Italy and Russia: How Sanctions Affect Bilateral Commercial Relations

Approximately 570 Italian companies are present now in Russia, particularly dealing with energy, automotive industry, food processing and telecommunications. As to the energy sector, Italy has a fruitful partnership with the Russian government, sharing real interdependence and common interests.

Russia is facing serious economic slowdown due to the political uncertainty related to the Ukrainian crisis, the impact of international sanctions and the sharp decline of oil prices. Among other things, Russia also suffers a substantial outflow of capital (estimated at $ 151 billion in 2014), which contributed to the gradual depreciation of the ruble. Recently, the American rating agency Standard & Poor's has rated creditworthiness of Russia BB +, Moody's assigned Ba1, while Fitch has considered the Russian outlook still negative, BBB-. Nevertheless, the current account balance remains positive, supported by exports of energy resources and metallurgical production, accounting 75% of total Russian exports.

The European economic crisis, complicated by the impact of sanctions and the decline of oil prices, has weakened Russian exports. This negative trend could continue in 2015. Anyway the EU-Russia balance of current transactions is still positive, over USD 40 billion, equal to more than 2% of GDP. Foreign exchange reserves are high, equivalent to about 10 months of imports. However, there is a drop in hard currency reserves due to recent interventions by the Central bank to support ruble liquidity.

The oil/gas sector remains the driving force for the national economy, along with mining industry. Other important sectors are manufacturing and services, the latter grew faster after the end of the Soviet era. In present situation Italy continues strategic partnership with Russia based on interdependence and shared interests. In recent years, relations between the two countries have been further consolidated to the point that he can be described as a "special relationship", marked every year by busy schedule of political events, hosted in Italy and in Russia.

Italy is the third largest trading partner of the Russian Federation. According to the latest available data, the Italian FDI in Russia amounts 51 billion euros. The main Italian investment destination remains the energy sector. The Italian presence also is growing in other areas - defense, household appliances, food processing.

In 2014 the trade between the two countries exceeded 25 billion euros, where approximately € 9.5 billion was Italian export to Russia and about € 16 billion import of Russian goods to Italy. Anyway the amount fell down by about 17%. In fact, in 2013 the trade exchange was almost 31 billion euros.

Unfortunately, first months of 2015 confirm this negative trend with Italian exports decline by 25% in the first quarter of 2015 compared to the same period of the last year, mainly due to the effects of sanctions against Russia. Particularly affected were the micro and small businesses. According to figures provided by Confartigianato, in period between March 2014 and March 2015 the value of products exported by micro and small businesses totaled 102.4 billion euros, equal to 6.2% of Italian GDP. There was a real collapse (-34.6%) in exports by Italian small businesses to Russia. According to analysts, without sanctions the total exports of micro and small Italian companies to Russia would record a potential growth rate by 5.4%.

Approximately 570 Italian companies are present now in Russia, particularly dealing with energy, automotive industry, food processing and telecommunications. As to the energy sector, Italy has a fruitful partnership with the Russian government, sharing real interdependence and common interests. ENI, ENEL, Saipem and Finmeccanica are very active in the country. In particular, it is necessary to mention the SuperJet International project, which is the joint venture created in 2007 between the Italian company Alenia Aermacchi (Finmeccanica group), which holds 51% of stakes, and the Russian Sukhoi Holding, which owns 49% of the capital. This is the civil aviation partnership program, the most important project ever concluded between Europe and Russia.

Russia is among main energy suppliers to Italy. Between January and February 2015 Italy purchased from Russia natural gas for about 39% of our imports and crude oil for about 30% of imports. Russia traditionally has been a reliable supplier, whom Italy could rely upon in case of difficulties with other energy producers.

In industrial and high-tech sectors such Italian companies as Finmeccanica collaborate successfully with Russian firms. Significant are investments from Pirelli, Danieli, Marcegaglia Group, Ferrero, Indesit, Cremonini, Coeclerici, Marazzi, and Barbaro. In spite of difficulties Russian Rosneft continues to keep strong ties with Pirelli. The two companies recently signed another cooperation agreement.

This agreement provides the establishment of new Pirelli stores in Rosneft service stations, the construction of a flagship store entirely dedicated to Pirelli tires. The agreement will allow Rosneft to expand the portfolio of products offered in its own service stations and Pirelli would strengthen its strategic commercial presence in Russia, where the company has already two plants in Voronezh and Kirov. By the end of 2015, the two companies plan to open up to 15 stores in the Moscow area, while by 2019 there should be at least 200 Pirelli stores.

The present sanctions did not bring particular benefits to European economies, but analysts envisage limited consequences. It is claimed that the majority of exports are not affected by sanctions and the impact on the European economy is relatively small and manageable. European companies, even those of the agricultural sector, have now redirected exports to other countries. However, according to the WIFO calculations, the European Union is preparing an extreme scenario with possible loss of more than 2 million jobs and 100 billion euros in added value. The forecasts are based on data of the first quarter of 2015, when many countries felt the collapse of exports to Russia. Germany alone in the short term could lose half a million jobs and 27.6 billion euros in added value; Italy may lose 80 thousand jobs and over 4 billion euros of added value. According to the WIFO analysis, the agriculture and food industry of the European countries will record the most damage. For example, the Italian consortium Parmigiano Reggiano may not export its production not only in Russia but also in other countries such as Germany, Netherlands and France. This is because of the dairy market overproduction in Europe.

On the other hand, European sanctions against Russia could encourage competitors from China and other countries to exploit the situation. This is the scenario for the near future.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.