RD interview: Chairman of the Association of European Business in Russia Philippe Pegorier explains how European businesses view the current political crisis between Russia and Europe and offers his take on how these businesses are adjusting to Western sanctions.

Patrick Pouyanne, Chief Executive Officer at Total SA, Russia's President Vladimir Putin and Alibaba Group Founder and Head Jack Ma (L-R front) at a working dinner with heads of the largest foreign companies and business associations as part of the 19th St. Petersburg International Economic Forum. Photo: TASS

Philippe Pegorier, the chairman of the Association of European Business(AEB) in Russia, the largest foreign business association in the country, has been working in Russia for the last 35 years and has been living in the country for about 20 years. He is well aware of how to do business in Russia and what European business thinks about current political tensions between the European Union (EU) and Russia.

On the sidelines of the Greater Europe meetings in Paris, he talked to Russia Direct about the current state of trade and economic relations between Europe and Russia. As Pegorier explains, European businesses are not as worried about anti-Russian sanctions as people might think because they have already localized their production within Russia.

Russia Direct: It’s been a year since Russia and the European Union initiated mutual sanctions. Are French and European businesses suffering as a result of sanctions?

Philippe Pegorier: Of course, French as well as European businesses in general suffer. But in my view, small and medium companies suffer significantly more than big ones. The big companies have already localized their production lines in Russia and produce in Russia.

If we look at cumulative European investments in Russia they total about €170 billion ($190 billion). This is to say that we have our factories and plants in Russia and we created 500,000 workspaces, which is quite an impressive number. Therefore, in general, we continue our work.

Philippe PegorierWe are trying to localize our production in Russia even more and there are two reasons for that.

The first and the most important one is the Russian ruble devaluation. Before sanctions and the economic crisis, Russia was quite an expensive country in which to produce. With the ruble depreciation, it has become almost twice cheaper for us to produce in Russia.

Secondly, there is the Russian government policy that aims at attracting investments and localization of foreign production. For example, Alstom (Philippe Pegorier is also Alstom Country President in Russia, Ukraine and Belarus. – Editor’s note), as well as Siemens, Schneider Electric, and others had localized their production in Russia long ago. It happened because this is what our clients wanted and because our major clients were state-owned Russian companies. Only the companies that have already localized their equipment and production in Russia could successfully bid for a state tender.

This is why de facto big companies already localized their production in Russia.

And large European businesses in Russia try to do everything to keep their share of the Russian market. But we have to keep in mind that a company’s share in the market is not a country’s share in the market. For example, when Siemens or General Electric orders its equipment for Russia from its factories in China then it is, of course, considered as part of Chinese, not European, exports to Russia. But what is more important for a company is that it has its own equipment in the country where it operates.

RD: What is the attitude of French and European business to the policy of Brussels towards Russia?

P.P.: We are lobbying. We have been saying for a long time that we are dissatisfied and are not happy with current policy. That was pretty much clear. And our Association of European Businesses in Russia is among those that expressed concerns and dissatisfaction. We told them that these sanction against Russia are also sanctions against us, as we have such enormous investments in Russia.

So if our country wants to hurt us of course we are not pleased with that, however it is a law for us and we have to follow our French laws in the same way we have to follow laws in Russia – it is natural. We can work only in such a manner.

But sanctions against Russia are not UN sanctions that were adopted by the Security Council; hence, we can find ways of how to play around the sanctions. We can find a legal way to keep our interests untouched.

RD: What do you see as the possible way out of the current crisis in relations between Russia and the EU?

P.P.: We, all European businesses, already said that the only way out of this crisis is to talk with Russia, to negotiate with Russian President Vladimir Putin. This is the way how business is done in Russia.

How can you solve an issue if there is a question which has to be discussed with the President and you refuse to talk? It is illogical. You have to meet and have a meaningful discussion of the issues of concern.

After all, Russia is our partner and neighbor. You can divorce your wife or husband, but it is impossible to do so with your neighbor. You have to get along with a neighbor. The same is with Russia – we have to get along with our neighbor.

RD: Do you think that the issue of the Mistral deal between Russia and France will not affect French-Russian trade and economic relations?

P.P.: It won’t because it is the will of two presidents – Vladimir Putin and François Hollande. This is their will to solve this issue in the mutually beneficial way and not to politicize it. So far they plan that ships will stay in France and Russia will get back its money and compensation. So there are only commercial details left for negotiation.

RD: How do you see the role of the U.S. in this crisis? Does it influence European businesses?

P.P.: The U.S. always has an influence because every single big European company has business in the U.S. So, European companies have not only to observe European sanctions but also to look at the U.S. In this regard the U.S. has influence.

RD: What about U.S. influence on the political level with regards to the EU? Some say that Europeans adopted anti-Russian sanctions under U.S. pressure.

P.P.: I do not think it was merely under U.S. pressure. I do not think so. I believe it was also a common decision of the heads of the EU member states because of Crimea and Ukraine, they think Russia should respect the rule of law. In Russia there is a different view: Crimea is an integral part of Russia and it has historical justification for that.

RD: What can be done to restore EU-Russia relations? What can motivate both sides to do that?

P.P.: Firstly I want to say that since the beginning of the year, trade between Russia and the EU decreased by 12 percent. However the main reason for that are not the sanctions, it is the economic crisis. Of course, sanctions also play a certain role here but not a central role.

What should companies do? It is very simple – they should save the contacts with their partners and clients. We, European businesses, are all in Russia for the long-term and, of course, we must adapt. There will be fewer expats and more Russians to work; maybe we will produce less if there is less demand on the market. We will do everything to stay in Russia, unlike American companies that are leaving the country, such as General Motors and Hewlett-Packard.

RD: Russia is currently opening more and more for Chinese companies, which come to Russia with huge investments and projects. Don’t you think that they can pose a threat by challenging European companies and business in Russia?

P.P.: Chinese companies are our competitors everywhere in the world, not only in Russia. In fact, they are not represented in Russia to the same degree as European companies are and underrepresented in Russia by way of comparison to the overall Chinese presence in the world. So, we can say that China was sort of distanced from Russia to a certain degree in terms of economic and trade cooperation. However now, the doors to Russia are wide open and the Chinese naturally enter the market. This is normal.

What is not normal is that this is happening too fast. In one year, everything has changed so fast. But the fact that Chinese companies are entering Russia is absolutely normal. There is no threat here. By the way, the trade between Russia and China dropped as well – and it is also normal because of the economic crisis and global economic slowdown.

I also want to stress the fact that Chinese companies never localize their production abroad. They produce everything in their country, which makes their ties with a partnering country less strong.

RD: What is your estimation of when the sanctions will be lifted? 

P.P.: Only God knows for how many years more the sanctions will stay in place.

RD: So, you think that they will not be lifted in the next couple of years?

P.P.: Yes, because I think that sanctions will stay at their current level. I do not think that new sanctions will be introduced unless there are some negative developments, which you cannot predict to occur. So, sanction will stay for quite a long time, but for us it is not that important. We believe that economic growth will return to Russia and we will continue to grow and benefit from doing business in Russia despite the sanctions.