The world is watching the events in Crimea unfold with great trepidation. Russian forces are poised to take the region, potentially by force, from the Ukrainian government. Russia insists it only has the interests of the majority Russian population of Crimea in mind and will not use military force – despite the Russian Government approving its use. However governments around the world are less than reassured by the Kremlin’s protestations of peaceful intent.
Events in Crimea and the Ukraine have moved fast. The consequences of any military action by Russia will send huge waves crashing across the political and diplomatic landscape of Europe and the wider world. British Foreign Secretary William Hague said this had the potential to be the biggest crisis to face Europe in the 21st century so far.
So if Russia does step up from sabre-rattling to sabre-wielding what are the likely consequences for the business environment and, by extension, into the mobile device market?
Should Russia unleash military action on Ukraine there will likely be a swiftly implemented series of political, diplomatic and economic sanctions. It is the economic ones that would have the most impact on business near term. Actions, reactions and their consequences could include:
- Freezing assets and applying sanctions against Russian firms. Russian operator Megafon trades on the London Stock Exchange as well as on the Russian MICEX. Its stock price was down 14% on 3rd March indicating the level of concern over the crisis in Crimea. Operator MTS was down a similar amount.
- More broadly Russian companies involved in financial services, energy, chemicals and property could all be adversely impacted, potentially causing an economic slowdown in Russia, which in turn could lead to reduced demand for mobile devices. Nearly $60 billion has been wiped off Russian company valuations in the last two days of trading. The stock market is clearly expecting trouble for Russian companies. It is worth noting that the Russian handset market was already forecast to be marginally down year on year in 2014. This conflict will exacerbate the market’s inherent weakness. We will be tracking the impact of the crisis and may adjust down our forecast for Russia still further.
- Russia is one of the world’s largest suppliers of oil and natural gas. It is also a supplier of chemicals for industry. Any sustained disruption to fuel supplies from Russia, or even the threat of it, will cause commodity prices to spike upward. The price of crude oil rose to the highest level in 6 months on 3rd March. The consequence will be to increase the cost of business for players in the mobile device supply chain. It will also drive up costs for consumers. With fuel for heating and cooking accounting for as much as 30% of disposable income for the poorest segments in society, these people will be forced to curtail spending on other goods including mobile services and devices. This is an impact we saw in the aftermath of the financial crisis in 2008/9. The result will be reduced demand for ultra-low cost handsets and even some of the low cost smartphones.
- Preventing companies from doing business in Russia. Russia imports all mobile devices sold in the country from overseas suppliers. If sanctions are applied broadly that hinder this supply line, companies with significant market positions in Russia will be adversely affected. Russia has a more diverse competitive landscape than some markets, nevertheless Samsung, Apple and Nokia would bear the brunt of any sanctions that restrict their ability to supply into the Russian market.
- Political and economic turmoil: Ukraine has undergone a revolution in the last 2 weeks – President Viktor Yanukovych was dismissed in the last week of February. A prime minister has been appointed in Crimea in a direct snub to the interim Ukrainian government. Any escalation in the standoff with Russia could plunge Ukraine into an extended period of turmoil. This would likely have a negative impact on the mobile market in Ukraine – although this is not a given; natural and man-made disasters often have a short-term negative impact but are long-term neutral to slightly positive relative to the mobile device market.
- Currency fluctuations: The Russian Ruble is down 10% against the dollar year to date. The Russian central bank has spent billions propping up the currency, but it remains at risk of further declines. Most handsets are likely traded in dollars but the final sale to consumers is typically in Rubles. Extended periods of weak Ruble can lead to the consumer price increasing. Mobile device purchases are price elastic so demand will decline if prices go up, or consumers will switch to cheaper models. Either way the net impact is negative.
Bottom-line: we hope fervently that the situation is dealt with diplomatically and peacefully and that any impact to the general population is minimal. However conflicts like this often lead to extended periods of destabilization in a country or region. Companies active in the region will likely already be taking contingency actions. However all companies should be thinking of the potential broader ramifications of this deeply concerning series of events. Although the conflict will be fiercest in Crimea, Ukraine and Russia – the impacts will be felt far from the conflict’s epicenter.