The COVID-19 outbreak could be a litmus test for Russia’s businesses. Although a political adherence to fiscal conservatism and a hefty financial cushion might help to sustain macroeconomic stability, businesses might still bear the biggest brunt. So far, however, we have witnessed divergences among the Russian companies.
Whereas financial hurdles and changing consumer preferences, pushing some to reconsider growth models and spearhead transformations in order to survive, others showcase their resilience and benefit from business transformations that started before the quarantine began.
The pandemic in Russia is still far from starting to plateau. During the past two weeks there has been a consistent growth in cases and most recently the total number surpassed China to become the world’s ninth most-affected country. Although the researchers at Singapore University of Technology and Design (SUTD) have predicted that COVID-19 pandemic in Russia would recede by the end of May, stay-home policies might persist and restrictive measures aggravated by fears of the second-wave could last for much longer.
Last week, Valentina Matviyenko, the senator from Saint-Petersburg and chairwoman of the Federation Council, asked to postpone any international flights until the next year, as hinting to prolonged countrywide restrictions. This likewise implies that even in the higher corridors of power there is little understanding of when the pandemic will finally recede. In effect, there are varieties of measures that the Kremlin is currently considering, including the prolonged lockdown. Similarly to other nations worldwide, such situation would impose significant constrains on businesses activities.
The recent estimates project that Russia might lose up to a third of its 6 million registered SMEs. Nonetheless, at this stage it is impossible to say for sure how the situation might look at the end of the year. Despite a unanimous consensus among the economic analysts that fiscal conservatism and more than $550bn in resources will help to shield macroeconomic stability, there is not enough understanding about the actual depth of the slump. Fitch announced that Russia’s economy will contract by 1.4 percent, the Russia Central Bank predicts that a no-work April alone will cost 1.5-2 percent of GDP and Bank of America forecasts a steep decline by 5.6 percent.
Despite such divergences, one thing is certain: the current crisis will reveal the companies, which have been better prepared and managed to accumulate sufficient resources to withstand the fallout. Such businesses would likely be able to solidify their market standing and further transplant their resilience into competitive advantage in the post-pandemic era.
Companies that have started transformations before the pandemic might indicate higher rates of endurance. M.Video — Eldorado Group, Russia’s major non-food retailer, is one of the best examples of such shifts. The Group combines 513 stores under the M.Video brand and 506 stores under the Eldorado brand, as well as 19 m_mobile stores in more than 250 cities across Russia. The total trade turnover of the group’s companies exceeds RUB435bn. The management started implementing changes even before the pandemic and the major goal was to boost its e-commerce businesses and offline network of stores. The strategy turned out to be both timely and paid back quickly; it invested into the resilience of its debt profile towards market volatility and increased supplies of essential household appliances.
The changes likewise offered customers more contactless payments options, such perks as free delivery and additional cashback for online purchases, maximizing and simplifying electronic document flow to support vendors. In effect, the Group is projected to increase its market share in the post-pandemic settings. Last week, the company announced its partnership with Ozon, the country’s leading e-commerce platform, and now the platform will feature about 80 percent of the group’s assortment. This step will likewise contribute to the company’s revenue flow and diversify its market presence.
Another example is Ozon, one of the three largest in terms of turnover of Russian online trading sites with RUB 80.7 bn turnout and more than 5 million of featured items. The company had proceeded with measures to combat inflated pricing by its marketplace sellers and offered more opportunities for contactless delivery. With online deliveries hitting new highs amidst stay-home policies, the company would set to benefit even more and likely destined to expand its market share. Ozon recently reported that the number of new customers in March had doubled compared to last year, and, in the first 2 weeks of April, the number of new customers has grown by at least a third. Furthermore, in the second decade of March, in just a few hours, 20 thousand customers placed orders for the first time and in April, every third new user returned for a re-order. Prolonged quarantine measures would likewise add more profit to the company and expand its outreach.
Moscow’s stock exchange (MOEX) is another good example of corporate resilience. Before the pandemic and against multiple warnings of the market’s participant, the company decided to consistently increase its customers base by registering multiple individual accounts. For instance, in March, the number of individuals holding accounts grew by 7.5 percent, to 4.57 million people. The number of active private investors grew by 35 percent, to 607 thousand people. On April 24, Yury Denisov, chairman of the board, stated that the number of individual shareholders has almost doubled since the beginning of the year.
The strategy paid off quickly and despite volatile situation MOEX has not experienced any difficulties with finance. In March, registered accounts added more than half a billion dollars into shares. The trend will likely continue and the upcoming results in April will likewise demonstrate significant financial influx and many thousands of newly registered accounts. Changes that had been introduced before the pandemic already contributed to stable growth indicators and would likely persist throughout the volatile times.
Another example is Tinkoff Bank, which has pioneered the branchless business model in Russia and a unique cloud call center serviced by over 10,000 employees, a significant share of which are from socially vulnerable demographic groups. The company currently operates as a digital financial institution, which contribute to the resilience of the business model in times of stay-home policies, as it allows client to apply for a credit card online and receive it without leaving your home. Thus, about 90 percent of the bank’s retail deposits are covered by the state deposit insurance system and, last year, TSC Group (the parent company of Tinkoff Bank) announced a profit of RUB 36 bn. Despite the coronavirus disruptions, the business model remains resilient and would allow the bank to withstand the fallout with major risks to its customers.
