Ami Lustig, one of the partners in Israel’s LR Group, is a nervous man these days. He has a contract with a Russian customer to build a facility for 1,200 dairy cows and now he’s not sure what to do as the Russian currency implodes and the financial markets are full of talk about the country falling into recession.
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LR got a 900-million ruble ($14.9 million) loan from Russian banks to finance the project, but with the ruble so unstable Lustig cannot estimate the dollar value of the loan.
“The market is correcting and I think at some stage things will rebalance,” Lustig said on Wednesday. “Meanwhile, the loan has dropped from 20 million euros in value to 10 million because of the depreciation. We certainly can’t move ahead with the project in such a situation because it’s based on buying equipment from overseas.”
Lustig and LR’s predicament is shared by many Israeli companies exposed to the Russian economy. Israel exported some $1 billion of products to Russia last year, when the Russian economy was riding high. Teva Pharmaceuticals is the single biggest exporter, with drugs accounting for 12% of the total and chemicals accounting for another 10%.
But oddly enough, despite Israel’s high-tech prowess, when it comes to Russia, agriculture is the leading sector. Last year 28% of all Israeli merchandise exports to Russia were farm products, and Russia was Israel’s biggest export market for everything from avocados to that traditional Russian staple, potatoes.
Apart from Teva, among the top 10 Russia-exporting companies are the machine-tool maker Iscar and the telecoms equipment company ECI Telecom, but almost all the rest are agricultural exporters. And now that export market is at risk, industry figures said on Wednesday.
Dror Eigerman, CEO Galil Export, which sells farm products from growers in the Upper and Western Galilee as well as from the southern Arava Valley, said Russia accounts for about a fifth of its overseas sales of 350 million to 450 million shekels ($89 million-$115 million) annually.
“We’re worried about what we’re owed and what will happen next, because we have nowhere else to sell if not to Russia,” said Eigerman.
The reason that there is no alternative to Russia is that Europe, Israel’s traditional market for agricultural goods, is suffering a market glut right now, ironically in part because Russia imposed a boycott of European farm goods in the summer to protest Western sanctions against Russia.
Israel’s poor political standing in Europe has also hurt sales there. “There’s no official boycott, but there’s an anti-Israel products sentiment in many places. A lot of importers don’t want to come under criticism for selling Israeli products,” said Eigerman, noting that he has been selling about 60% of all his peppers to Russia.
There are other sectors heavily exposed to the Russian market, albeit not as big as agriculture. Some 7% of Israel’s $530 million in jewelry exports go to Russia and 6% of its $950 million in processed-food exports. The plastics, furniture and printed products sectors export about 4% of their products to Russia.
Despite the problems, Israeli exports won’t give up on the Russian market so quickly, said Shauli Katznelson, deputy director general for economics and professional services at the quasi-governmental Israel Export Institute. The market is notoriously difficult to penetrate, so those who have succeeded or invested time and resources won’t quit, he said.
“The [Russian] market coped with difficult economic crises in 1998 and 2008 and overcame them,” he said. “In 2013, the Russian economy was the eight largest in the world and sixth in terms of purchasing power. So I’m confident that Russia will overcome this crisis and continue to provide opportunities for Israeli companies.”
Katznelson recommended that Israeli businesses that have been weighing entering the market but have yet to take any concrete steps to wait for the crisis to wind down.
Ofer Sachs, the Export Institute’s CEO, said he remains confident in Russia’s ability to overcome its problems, noting that it is still a major producer of natural gas, oil and metals. “Russia is going through a crisis, but I don’t think it will crash in the long term. The minute oil prices begin rising things will get better,” he predicted.
Meantime, he conceded that Israeli farm exporters will have to settle for lower prices and reduced profits. “On a national level, it seems right now there’s not going to be any great drama,” he said about Israeli exports generally.
For his part, Lustig said he would be flying out to Moscow this weekend to meet with his customer and tell him that LR plans to continue with the project. But he is not sure how it will continue, especially if his Russian banks won’t commit to making the loan they promised his company.
“You can’t dismiss Russia just like that. People are still living there,” he said. “Russia has huge potential in everything connected to agricultural projects with Israel.”