How do sanctions against Russia affect the construction industry?

As a new wave of sanctions against Russia comes into effect, many people are asking how regulations will impact the construction industry.

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JCB chairman Lord Bramford recently went on record saying EU sanctions against Russia would hurt UK jobs. Back in March, Caterpillar Inc., with over 1000 employees in Russia, asked the U.S. congress for a “multilateral and not unilateral” approach to sanctions. But how much of that is rhetoric? How worried should we really be?

Not yet clear

There have so far been three rounds of sanctions against Russia; a fourth may come into effect in the coming, depending on the results of current resolution talks. But up until now, trade and business sanctions against Russia have not directly affected export of construction equipment. Many manufacturers fear that sanctions will impact either operations in or export to Russia. JCB and Caterpillar bosses, for example, have sought to influence sanctions and mitigate possible risks to operations. This comes as Bank of America has just downgraded CAT stock from buy to neutral, siting a “slowdown in growth outside the U.S.”

U.S.-based Deere, JCB and Caterpillar Inc. all have factories inside Russia. Though, as sanctions currently stand, construction equipment is not banned for export to or sales in Russia. This may change in the coming days, depending on what 4^th-round sanctions hold and whether the situation in the Ukraine deteriorates further.

Chicago Business journalist Joe Cahill probably sums this up best when he says, “I can’t blame [these companies] for hoping the whole thing will blow over. But at some point, they’ll have to recalibrate their expectations for Russia.” The bottom line is this: it’s just too soon to tell if there will be an export ban for construction equipment or how greatly it would impact financial outlook for the heavy equipment industry.

Big projects = big need

Russia is one of the largest construction markets and is on everyone’s hot list for heavy equipment sales. Despite sanctions and the Ukraine crisis at large, Russia continues with major construction projects (e.x. world cup preparations or the Chinese-Russian gas pipeline). IHS Global Insights notes that Russia accounts for half of all construction in Eastern Europe, but also points out the unattractive investment environment created by the Ukraine crisis.

Notwithstanding a robust construction sector, Russian equipment companies lack the ability to keep up with demand, or to manufacture modern equipment in general. Sandy Guthrie of Construction Europe magazine says, “construction equipment has declined in Russia since 2000” and that “limited productivity and high running costs have stunted the competitiveness of Russian machinery.” Since 2000, construction companies in Russia have seen significant reduction in stock of: scrappers (down 83%); wheeled cranes (down 66%); crawler cranes, mobile cranes and tower cranes (down 50%); and single-bucket excavators (down 50%). Guthrie attributes this to retiring of old machines and failure to replace with modern machines.

This just goes to show how complicated the situation is in Russia. Yes, a ban on construction equipment export to Russia will impact sellers of both new and used heavy equipment. Yet, a real demand for construction machines and poor local manufacturing make the Russian market important for North American and European equipment sellers. That means a reason to be cautiously optimistic for rebound opportunity if the worst-case scenario—a worsening crisis and ban on exports—comes to pass.