Growth Strategies: How Corporations May Become Antifragile in Turbulent Times

On 7 November School of Finance of the Faculty of Economic Sciences of HSE University presented a multi-authored monograph Russian Corporations in New Economic Reality. Financial Strategies on the Way towards Antifragility written by a group of scholars and financial management practitioners and released by the HSE publishing house. The authors and business community representatives took part in the presentation and discussion of the research results.

Academic supervisor of HSE University Yaroslav Kuzminov emphasizes that new reality which emerged after February 2022 does not revert the domestic economy back to the planned system. The fundamental principles of the market, private ownership and sovereignty of economic decisions remain intact. HSE in its study of company management applied the model of inductive reconstruction of the state of things by conducting a polling of large corporations. Thus, it got an opportunity to study the qualitative characteristics of companies’ adaptation to new environment.  Yaroslav Kuzminov informed us that it was the first book in the planned series which comprises studies in the field of financial management and corporate governance, HR management, technological and IT strategies focused on Russia. “If together with the Russian Union of Industrialists and Entrepreneurs and large corporations we set going publications of generalizing research we will pave the way for a more profound insight into the economic capitalism institutions, and Russia will benefit from it along with other countries” – summed up the academic supervisor.

Irina Ivashkovskaya, editor in chief for the book and head of the School of Finance emphasized that polling of chief executives of large companies provided a personal perspective of people who solved intricate problems at the times of greatest turbulence. Based on a sample of 4,000 corporations the authors evaluated their resilience under sanctions, defined the patterns of sanction-related risks and strategic, operational and financial practices.

In her opinion, it was of importance to detect changes in the financial decisions cycle, the establishing of a new manner of corporate financing, to reveal the best practices of achieving antifragility by Russian business, to develop the roadmap for maintaining its sustainable growth. Irina Ivashkovskaya said: “We had to get a grasp on how those decision makers managed to build their roadmap”.

A co-author, associate professor of the School of Finance, the head of the Rating Service of the National Rating Agency Sergei Grishunin explained that the mechanism of formation of financial behavior patterns was defined on the basis of interviews with executives who answered questions about the impact of sanctions and market changes on financial resilience. In particular, it was found out that limitations did not affect retailers, pharmaceutical and construction companies and they had little effect on power generating and agroindustrial corporations which found themselves in a better position. The West imposed an embargo on the products of oil and refining companies, but they retargeted rapidly new markets. Automobile manufacturers, transportation and wood processing companies were at most disadvantage because they not just lost their conventional markets, but also faced difficulties in switching to other markets.

Sergei Grishunin stated that the authors studied financial resilience using the Altman’s Z-score which represents the ratio of working capital to assets, retained earnings and return on assets. According to the authors’ calculations, resilience of Russian companies after a decline of 2022 in 2023 achieved the indicators of 2021. Some companies (military-industrial complex and the ones engaged in the consumer market) reinforced their financial resilience, the construction sector recovered partially due to mortgage programs, electric power companies managed to conduct maintenance of the equipment made abroad. There was an insignificant decline in resilience of pharmaceutical and metallurgical companies, wood processing companies and automobile manufacturers got into the fragility zone. Sergei Grishunin elaborated that some companies managed to overcome sanctions due to sales growth in the domestic market.

Another co-author of the monograph, professor of the School of Finance Alexandre Abramov, emphasized that Russia stays among the countries with developing financial markets. Large corporations generate over 50% of GDP while the joint-stock legal structure makes them pursue higher performance. At the same time in the past 10 years capitalization of domestic companies stagnated for certain reasons (fluctuation of energy resource prices and withdrawal of a part of portfolio investors).

The recent events made business look for new growth models backed by domestic long-term savings and equity financing. One of the areas for development is expansion of the market of initial and secondary public offering. The authoring team’s research shows that since 2022 the share of IPO and cash-in transactions has grown. The market develops driven by domestic investors and government’s funds. Also, businessmen try to raise new capitals to bring them to the market. At the moment the market of stock offering and corporate bonds’ circulation rests upon large issuers and government property issuers.

For development of the stock market and equity capital market new issuers with high transparency and an increase in the number of medium-size companies are necessary.

“We expect growth of the Russian stock market, companies’ transfer from borrowed to corporate forms. Let us look for those who can do it” – was Yaroslav Kuzminov’s comment.

Irina Ivashkovskaya noted that against the background of a structural crisis in order to deal with the challenges of financial strategies aimed at achieving antifragility it is necessary to expand the analysis of corporate capital and resource base, as well as take into consideration unconventional types: human, client, organizational and natural capital.

