Trade with Russia in rubles: new risks for Armenian companies
Trade with Russia in rubles
Armenia and Russia have completely stopped mutual settlements in dollars and euros, as announced by the Minister of Economy of Armenia Vahan Kerobyan. The choice of currency for payment has become a major problem for trading partners in the current environment, as the Russian ruble is currently too unstable against the dollar and the euro to conclude long-term contracts. The Armenian dram is preferable in settlements, but its potential for use in bilateral trade is limited.
Exports from Armenia to Russia increased dramatically due to the withdrawal of Western companies from the Russian market, which has allowed Armenian suppliers to expand their business in Russia. Western sanctions are also expanding, however, but according to experts these sanctions will not affect Armenian exports.
Due to the rejection of mutual settlements in dollars and euros, Armenian exporters face new risks that will be difficult to overcome.
- Mirzoyan-Lavrov meeting in Moscow
- Volodin’s statement: what is behind it? Comment
- Stagnant economic ties in the South Caucasus: Three stories
Armen Ktoyan, economist
“The refusal to settle in dollars or euros in trade with Russia may not affect the Armenian economy. It’s all about the flexibility of our exporters.
Armenian enterprises carry out their expenses not in rubles. When switching to ruble settlements with Russia, they need to convert proceeds either into drams or dollars in order to make settlements with suppliers and employees. And any changes in the market situation during this period, for example if the ruble depreciates against the dram or vice versa, create certain risks that will be difficult to avoid. This can lead to losses for the companies themselves due to settlement losses.
But flexibility can make a difference and balance those risks. For example, if an enterprise carries out a certain kind of activity in dollars, respectively, receiving revenue in this currency, then it can balance the risks associated with currency fluctuations by making its costs also in dollars. In this case, regardless of the dollar exchange rate, potential losses will already be balanced by potential profits.
This is a mirror operation, and dollar volatility doesn’t matter. The same is true with any currency, including the ruble.
But the problem is that entrepreneurs working with Russia do not have mirror operations where they can balance the potential loss or increase in value. For example, if they received components from Russia, manufactured products in Armenia and sold them to Russia, they would be able to balance these losses thanks to mutual settlements with suppliers, which would need to be made in rubles.
But when a business carries out its activities in drams, receives components for example from China and makes payments in dollars, and sells its products to Russia for rubles, it will be very difficult to manage such risks.
A change in the exchange rate in this situation will greatly affect revenue, because it will be necessary to carry out a three-fold operation — to convert rubles into drams and drams into dollars, in order to settle accounts with the Chinese.
If you are dealing with a currency that is prone to sharp fluctuations, this creates a certain risk. You can both lose a lot and gain. Therefore entrepreneurs do not risk entering into long-term contracts, because no one knows what value the Russian ruble will have in five years.”
It can be replaced, but it’s difficult and impractical
“Despite these risks, it is unlikely that our businesses will abandon the Russian market. This can only stimulate the search for Russian companies from which it will be possible to buy raw materials, as well as companies ready to buy finished products from these raw materials. For example, if you produce furniture, then you can buy wood in Russia and sell finished products to Russia too. Thus all calculations will be made in rubles, and fluctuations in the ruble exchange rate will not affect revenue in any way.
But this is not easy either. Russia itself does not have such potential, at least in the short term it does not have this potential.
It is theoretically possible to replace the Russian market with another one with diligent and long-term work, but it is hardly advisable. Even with a strong desire, technically it is very difficult. This will mean additional costs, primarily for our consumers.”
Rational choice of Armenian entrepreneurs
“If Russia’s share in Armenian exports is more than 40%, and the trend is to increase this share, then of course it will be very difficult to get rid of such a market.
One should take into account the fact that our companies have been establishing foreign trade relations for decades. It will be very difficult to replace these connections with new ones.
For example, for our exporters entry into the European or Asian markets is associated with a number of barriers in comparison with the Russian market. This is a language barrier, plus bureaucracy.
Russian companies have much in common with our entrepreneurs. In addition, Armenia is in a single economic union with Russia, the EAEU. Russian consumers are already familiar with Armenian products, there is no need to work on product recognition. Russian regulation also plays an important role. It is not very tough compared to Europe. In Russia many aspects can be bypassed, including licenses, etc.
The Russian market is a rational choice of our manufacturers in terms of economic feasibility.”
Sanctions will have no effect
“The imposition of sanctions on Russia in relation to certain goods is a political decision. If they decide to put pressure on Armenia, then Armenian exports may fall under sanctions. But I don’t think it will come to that, because Western sanctions concern the oil and gas sector, and there is no relationship between Armenia and Russia in this area.
The volume of exports from Armenia to Russia has increased by more than twelve times. Basically these are automotive exports, various kinds of machines, electronics, Western food brands, etc. These are the products whose manufacturers have withdrawn their business from Russia, but these goods have not been subject to any sanctions. And nothing prevents Armenian entrepreneurs from re-exporting from Europe to Armenia, and from Armenia to Russia.
These goods are not of military importance; they are produced for general consumption and there should be no sanctions on them.”
Follow us – Twitter | Facebook | Instagram
Trade with Russia in rubles