Squeezed between the United States and European Union sanctions, Russia has been exploring effective ways to increase exports of its industrial products under “Made-in-Russia” program to traditional markets in Latin America, Asia and Africa. The primary strategic goal is to secure Russia’s economic interests abroad while at the same time support Russian industries in raising revenue to modernize Soviet-era industries. But increasing exports especially to African markets, Russia has to confront market competition from western players and Asian countries such as China, India and the Gulf states.
In a recent interview, Peter Fradkov, general director of the Russian Export Center (REC), has explained that Russia has been making every effort to avoid the “raw-materials” export model and focus on developing export-oriented industries and the launch of the Russian Export Center was a key step towards the development of a full-fledged national export support system.
The Soviet Union made a significant contribution to the social and economic development of African countries by building large industrial and infrastructure facilities and helping to establish national education and health care systems. However, in the 1990s the Russian-African relations came virtually to a standstill. At present, Russia’s foreign trade turnover with Africa is about 12 billion US dollars, which is a rather modest achievement. Nevertheless, the African continent remains a rather promising market for Russian industrial goods.
Admittedly, the Government authorities, and both Inter-Governmental Commissions and the REC, are primarily concerned with removing barriers for Russian exporters and opening up foreign markets for them in Africa. Reinforcement of positions of Russian exporters in Africa requires creation of certain conditions and the key task is penetration into the global market. For this purpose, the Russian Export Center has launched a program to promote Russian goods and services under a single country brand “Made in Russia” and in this context, Africa is a very important partner for us, though not an easy one.
He underscored the fact that “Russian manufacturers have a number of specific competitive advantages. Let’s take, for example, agricultural machinery. The main advantage of Russian products as compared to the counterparts by major foreign manufacturers is a lower price and almost the same level of capacity, quality and useful life.”
On the other hand, there are some difficulties still inherent in the Russia-African business partnership. According to Fradkov there are still insufficient awareness of the real economic opportunities, market conditions and specific counterparts in African markets by Russian businesses and poor awareness of capabilities of Russian partners for Africans.
“We are often faced with discriminatory barriers, which are there not because we are from Russia, but because we have just not thought about how to remove these barriers. Our primary task is to gradually change the thinking of Russian entrepreneurs, who are often skceptical about entering foreign markets, including Africa. Secondly, we strive to promote the image of Russia as a producer of diverse and high-quality products,” he underlined in the interview.
With new trends and directions in global business, African countries have to look to the Eurasian region as a huge market for exports as well as make efforts to consolidate and strengthen economic cooperation, says Tatiana Cheremnaya, the president of ANO “Center for Effective Development of Territories” and head of the working group on public-private partnership “Business Union of Eurasia” based in Moscow.
Cheremnaya discussed here three main points and are as follows: The problems of effective cooperation between Russia and Africa are political in nature. Thus, the strengthening of Russia’s position leads to the strengthening of its influence in the world, including in Africa and vice versa, sectional policy has significantly reduced Russian exports.
The second problem for the development of Russian-African business is the lack of competitiveness of Russia which allows working only in the low-budget segment. This is due to structural problems in the Russian economy, the need for modernization, the bulk of the products produced during the Soviet Union.
The third problem is competition from the United States, China and India as more developed countries with more advanced technological solutions, and from the European countries as the former “patrons” of African countries.
Russian President Vladimir Putin, taking part in a congress during the 11th Russian Business Week organized by the Russian Union of Industrialists and Entrepreneurs (RUIE) early February, discussed how innovative technology is reshaping the global business landscape. He, however, encouraged Russian industrialists and businesses participating in the forum to improve their business approaches in order have competitive advantages in the global market.
“This is the most important thing. And fundamentally fresh markets for goods and services will become available, and new leaders will appear as well. Naturally, competition will exacerbate. Clearly, in a situation like that, no one will be playing fair with their competitors, including in the global business environment,” Putin said.
