France is investing in Russia without reluctance

Despite the economic sanctions, France is the largest direct investor in Russia, and French companies have overtaken German companies in the conquest of the Russian market.

“Russia is a fantastic market and French companies are present in virtually every sector here,” says Emanuel Quidet, the head of the Franco-Russian Chamber of Commerce and Industry with headquarters in Moscow. In response to questions concerning investment in Russia, French businessmen emphasize: “We’re all about business, not politics.”

Samuel Carcanague, a specialist on Russia and Central Asia at the Paris-based Institute for International and Strategic Affairs, is of a similar opinion. “The French companies did not withdraw from the Russian market despite the sanctions and are lobbying for them to be lifted,” says the expert.

Emanuel Quidet also hopes that the sanctions imposed by the US and EU will be lifted because they have a negative impact on the financing of investments. “Right now, in order to implement projects in Russia, you have to either have your own funds or borrow money in countries for which the sanctions are not binding, e.g. in China,” he explains. In his opinion the French global companies have a very strong position on the Russian market, whereas enterprises from Germany dominate in the sector of medium-sized companies.

Four days after the talks with the French President Emmanuel Macron in Versailles, Vladimir Putin opened an economic forum in St. Petersburg which was dubbed “Russia’s Davos”’. The forum was attended by the bosses of such giants as Total, Schneider Electric, Société Générale and Engie (formerly: GDF Suez).

“Putin was the first head of state who was hosted by the new French president. That is a very strong signal. A good political atmosphere makes life easier for entrepreneurs,” stressed Isabelle Kocher, the CEO of the French energy giant Engie, currently operating in 70 countries across the world, in an interview for the economic journal Les Echos.

“It is very good that the meeting of Putin and Macron has taken place, but our investment decisions do not depend on their good relationship,” claimed in the same journal Ghislain Lescuyer, the chairman of Saft, a French manufacturer of industrial batteries, which is present on all world markets.

The potential of the Russian market

Vice President of Sanofi Oliver Charmeil assured that the investment climate in Russia was improving, and that his pharmaceutical company intended to continue investing in Russia. Sanofi has opened a modern insulin factory there with a view to export part of the output to other countries.

The Russian economy has recently been gaining momentum. GDP growth of 0.5 per cent was reported in the first quarter, and at the end of the year – according to various forecasts – it is expected to reach between 1.4 and 2 per cent of GDP. This is a significant improvement considering the recent recession (-2.8 per cent in 2015 and -0.2 per cent in 2016). The forecast of the International Monetary Fund (IMF) concerning growth in Russia for 2017 and the subsequent years up to 2021 ranges between 1.4 and 1.5 per cent of GDP.

“Although this is not the growth level that we would expect, it is not worse than that in France,” Dr Alexander Shokhin, the head of the Russian Union of Industrialists and Entrepreneurs and a former Deputy Prime Minister, joked about these forecasts while opening a Franco-Russian panel during the economic forum in St. Petersburg.

The largest projects

The largest current Franco-Russian investment projects are carried out in the energy sector. Christophe de Margerie is one of the 15 giant icebreaking tankers which will open the Arctic Yamal liquefied gas transport route in October. The 300-metre long tanker was named in honor of the head of the French company Total, who died in an airplane accident at Moscow airport in 2014. The decision to pay homage to the deceased CEO in this manner was made by Vladimir Putin himself, who also honored de Margerie with a medal for the development of Franco-Russian economic and cultural relations.

Christophe de Margerie was known for his criticism of the sanctions imposed against Russia. Supposedly just before his unfortunate arrival at the airport he walked out of a meeting of investors and government representatives, where he described the sanctions as unjust and unproductive.

The vessel bearing his name, worth USD320m, can carry 172,000 cubic meters of liquefied gas and can travel at a temperature of -50°C, breaking ice with a thickness of 2 meters. Total has a 20 per cent stake in the project, and the other shareholders include the Russian Novatek (50.1 per cent), the Chinese CNPC (20 per cent), and the Silk Road Fund (9.9 per cent). The start of transport operations is planned between 2017 and 2018. The Russian Novatek is included on the list of companies covered by EU financial sanctions.

