Geopolitical uncertainty and the difficulties arisen both with products exports and with imports of goods necessary for their production are forcing Russian companies to radically revise their investment programs.

How Sanctions And Geopolitics Affects Russian Companies
How Sanctions And Geopolitics Affects Russian Companies And Their Investment Programs Pixabay

"We have experienced all sorts of crises, but nothing like this has ever happened before," Viktor Rashnikov, the board chairman and main owner of Magnitogorsk Iron and Steel Works (MMK), said in late June.

MMK has not been exporting products for the third consecutive month, has "no profit," and the profit margin fell to 4% in May from last year's 20-25% due to ruble strengthening and the excise duty on liquid steel, which was introduced last year, he said. In these conditions, MMK may suspend the implementation of its ambitious investment program.

"(To do this), you need to have a minimum profit margin of 15%, you need to earn 7-8 billion rubles in order to maintain the volumes that we have," Rashnikov said, as quoted by TASS. However, the plant's utilization was only 60% in June.

Rashnikov's statements cannot be classified as revelations; NLMK owner Vladimir Lisin, another major player in the Russian ferrous metallurgy, said back in March that the investment forecast for 2022, which was planned to exceed $1 billion, would not be confirmed "against the background of a high level of macroeconomic uncertainty."

"General uncertainty, difficulties in marketing exports and imports of goods needed for production will lead to a marked decrease in private investment," the central bank acknowledged in its monetary policy report in May.

However, so far, few have openly admitted to a complete suspension or a radical reduction in investment programs. Among them are mainly retailers, which, even before the current crisis, worked in high competition, and now they are also forced to act in the face of declining incomes of the population and the collapse of supply chains.But in general, it is quite obvious that the regime of "sanctioned development", in which all Russian businesses now live, affects everyone in different ways. In relation to investment programs, three main trends can be conditionally identified.


Some companies have not yet abandoned their previous plans, but at the same time, some find very unorthodox ways of financing. For example, they refuse to pay dividends, declaring that they are doing this precisely in favor of investments. This is what happened, for example, to carmaker KAMAZ: shareholders decided to allocate 3.987 billion rubles from its 4.6 billion rubles net profit to finance the investment program, which, as the company's CEO Sergey Kogogin previously said, was projected to reach 17 billion rubles this year.

Gazprom's latest decision on non-payment of record dividends in the company's history followed the same logic, sending the company's shares and the entire stock market down. According to the official version, the choice was made in favor of implementing the investment program, in which a significant place is given to the gasification of regions and preparation for the winter period.

Previously, it was approved in the amount of more than 1.7 trillion rubles for 2022, up almost 50% from last year, of which 1.4 trillion rubles were projected for capital investments.

FINAM analysts believe Gazprom will really be forced to increase its capital expenditures in the coming years: the company continues to develop domestic gasification and can also accelerate its shift to the Chinese market, which requires construction of the necessary infrastructure.

In general, the response of oil and gas sector to existing challenges may differ.

"We believe that the capital expenditures of Novatek and Rosneft, which have confirmed the relevance of their key development projects and the possibility of their orientation to Asian markets, may remain stable or moderately decrease. At the same time, in most other companies, we consider it possible to reduce capital expenditures by up to 10-20%," FINAM said.

Under EU embargo, the key task for the oil industry will be to minimize the decline in production, it said.

Radical cuts

A number of companies have already radically cut their previous, "pre-special operation" and, as a rule, very ambitious development plans.

This is what Russian Railways did, for example: the investment program adopted late last year was reduced to 808 billion rubles from a record 1.028 trillion rubles. The revision was due to the expected decrease in revenue from cargo transportation by 197 billion rubles in 2022 and will mostly affect a comprehensive infrastructure modernization plan, which was cut to 390 billion rubles from 600 billion rubles.

Although the largest metal and mining companies have not yet made decisions to reduce their investment programs, this cannot be ruled out in the near future, FINAM analysts believe.

"The main problems now are also in the steel sector, which, due to EU sanctions, has lost the opportunity to export finished products to Europe, while domestic demand from engineering and construction is also declining. Representatives of steel companies report a drop in production capacity utilization, a decrease in production profitability to a minimum, and a threat of a real stoppage of investment programs," FINAM said.

According to steel giant NLMK's forecasts, Russian steelmakers may cut production by 15%, or more than 11 million tonnes, this year, and by 26%, or 9 million tonnes, in the second half of the year.