Russia has trade centers established in Africa. But these Russian trade centers must necessarily embark on a “Doing Business in Africa” campaign to encourage Russian businesses to take advantage of growing trade and investment opportunities, to promote trade fairs and business-to-business matchmaking in key spheres in Africa.
Maxim Matusevich, an associate professor and director, Russian and East European Studies Program, at the Seton Hall University, told me in an interview that “in the past decade there was some revival of economic ties between Africa and Russia – mostly limited to arms trade and oil/gas exploration and extraction. Russia’s presence in Africa and within African markets continues to be marginal and I think that Russia has often failed to capitalize on the historical connection between Moscow and those African elites who had been educated in the Soviet Union.”
“It is possible that the ongoing crisis in the relations between Russia and the West will stimulate Russia’s leadership to look for new markets for new sources of agricultural produce. Many African nations possess abundant natural resources and have little interest in Russia’s gas and oil. As it was during the Soviet times, Russia can only offer few manufactured goods that would successfully compete with Western-made products. African nations will probably continue to acquire Russian-made arms, but otherwise, I see only few prospects for a diversification of cooperation in the near future,” added Maxim Matusevich.
Former Ethiopian ambassador extraordinary and plenipotentiary to the Russian Federation, professor Teketel Forssido has also explained that Russian businessmen think that business can be done from government to government levels (at the state levels) but in many countries business at the state levels has been complimented by private participation. Using government as an umbrella could be alright, countries such as India, China and others run businesses without government in Africa. The government, of course, has to clear the way for smooth business transactions.
“Russians are counting on the authorities to do business, but if they always rely on the state, business can be ineffective. That’s why Russians businessmen are slow as we have seen it,” he said.
According to Forssido Russia has to open its market for Africa and there are various ways to this. One surest way is to use the existing rules and regulations. The preferential treatments for agricultural products exist but Africans don’t use them. Then, individual countries have to negotiate with Russian government for their products to enter the market.
Further, the African regional economic blocs can be useful instruments because these blocs are very important and can work with their counterparts to facilitate trade between Africa and Russia. For instance, in COMESA and SADC zones in Africa, goods and services move freely, and now I think these blocs should look into the line of working as regional economic blocs with Russia.
“At the moment, China has done a lot in Africa despite worldwide criticisms. China is not the only player on the continent, but also India, Turkey and other serious players. But, when we talk about Russia, I think it’s not comparable. China has largely involved in Africa, practically in all sectors as we can see. We expect that Russia can do more if they want to, looking at their huge potential capability. They still have their own priorities, anyway,” he pointed out assertively.
As already known, Moscow’s long term goals include developing investment cooperation with African countries, widening the presence of Russian companies in the African markets through increased deliveries of industrial and food products, and enhancing Russian participation in driving the economic development of Africa. At the same time, Russia needs to look at simplifying access to its market for African countries.
In one of his speeches posted to the official website, Russian foreign minister Sergei Lavrov noted frankly in remarks: “it is evident that the significant potential of our economic cooperation is far from being exhausted and much remains to be done so that Russian and African partners know more about each other’s capacities and needs. The creation of a mechanism for the provision of public support to business interaction between Russian companies and the African continent is on the agenda.”
A Sustainable Recovery In Gaza Is Not Foreseen Without Trade
Gaza has seen conditions steadily deteriorate over the last two decades, leading to collapsing of the economy and basic social services. While additional cash inflows are urgently needed to bring relief to the difficult living conditions, a lasting recovery depends on a concerted strategy to revive the Gaza economy through access to external markets and expansion of commercial activities.
A new World Bank report explores the nature of the rapid decline of the socio-economic conditions in Gaza and identifies what is needed to unlock sustainable growth. The report will be presented to the Ad Hoc Liaison committee (AHLC) on March 20, 2018 in Brussels, a policy-level meeting for development assistance to the Palestinian people.
