Russian economist: How can business survive in a shrinking global market

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November 11, 2015

Mikhail Delyagin Blog
Russian author, economist and politician, director of the Institute of Problems of Globalization

Translated by Kristina Rus

About just how much the recession has affected the retail business, and what strategies companies should follow in order to survive, Retail & Loyalty Magazine spoke with a well-known Russian economist Mikhail Delyagin at the IBM Cognos Live Forum.

R & L: How would you describe the current situation in the Russian and global economy? What is the most likely, in your opinion, scenario of its further development?

Mikhail Delyagin: The world is now faced with a situation of complete uncertainty, one cause of which is the transition from money based economy, to technology based economy. Most of the players now don’t have the slightest idea of ​​what tomorrow will bring, because the technology needed for business development is no longer transferred or sold: only access to technology is sold, without the possibility to somehow adapt it to suit your needs.

 In other words, technology is acquiring a character of infrastructure, thereby creating a new business ecosystem and offsetting the importance of monetary funds.

Another important sign of the times is the breakdown of the global market. To date, this process seems slow, but in the near future it is expected to accelerate, and the situation – both political and economic – will likely resemble the period between the First and Second World Wars.

 The world is undergoing a hidden to the public, but rather ‘effective’ elimination of the middle class, and it is even impossible to predict what will become of the global economy when this generator of most demand will disappear completely. 

Even more uncertain seems the future of democracy as such, after the extinction of its most important foundation. Thus, the basic contours of the future of the global economy can be seen, and although they do not inspire optimism, it is already possible to build more or less coherent forecasts.

In Russia, we are now seeing the final approach to the long process of destruction of the Soviet economic system. I note that the final itself can be very painful, and the hopes of the state dampening the likelihood of destruction are not very great, because the government in the end may also end up overboard. Only the certainty that in the next year there will be no qualitative change in the world or in Russia adds optimism: all the states have a sufficient margin of resilience. However, I note that many of the countries that seemed to be an island of stability, are no longer that – this also applies to Germany and to a large part France and Italy.

R & L: What sectors of the retail business proved to be most affected by the recession?

Mikhail Delyagin: Recommendations to the members of all the segments of the retail business are the same: 

Get used to live and work in a shrinking market, because over the next 3-5 years you can not hope for any change. 

Periods of calm, perhaps even short periods of growth are possible, but in general, the prospects of markets around the world are negative. 

The main advice in this situation: all entrepreneurs who are not capable to increase profit in a falling market, must exit the business today: this is the only way to minimize the losses. 

Note that this recommendation is relevant to the financial and retail business. You need to get used to working with low-income segments of the population, as strange as it may sound, representing the most promising segment, focus on extending the quality, as they today politely referred to repair, and  to the degradation of not only customers, but also your own staff. Finally, you must adjust to the degradation of infrastructures in general. At the same time, of course, the population will acquire qualitatively new needs, and those who are the first to catch these changes will become the “king of the world” – the number of such successful businessmen most likely will not exceed 3%. The number of those who not only sense the new trends, but themselves will take part in their creation, will be much smaller.

R & L: What are your forecasts regarding the ongoing sanctions wars. Do we have a strong side in this confrontation?

Mikhail Delyagin: In fact, I do not really understand the meaning of this term – sanction wars. 

Since 2008 all the countries followed an aggressive policy of protectionism, and the only country of the G20, which did not participate in these processes, was Russia. The beginning of sanction wars, in fact, eliminated this anomaly. 

The policy of sanctions and counter-sanctions is not an anomaly: it is the most objective reality.

In conditions of growing protectionism introducing sanctions seem quite logical: any process is not always linear, but also occasionally abrupt. In the current situation we witnessed a sudden spike in protectionism – no more.

Much worse is the fact that Russia is now the losing side, because we are not too actively involved in sanction wars, because instead of hammering exclusively the fingers of our colleagues, we also hammered our own fingers. In fact, we punished not only and not so much our Western opponents, but many Russian businessmen who paid for the goods, but did not make it in time through the customs. The special geographical conditions in Kaliningrad and Crimea were forgotten, and most importantly, the issue of over-monopolization of the Russian economy was completely ignored, which responds with explosive rise in prices to all external stressors, as happened in the present situation. 

As for the Russian counter-sanctions, they were not enough: if the government banned the import of cars and wine for a year, the sanctions by the European countries would have been abolished long ago.

R & L: What is your vision of the roles of government and business in an effort to exit the recession?

Mikhail Delyagin: State – is the brain and hands of society, it must establish the rules of the game, determine the goals and strategy to achieve them, as well as maintain the old part of the infrastructure. Its new part – IT infrastructure – is created by a partnership of business and society, and the old is entirely dependent on the state. In fairness, I note that the failure of the state in this area is typical for almost all the countries of the world. The problem is that previously it used to be the main subject of development, and in the past twenty years these functions have been assumed by the global business that is irresponsible by definition. In this situation, the state must recapture its lines of authority from global business, otherwise the economy could face monstrous catastrophes due to fundamental irresponsibility of control systems. 

With regard to the role of business in an effort to overcome the crisis, you should not entertain any illusions: business is a mechanism for generating profit and not for solving social problems.

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