"Mining companies faced virtually no direct sanctions restrictions on their exports, except for problems with logistics and settlements. Exception, perhaps, is gold mining, but here the Bank of Russia came to their rescue, resuming the purchase of gold in reserves. However, bans on the supply of heavy machinery and equipment create certain difficulties for the industry. The companies kept their plans, but almost all of them announced the possibility of postponing the completion of some projects," FINAM said.

Revisions and shifts

Aton analysts previously noted that the tactics of "delays" looks the most expected, as companies need time to adapt to unexpected changes in the geopolitical environment. Therefore, it is not at all surprising that most enterprises still prefer not to admit that they are cutting development budgets, covering such decisions with "revisions" of strategies and declaring "shifts to the right" only for some projects.

For example, back on February 18, Severstal announced that it planned to use about $1.6 billion this year, increasing capex by 38% from $1.157 billion to 2021. But in May, the company's CEO, Alexander Shevelev, said that a major part of the investment program depended on imported equipment.

"Today, we simply do not have the opportunity to obtain a significant part of such equipment. This does not mean that we will save money on some programs, for example, environmental ones. No, we're going to continue them all. But technically and physically it will be very difficult to meet the conditions with supplies. Yes, some of the programs will be revised, some of the investment projects related to foreign equipment at an early stage of implementation will be shifted to the right," he said.

A similar position was taken by Nornickel. Late last year, the company increased its long-term investment program through 2030 to $35 billion, of which $6 billion were earmarked for environmental projects (mostly for the large-scale Sulfur Programme in the Norilsk division), and $8 billion for the development of energy infrastructure. But by the summer this year, Nornickel lost half of its traditional suppliers of spare parts and equipment due to anti-Russian sanctions, the consequences of the coronavirus pandemic and logistical problems, Sergey Stepanov, the company's senior vice president and operational director, said.

Nornickel CEO Vladimir Potanin confirmed in an interview with RBC that refusal to supply equipment due to the so-called "voluntary sanctions" complicated both the company's current activities and the implementation of investment projects.
"So we will have to shift some of them to the right, including the second stage of the Sulfur Programme, which is planned to be implemented at the Copper Plant in Norilsk," Potanin said. The company is now looking for alternatives to equipment and components, including in China, and is also counting on Russian partners — in June, it organized a large forum on import substitution in Norilsk.

But at the same time, Potanin confirmed that all social and environmental projects will be implemented.

"The ESG agenda is relevant and correct. All activities are ongoing, from reducing emissions directly from the enterprise to compensating measures through renewables," Nornickel CEO said.

According to FINAM, Nornickel, unlike many others, has no problems with financing its investment program. Due to its solid share in the global metal markets, the company has very little chance of facing direct sanctions, and high sales prices of metals compensate even some probable reduction in sales volumes, it said.

However, the refusal of up to half of the suppliers to provide equipment may force the company to delay the deadlines for the completion of some projects, FINAM noted.

It is interesting that, according to Viktor Rashnikov, the investment program at MMK is "going well" so far, since Chinese companies, in particular Sinosteel, are more involved in the construction of the first stage.

"Today, equipment deliveries are proceeding confidently, in this respect we are in a very good position: today the only country that delivers is China, we didn't guess, it just happened, and before that we built for 20 years mainly at the expense of European suppliers," Rashnikov said.

However, Sinosteel is building only a new coke battery No. 12 at MMK, while another breakthrough investment project, a new blast furnace No. 11, was to be built by the Luxembourg-based Paul Wurth by 2025. The contract worth more than 61.3 billion rubles was signed in June last year. And MMK said nothing about the project's fate yet.

Looking forward to restructuring

Potentially, all this in any case can lead to a decrease in fixed-asset investment in 2022. According to Rosstat, they still grew 12.8% year-on-year in the first quarter. But in March, according to the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF), the index of investment activity fell by 19.5% to 103.6 points from 127 points in February, while the Gaidar Institute's index of industrial optimism returned to March's lows in June.

The central bank believes that the Russian economy will have to go through a structural transformation, signs of completion of which will be "a significant recovery in imports with a reorientation to alternative suppliers(in the short term and a sharp increase in investment and production at the level of individual companies and industries in the longer term."

However, between now and active restructuring "there is likely to be a time gap during which the decline in production and supply of goods may increase."

The further trajectory of the economy in the second half of 2022 will largely depend on the extent to which companies can find alternative supply chains from abroad or substitute imports with domestic producers, the central bank said.

According FINAM, under these conditions, further interest rate cuts, government subsidies or other forms of support, such as tax incentives, would help businesses, which would improve the economics of projects. Uncertainty around the exchange rate can also make planning difficult if the company is involved in export-import operations, analysts noted.