“While additional aid is needed to provide humanitarian relief in the short term and ease the fiscal stress, it cannot continue to substitute for long term measures,” said Marina Wes, World Bank Country Director for West Bank and Gaza. “Serious commitments by all parties are needed to spur growth and jobs by putting in place the right conditions for a dynamic private sector. Without addressing the constraints, Gaza will continue to suffer with a heavy toll on its population,” she added.
Donor aid is urgently needed in the short-term to address the recent liquidity squeeze and improve dire humanitarian conditions.
Recent economic data revealed a drop in Gaza growth from 8 percent in 2016 to a mere 0.5 percent in 2017 with almost half of the labor force unemployed. The drop is attributed to a decline in inflows that has weakened reconstruction activity and led to a sharp decline in the income of a quarter of Gazans.
Access and quality of basic services such as electricity, water and sewerage is rapidly deteriorating and posing grave health risks. An additional destabilizing factor is the possible cuts to UNRWA funding – one of the main providers of jobs and services in Gaza. In fact, the cuts could risk income loss to 18,000 staff, and even more when counting their dependents.
Additional aid will be needed to avoid financial exacerbations. The potential reconciliation with Gaza, a positive for the territories overall, could increase the expected financing gap for 2018 from USD440 million to USD1 billion. Measures proposed by the Palestinian Authority will not be enough to close the gap and it will resort to domestic sources of financing including debt from local banks and arrears to the private sector and the pension fund. This could eventually choke the economies of both the West Bank and Gaza with negative consequences on suppliers, banks and ultimately growth and tax generation.
In the long term, aid will not be able to provide the impetus for growth, nor can it reverse Gaza’s de-development. The current market in Gaza is not able to offer jobs and incomes leaving a large population in despair, particularly the youth. Gaza’s exports are a fraction of their pre-blockade level and the manufacturing sector has shrunk by as much as 60 percent over the last twenty years. The economy cannot survive without being connected to the outside world.
Any effort at economic recovery and development must address the impacts of the current closure regime. Minor changes to the restrictive system currently in place will not be sufficient. Proposed projects to increase the supply of water and electricity are extremely welcome, but unless there is an opportunity to boost incomes through expanding trade, the sustainability of these investments will be in doubt.
The report highlights necessary preconditions for a sustained economic recovery in Gaza. They include a private sector that can compete in regional and global markets and increase its exports of goods and services. Required actions include relaxing the dual use restrictions, streamlining trade procedures at Gaza’s commercial crossing and rebuilding trade links with the West Bank and Israel. Effective governance systems and institutional strengthening under the Palestinian Authority’s leadership are also key for a sustainable recovery.
Donors can also help by offering innovative financing instruments that can mitigate risks holding back transformative investments by the private sector in Gaza.
Brazil Must Strengthen Structural Reforms to Drive Growth and Productivity
A sustainable economic recovery in Brazil can only be achieved through a programme of structural reforms aimed at driving growth and productivity. This is the finding of a report, Brazil Competitiveness and Inclusive Growth Lab, published by the World Economic Forum, which summarizes recommendations from a multistakeholder group comprising key actors and experts from the public and private sectors and academia. The report identified the main priorities for achieving higher growth and a more inclusive economy in Brazil with a view to informing the country’s economic strategy. The process was facilitated by the World Economic Forum in collaboration with the Ministry of Industry.
While Brazil’s economy is on a path to recovery, the Brazil Competitiveness and Inclusive Growth Lab report finds that over-reliance on its large domestic market and commodities exports has led to it falling behind other large emerging markets in productivity growth. Data from the Forum’s Global Competitiveness Report 2017-2018 suggests that important reasons for this are the high costs of doing business, the challenges for effective innovation and the relatively poor integration into global value chains of Brazil’s economy, which imports and exports considerably less than regional peers Mexico and Colombia and all the other BRICS economies.
According to the report, Brazil needs to put in place a new generation of reforms and public policies capable of addressing the high production costs, weak competence within industries, higher prices to consumers and low overall competitiveness, as all these factors lead to loss of potential wealth the country needs to raise living standards.
