Industrial companies count the cost of doing business in Russia

Claas is not due to open a €120m extension of its farm machinery factory in Krasnodar, near Russia's Black Sea coast, until the autumn but already the family-owned company has been forced to book a €50m asset writedown.

The sharp economic downturn in Russia has hit demand for the German company's tractors and combine harvesters but chief executive Lothar Kriszun is convinced that the expansion will pay off due to a continuing need for the country to modernise. "Agriculture in Russia, with its huge acreage and good soils, has excellent future prospects," he says. 

Claas's decision to trade short-term pain for a long-term but uncertain gain will be familiar to an array of western carmakers, energy companies and engineering groups that flocked to Russia over the past decade. 

These companies now face a stark choice: invest and localise production further, cut operations in Russia back to the bone or get out of the country altogether. How they choose to respond will not only impact corporate earnings and balance sheets as companies start reporting their first-quarter results for 2015, but also dictate how quickly Russia's economy can get back on its feet. 

Foreign investors' prospects in Russia were upended in late 2013 when tensions with the US and the EU first flared with Moscow over its intervention in the Crimea and Ukraine. Western companies held back from making hasty decisions but almost 18 months later Russia is reeling from a combination of Ukraine-related sanctions, plunging oil prices and enormous currency volatility. Recession looms.

The latest economic data make grim reading. Second only to China as an exporter to Russia, Germany saw its shipments - primarily cars, chemicals and machinery - tumble 35 per cent in January compared with a year ago.

Russia's car market contracted by 10 per cent in 2014 and could plunge another 35 per cent this year, according to a forecast by PricewaterhouseCoopers, the accounting firm.

Although the rouble has rebounded strongly in recent weeks, Russia's economy is expected to shrink 3.8 per cent in 2015 according to the World Bank, and a further 0.3 per cent in 2016.

Opel, General Motors' European arm, became the biggest foreign investor casualty to date when it announced in March it would pull out of Russia at a cost of about $600m.

Opel once had huge hopes for the Russian market but its St Petersburg plant will now be mothballed and most of the 1,150 employees will lose their jobs.

"We came to the conclusion that the perspective for the Russian market was not only not good in the short term, but also not in the middle or long term either," chief executive Karl-Thomas Neumann told Handelsblatt last month.

Ferdinand Dudenhoffer, automotive expert at the University of Duisburg-Essen, says that "the longer conditions do not improve in Russia, the greater the likelihood that others will follow Opel's decision to leave".

Yet so far most foreign investors have dug in their heels. BASF, the German chemicals group, was forced to scrap a multibillion euro asset swap with Russian energy company Gazprom in December. But Kurt Bock, BASF chief executive, said last month: "We do feel comfortable; we don't see any reason to go back to the drawing board . . . Yes, it does makes sense to have assets in Russia."

Instead, foreign manufacturers are trying to ride out the storm by adopting what analysts dub a "hibernation strategy" involving a mix of cost-cutting, production stoppages and job cuts to tackle low capacity utilisation.

Renault-Nissan shut down production for three weeks in February. Together with its lossmaking local subsidiary Avtovaz, Renault-Nissan controls a third of the Russian car market.

Some analysts think Renault-Nissan might have to follow Claas's example by writing down its Avtovaz stake, which is valued at €508m.

"The car market halved in 2009, and you could argue that this period for the Russian economy is as bad or even worse," says Stuart Pearson, analyst at BNP Paribas.

Due to the weaker rouble, which makes imports more costly, European companies with plants in Russia are in theory well placed to ride out the downturn.

Siemens chief executive Joe Kaeser told Bild-am-Sonntag this month the company's business in Russia had declined by "around half", without specifying a timeframe.

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Still, such a strategy is only successful if western companies are able to source components in Russia too.

This month Ford announced it was taking control of its Russian joint venture and would provide additional funding, in part to help further localise component manufacturing.

Similarly, Volkswagen confirmed last month that following "intensive discussions" the German carmaker will open a €250m engine plant later this year adjacent to its existing factory in Kaluga, southwest of Moscow.

At Continental, the German car parts supplier, chief financial officer Wolfgang Schaefer said last month the company would increase tyre production at a plant in Kaluga this year and might eventually export to northern Europe to benefit from the favourable exchange rates.

Opel's decision to pull out of Russia currently places it in a very small minority of western companies. However, for those such as Claas that are making a bet that Russia will stabilise and prosper, it looks like they may have a long and costly wait.

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