Unconventional approaches are necessary to develop in the Russian business the corporate finance model which suits the drastically changed circumstances, including implementation of inclusive growth principles. This implies integration in financial management of new risk factors related to non-financial resources which are nonstandard for financial analytics, their active drawing into the orbit of risk management, modelling of scenarios and financial results of companies. The head of the School of Finance is sure that it is incumbent to identify the cohort of exemplary businesses which implement inclusive growth strategies, thus, laying the groundwork for an increase in the companies’ stock value even in turbulent times. She told us that the co-authors developed the inclusive growth metrics which comprise, in particular, the strategic resilience index and the resource potential index and tested them in a range of industries.

In future the research team of the project plans to analyze corporate classes, i.e. patterns, of Russian business against the criteria of resilience, antifragility as a set of financial practices and inclusive growth strategies which will be indicative of the contribution into the social capital. They will provide an opportunity to obtain government support by the companies which meet the standards for such capital.

Senior director of FBK Grigory Minaev noted that in the majority of countries, even with high key interest rates, the cost of share capital exceeds that of the debt capital. Therefore, shareholders have no other choice but to search for unconventional solutions, for example, IPO. In recent years individuals have become the main actors in the stock market. Against the background of difficulties with cross-border transfers they switch to investing within the country. This foundation has already been formed, making it possible to obtain good investment instruments. He provided an example: recently a herb cultivation company from a locality near Moscow, which capital amounts to RUB 250 mln., raised in the market RUB 100 mln. It would have no chance under previous circumstances.

“It is impossible to get a grasp on this market quickly but it is clear that we need different operating algorithms which result in qualitative changes of business, improvement of corporate culture and multiplicative effect” – said Grigory Minaev.

Another co-author, associate professor of the School of Finance, partner of Yakov and Partners, Ilya Ivaninskiy emphasized that Russia has something to be proud of because our payment system ranks among top 10 of the world systems. However, our banks should not get complacent as now in China 90% of payments are made bypassing banks by means of AliPay and similar systems. In his opinion, Russia’s experience may be of great value. He called the published book about financial strategies of achieving antifragility in new reality a manual for acting in the circumstances which may be the case for many emerging countries in the immediate future.

Natalya Loginova, director of the Issuer Relations Department at the Moscow Exchange, noted that in Russia the structure of financing resources is skewed towards banks while the capital market is underdeveloped, in particular, the proportion of share capital in Russian GDP is very low. In the USA it is the highest in the world. This motivates individuals to create investment assets, among other things, in order to get tax deductions. Available cash assets are also of importance. In Russia in order to get them the equity capital market is to fight off tough competition with financial institutions and instruments. In the short term it will be difficult because now an individual thinks that placing money on deposit is more gainful and safer than developing business and investing in it.

Natalya Loginova said that another important focus area in the stock market development is a decrease of the banks’ share in raising debt capital in order to provide a strengthening role of corporate bonds.

The vice-president of the Russian Union of Industrialists and Entrepreneurs Maria Glukhova said that the book is an important and interesting research which confirmed the data of snap polls conducted by the Union. She noted that equity capital of companies was the basis for their antifragility. Today business reduces expenditures in general but keeps expenses for personnel and training at the same level, it diminishes minimally investment and labour productivity improvement programs as well as attempts to raise funds in the market or from other companies on its own efforts.

In her opinion, it is important that in the composition of investment equity capital plays the key role while the proportion of the stock market does not exceed 10% despite the fact that at present 37% of companies are ready to attract funds to it for investment projects. Although just one third of companies are ready to issue their bonds, in comparison to 2022, things improved for the better.

She noted the fact that according to the research many companies tend to store large reserves of materials and equipment, thus, freezing funds and impeding improvement of labour productivity but ensuring antifragility in operations management. According to Maria Glukhova, this trend will continue.

Other participants of the book discussion: deputy chief financial and economics officer of PJSC Unipro Denis Alekseenkov, member of the board of executive directors of the fund Moscow Innovation Cluster Anatoli Valetov, head of the Finance and Credit Department of the Faculty of Economics in Lomonosov MSU Ilya Gurov and head of Investor Relations and Capital Markets, of PJSC Aeroflot Andrey Napolnov.

The book Russian Corporations in New Economic Reality. Financial Strategies on the Way towards Antifragility was written when implementing the strategic project Social Policy for Sustainable Development and Inclusive Economic Growth according to the program of the university development as a part of participation in the program of the Ministry of Science and Higher Education of the Russian Federation Priority 2030. The Priority 2030 program is accomplished under the national project Science and Universities. The editorial board of the book: Irina Ivashkovskaya (editor in chief), academic supervisor of HSE University Yaroslav Kuzminov, first financial vice-president of Public Joint-Stock Financial Corporation Sistema Rovshan Aliyev.