“The Competitiveness and Inclusive Growth Lab initiative in Brazil provides a successful example of using a multistakeholder approach to elaborate concrete and meaningful policy solutions to complex challenges. We hope the present experience will guide and promote future collaboration between the public and private sectors in Brazil,” said Børge Brende, President, Member of the Managing Board, World Economic Forum.
“Improving the business environment, deepening the integration of our economy with the rest of the world and creating a robust innovation ecosystem are the main building blocks of a more productive and competitive Brazil. This report presents a consensus roadmap to untap the potential of Brazilian economy,” said Marcos Jorge de Lima, Minister of Industry, Foreign Trade and Services of Brazil.
The recommendations of the multistakeholder group include:
Integration to global value chains: Recommendations in the report focus on improving market access, implementing trade and investment facilitation policies and improving the tax environment for trade, including a comprehensive analysis and review of Mercosur’s common external tariff (CET).
Innovation: Brazil still lags behind other leading economies in innovation. Better integration of policies and coordination between currently fragmented innovation centres would help to address this.
Public sector efficiency: In the Global Competitiveness Index, Brazil’s public sector underperforms the Latin America average, which in turn lags far behind the OECD average. Recommendations to improve efficiency centre on systematic integration of monitoring and evaluation mechanisms, allowing greater facility to reallocate investments in more productive sectors. This would also generate greater accountability and trust.
Reforming the business environment: A heavy regulatory burden, infrastructure deficit and tax system have all taken a toll on Brazil’s productivity. Delivering institutional and judicial reforms to reinvigorate domestic and foreign competition are needed to address this. To this end, the report examines a number of promising initiatives already being implemented by the Brazilian government.
The Forum’s Competitiveness and Inclusive Growth Lab Brazil is an ongoing multistakeholder initiative to support the design, launch and implementation of an actionable agenda to increase competitiveness. Like previous country experiences in Colombia and Mexico, its aim is to facilitate this by helping to build multistakeholder coalitions that comprise leaders from government, business and civil society.
Consumer Economics Are Driving Retail Industry Bifurcation
With retail sales increasing 3.5 percent in 2017, compared to a gross domestic product growth rate of 2.3 percent the same year, the retail sector is showing signs of healthy growth thus the so-called ‘retail apocalypse’ is a myth, according to a new study from Deloitte. The study, “The great retail bifurcation: Why the retail “apocalypse” is really a renaissance,” found that the retail sector is healthy and shows strong signs of growth. Rather than a battle of online against brick-and mortar, Deloitte found that retail is changing in line with consumer income bifurcation, with both high-end and price-conscious retailers seeing revenues soar, growing 81 percent and 37 percent, respectively, while those in the middle realized a mere 2 percent increase in sales over the past five years.
“Despite the popular narrative, the ‘retail apocalypse’ is far from reality,” said Kasey Lobaugh, principal, Deloitte Consulting LLP and the report’s lead author. “Brick-and-mortar retail is not on or near its deathbed. In fact, we’re seeing retailers open new stores at an astounding pace, and physical retail is growing alongside digital. Rather than witnessing the demise of retail, our study shows a dramatic change in line with the impact of consumer bifurcation along economic lines. While specific retailers may see an apocalypse, others see opportunity.”
Based on a survey of more than 2,000 consumers and an analysis of a large collection of US-based publicly traded retailers, the study examines a growing disparity between consumer income cohorts and highlights the impact of this economic bifurcation on retailers.
Consumer income bifurcation defies traditional economic metrics
While strong economic indicators paint a promising portrait on the surface, the study looked deeper and found massive gaps in consumers’ discretionary spending power. Incremental income generated since the recession has disproportionately gone to high-income households, with virtually all income growth between 2007 and 2015 going to the top 20 percent.
Deloitte found that the household economic health correlates to consumer spending behavior. Key economic findings from the study include:
- Economic well-being: Just one-in-five surveyed consumers (20 percent) are better off in 2017 than they were in 2007 in terms of disposable income, with little to spend on discretionary retail categories. Overall, four in five consumers (80 percent) have fewer funds for traditional retail segments such as apparel. Alongside this trend, high-income consumers are 10 percent more likely to report spending more over the last year.
