean less people are going out to buy things, and many traders in neighboring Niger, Chad and Cameroon have ceased buying their products in bulk from Northern Nigeria.

Still, businesses operating in affected areas are developing creative ways to address the challenges.

We just had to adapt to the environment. When Boko Haram destroyed the mobile phone masts, we couldn’t call our local representatives anymore. So we just invested in VoIP (Voice Over Internet Protocoll) technology, which is a little more expensive, but now we can communicate frequently with our local representatives, and business is flourishing,” the CEO of an FMCG distribution company told me.

A Common Enemy

While the threat resulting from Boko Haram is still geographically contained around the Northern and central states, the country’s commercial capital has been spared. It is believed that those funding Boko Haram have business interests in Lagos they do not want to be undermined.

Many business have refocused their attention to safer and more prosperous parts of the country to capture the abundant commercial opportunities Nigeria has to offer, but there is till concern that what led to the rise of Boko Haram is not just political maneuverings but real socioeconomic grievances which if left unaddressed could incite insecurity in more stable places.

Some business leaders stress the need for the government to take action. But as Nigeria enters what is only its fourth electoral cycle, others are more patient. They believe that more time is needed for democratic processes to mature and for the disrupted traditional structures to be corrected, calming the power struggles that lie at the heart of the Boko Haram threat.

And still a few try to look at the situation with a typically positive Nigerian attitude:

“In history, the unifying factors of nation states have often been the existence of a common enemy. We have that now, and it could help us focus less on what divides us as tribes and regions, but what unites us as a country.”

Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group, a Washington headquartered information services provider advising multinationals on doing business in emerging markets. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

*This article is Part 1 of an ongoing series, originally published in conjunction with How We Made it in Africa.

Multinationals must build contingency plans for Russia

European foreign minister
European foreign ministers gathered in Brussels on Tuesday. Associated Press

The EU has decided to impose more sanctions on Russia. For now, these fall short of the so-called Level 3 sanctions that could be against whole sectors of Russia’s economy and crucially, its banking sector. However, the international fallout from the downing of flight MH17 and the growing tensions between Russia and the West mean that Level 3 sanctions are increasingly a possibility.

For an MNC executive, this means that it’s time to plan. Level 3 sanctions would dampen Russian growth further, reducing demand across industries; they would cause significant problems for customers and distributors to access finance, affecting operations; and are likely to be met with Russian retaliation that could make it more difficult for MNCs (especially American ones) to do business in Russia. All of this will have an impact on a company’s customers, finance, supply chain, people, and marketing strategy and MNCs should be building step-by-step play books on how to respond to spillover across their Russia operations.

martinachart2This is not to say that MNCs should be pulling out of Russia. In fact, planning is so important because of the significant role that Russia plays in many MNCs’ EMEA and even global portfolios. Companies that have stuck with Russia through crises have historically reaped significant benefits and this could be an opportunity for MNCs to strengthen partner and customer relationships and to make low-cost investments.

Meanwhile, larger strategic questions are looming in the background for EMEA and global leadership teams. With the likely opening of Iran for business, a Russia that is increasingly closing in on itself could lose out in the competition for corporate investments.

For a full report on Russia contingency planning, FSG clients can click here. A full report on preparing for a post-sanctions Iran is also available.