Russia's ruble crisis: What's at stake for European businesses

Companies in Poland are wary of a recession in Russia and a downturn in trade and tourism. But Europe is probably less exposed than in 1998 when Russia defaulted on its sovereign debt. 

Russia has said its currency crisis is over. But for Polish companies like the family-run shoe producer Conhpol, which just opened its first store in the capital Warsaw, the danger signs are still flashing.

The ruble fell four percent Friday. It had held steady for days after last week’s precipitous drop on falling oil prices compounded by sanctions imposed by the US and European Union over Russia’s actions in Ukraine. Many Russians have stopped traveling to countries like Poland for shopping and vacations.  

Sebastian Konopka, who helps his father run Conhpol from its headquarters in the village of Stanislow Dolny, says orders from Russia have abruptly dried up. “If we were dependent only on Russian clients, we would have problems now,” he says.

For most of 2014, a militarily strong Russia has spooked the EU, particularly those countries formerly under the Soviet yoke. But as the year closes, an economically hobbled Russia is looking equally problematic for its some of its European neighbors.

“The fact that Russia is in a difficult situation from a financial point of view is not good news,” Federica Mogherini, the EU’s new foreign policy chief, said at a recent summit of EU leaders, “first of all for Russian citizens, but also it is not good news for Ukraine, it is not good for Europe, or for the rest of the world.”

Most European companies are less exposed to Russia than they were in 1998, when Russia last defaulted on its debts. Only 4 percent of Polish exports, for example, go to Russia. And Russia is barely a middleweight in the world economy – accounting for less than 3 percent of global output in 2013 – so it matters less than an equivalent meltdown in China or India. 

But many in Europe are still looking warily at Russia’s sinking economy. Those with stakes include small and medium businesses like Conhpol, the shoemaker, to border crossings dependent on Russian trade, to countries worried about any setbacks to already weak economic growth.

“What really tipped the European economy this year was fear sparked by Russia’s aggression in Ukraine,” says Holger Schmieding, chief economist in London at Berenberg Bank, a German investment bank. This uncertainty led many companies to delay investments. Then came the sharp fall in global oil prices that have exposed Russia and its banks, which are subject to Western sanctions.

Russia’s finance minister said Thursday that the acute crisis sparked by the ruble’s crash is over. But inflation is growing, and perhaps most tellingly, Russian President Vladimir Putin also said Thursday his ministers would not be able to take New Year holidays this year because of the economic downturn.

“Now the risk is that we don’t know how Putin will deal with an economy on the way down,” says Mr. Schmieding, the German banker.

Conciliatory tones?

In the spring, after Russia annexed Crimea and sent shockwaves through Western capitals, the EU struggled to forge consensus on how to punish Mr. Putin. At the time, economics loomed large: European politicians fretted over the impact on gas supply and luxury goods and, for cities like London, rich Russian expats.

Now some countries may voice a more conciliatory tone, as they consider how Russia’s economic woes might ripple outwards.

Schmieding says those countries, like Poland, that are the closest to Russia are the most immediately vulnerable, from tourist flows to exports. According to the Polish Border Guard near Kaliningrad Oblast, a Russian exclave in Poland, only 8,060 Russians crossed into Poland on Dec. 21. A year earlier, the figure was 13,804.

Ryszard Petru, president of the Association of Polish Economists in Warsaw, says Polish companies have grown wary of depending on its giant neighbor. “Polish exporters learned the lessons from the economic crisis in Russia in 1998,” he says. “(Russia) is an unpredictable country, and investing there or depending only on its market involves a huge risk for companies.”

Not ready to give up on Russian market

Still, Marek Rogalski, chief analyst at Brokerage House BOŚ in Warsaw, says that Russia is still a key market for many companies. “Polish companies should look for different markets, but it doesn't mean that they should abandon Russia, because in a few years, when the situation is more stable, it will be a quite interesting market. With a cheap ruble it would be a good place to do business,” he says.

In the 1990s, Mr. Konopka, the shoemaker, focused almost exclusively on exports to Russia, as well as the domestic Polish market. The company, which was founded in 1978, now depends on Russia for around one in ten of its overseas sales. Still, he's hopeful of expanding his business there, if and when the economic and political turbulence subsides.

“Russians pay a lot of attention to shoes. Shoes are, for them, the most important part of their outfit,” he says. “They say that you can know a person by the shoes he or she wears.”