- Rising costs: Faced with stagnant levels of income, lower-earning consumers have seen the costs of nondiscretionary items skyrocket: health care expenditures have risen 62 percent, education 41 percent, food 17 percent and housing 12 percent, according to Deloitte’s analysis of reports from Bureau of Labor Statistics.
- New expenses: Modern consumer essentials like mobile phones and data plans now take up an increased portion of discretionary spending, stealing share from traditional retail categories. Low-income consumers feel the brunt of the impact, spending 3.6 percent of their income on digital devices and data, compared to just 0.71 percent for high earners.
“Households have diverged along economic lines and now people’s respective income levels are steering their behaviors and dictating the success of retail segments,” said Robert Stephens, senior manager, Deloitte Consulting LLP and co-author of the study. “More affluent shoppers have fueled high-end retail as their income and net worth have grown, while lower-earning consumers, faced with growing expenses and dramatically less disposable income, have turned toward price-conscious stores. Retailers that try to court all consumers will likely be challenged as income bifurcation leaves different shoppers with differing motivations.”
Retail isn’t dying, and premier and low-price are thriving
In line with consumer bifurcation by income level, Deloitte found the retail market is also bifurcating along economically-driven divides. Through an analysis of publicly traded retailers, Deloitte defined three retail cohorts: premier retailers that deliver value via premier product and experience offerings; price-based retailers that deliver value by selling at the lowest possible prices and clearly communicating that proposition to customers and balanced retailers that deliver value via a balance of price and/or promotion.
Examined side by side, these three groups offer differing narratives that align with income-driven changes in consumer behavior:
- More stores are opening than closing: From 2015 to 2017, price-based retailers gained 2.5 stores for every store balanced retailers closed.
- Revenues have grown: Premier retailers have seen 40x more revenue growth than that of balanced retailers over the last five years, with revenues soaring 81 percent versus a mere 2 percent increase for balanced retailers. Price-based retailers, meanwhile, have seen their revenues steadily increase 37 percent over the same period.
- Sales climb overall: Premium (8 percent) and price-based (7 percent) retailers’ sales rose in the past year, while sales of balanced retailers declined by 2 percent.
Income bifurcation Impacts consumers’ category, channel and spend decisions
Income bifurcation has triggered differences in consumer shopping behavior between economic groups. Beyond their actual spending levels, these two groups also differ in how and where they make purchases:
- Preferred formats: Low-income consumers are 44 percent more likely to shop at discount retailers than other groups. These consumers are also more likely than others to shop at supermarkets, convenience stores and department stores.
- Channel choices: The majority (58 percent) of low-income consumers are choosing to shop in store, while 52 percent of high-income consumers prefer to shop online. High-income consumers were also 42 percent more likely to report an increased propensity to shop online over the prior three months.
- Shopping around: In-store spending fragmentation – or the number of retailers a consumer regularly shops – is 17 percent higher amongst high-income consumers. Fragmentation is even more exaggerated online, as affluent consumers are 40 percent more fragmented for online retailers than consumers in the lowest income cohort.
The millennial money myth
While millennials are often lumped together and portrayed as the source of disruption, Deloitte found that for the most part, millennial behavior (by income group) is virtually indistinguishable from other generations. Low-income millennials track closely with all other generations when it comes to whether they have spent in stores recently (79 percent and 81 percent, respectively), and in the middle-income cohort, there’s no difference between millennials and other generations, with 81 percent of each group having made purchases in-store.
However, high-income millennials, who make up less than one-fifth (19 percent) of the total millennial generation and just 6 percent of the population overall, skew perceptions of Gen Y as a whole. High-income millennials are 24 percent less likely than all non-millennial shoppers to shop in a store, and may be the source of the idea that millennials are the end of brick-and-mortar retail. When averaged together, the high-income shopper’s behaviors skew the averages for the entire millennial group.
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