Comment: Should retailers worry about the Russian currency crisis?

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Russia is facing yet another currency crisis as the rouble has been depreciating drastically this year.

The crisis started by Russia’s annexation of Ukraine in early 2014, and climaxed with the various EU sanctions against the country.

The EU sanctions hit the economy harshly as the currency depreciated 60% against US Dollar and Euro in less than a year, despite central bank efforts to balance it with interest rate rise.

Coupled with deep structural problems and high foreign debt, Russia forecasts that GDP could fall by 5% in 2015.

Price inflation remains a major concern for the average shopper. Until today, Russian grocery retailers survived the EU import embargo in August quite well.

In fact, major players such as Magnit and X5 Retail Group improved their year-end sales guidance as shoppers rush into price-aggressive neighbourhood stores for promotions.

Central European markets such as Poland and Hungary were more severely hit than Russia as they lost an important export market.

Poland faces economic stagnation and price deflation, which manifests the true meaning of Russian economy for the region: the earthquake may shake the Russian soil, but tsunami hits everyone.

Consumers are cautious

2014 is certainly not the first time the country has shaken. With all the bad memories of 1998, the consumers are extremely cautious.

As consumer confidence weakens, shoppers will focus on essentials, rather than luxuries in 2015. Currently, they perceive the current situation as the silence before the storm.

The consumer electronics sales accelerated in the last two months as shoppers seek to invest their savings in electronics rather than watching them melt away, hinting the future exposure of the category to the crisis.

The impact of the crisis will differ a lot across the vast geography of Russia. Price-aggressive grocery retailers such as Magnit and X5 Retail Group will be the shoppers’ heroes in rural Russia, whereas shopping centre managements will have to face falling traffic and empty leasing area in Moscow and St Petersburg.

Retailers have already been pressuring for re-negotiation of lease contract terms.

International retailers are revisiting their strategies, such as Apple closing down online operations in Russia, and British retailer New Look’s decision to exit the market.

Marks & Spencer is also reportedly discussing its Russian strategy with its franchise partner.

Despite all the gloom, Russia will always be a promising market for all retail sectors in the long term.

For Auchan and Metro Group, for example, it is an essential part of their growth strategies. But just like any other emerging market, it is also prone to deep, long-lasting crises. Western retailers are already under pressure of shrinking profits in their home markets.

That said, entry to Russia is a challenging decision in itself and an exit decision is even harder for retailers.

The success for international, non-grocery retailers in this crisis will be more about survival than profit generation. When the storm settles, Russia will reward the fittest.