The project which is the most controversial from the point of view of Poland and its interests is the construction of the Nord Stream 2 pipeline on the bottom of the Baltic Sea, funded by several European energy giants – the French Engie, the British-Dutch Shell, the German Uniper and Wintershall and the Austrian company OMV. These companies will not be the shareholders of the company, which will belong exclusively to Gazprom, but their financial contribution will amount to EUR9.5bn.

“This is a new structure which takes into account the opposition of the Polish competition protection authorities. However, in light of the decline in EU production and the fact that Russia provides 30 per cent of the gas consumed in Europe (450 billion cubic meters, bcm), Nord Stream 2 is a project of strategic importance for the European energy landscape. Germany, Austria, France, the Netherlands and the United Kingdom together account for 60 per cent of the European gas demand,” underlined Gérard Mestrallet, the chairman of Engie.

But the energy industry is not the only sector that attracts the French to Russia. French retail chains have a very strong position in that market, just like the logistics centers. Luxury products are still selling very well there. Auchan is the largest non-Russian employer in Russia. While the volume of trade between France and Russia decreased by about 40 per cent in comparison with 2013, the situation has been improving over the past several months and trade between the two countries began to grow again. Its decline resulted primarily from the restrictions introduced by Russia in response to the European sanctions, which mainly affected the suppliers of agricultural products.

The French group Renault intends to recapitalize the AvtoVAZ company. Schneider Electric is diversifying its production in Russia. The icing on the cake of the French investments in Russia right now seems to be the project for the construction of the MC-21 aircraft, carried out by the Russian company Irkut from the State-owned holding UAC with the support of the French companies Thales and Zodiac Aerospace and in cooperation, among others, with Saft. The aircraft is supposed to compete with Airbus A320 and Boeing 737 and is one of the flagship Russian projects carried out under the auspices of the Kremlin. The aircraft, which is to be officially presented during the aerospace trade fair in Moscow this summer, has already completed a trial flight. The aeroplane is supposed to be available in two versions: MC-21 300 (from 160 to 211 seats) and MC-21-200 (from 130 to 165 seats).

Sanctions against Russia

Since March 2014 the European Union has gradually introduced restrictive measures against Russia in response to the illegal annexation of Crimea and the destabilization of Ukraine. The sanctions against Russia can be divided into three categories:

  • diplomatic sanctions;
  • sanctions against specific persons;
  • sanctions against companies, mostly involving the freezing of assets and visa bans.

Sanctions against persons apply to 150 individuals, those aimed against companies cover 37 economic entities, including several political parties, paramilitary organizations and several Ukrainian companies nationalized by the Russians after the annexation of Crimea, e.g. Chernomorneftegaz and the Russian National Commercial Bank, which is currently the dominant bank in Crimea assisting in the functioning of the Russian government and Russian paramilitary organizations. The financial sanctions also apply to Russian banks and companies mainly from the energy sector (e.g. Lukoil, Gazprom, Rosnieft).

The sanctions also introduced several restrictions in economic relations:

  • restriction of access to EU primary and secondary capital markets for five major Russian financial institutions with a majority State Treasury shareholding and their subsidiaries established outside the EU, in which they have a majority stake, as well as for the three major Russian energy companies and three defense industry companies;
  • prohibition of export and import of weapons;
  • prohibition of export of dual-use items for military purposes or for military users in Russia;
  • restriction of Russia’s access to certain strategically valuable technologies and services that can be used for the production and extraction of oil.

Diplomatic measures included the cancellation of the EU-Russia Summit, and the Member States of the EU additionally decided not to organize regular bilateral summits with Russia. Bilateral talks with Russia concerning visas and the new EU-Russia agreement have been suspended. Instead of a G8 Summit in Sochi on 4-5 June 2014 a G7 Summit was held in Brussels.

Since then, meetings have continued within the G7 formula. EU Member States also supported the suspension of negotiations on Russia’s accession to the Organization for Economic Cooperation and Development (OECD) and the International Energy Agency (IEA). However, Russia’s representatives continue to participate in the meetings of these organizations as external representatives.

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