Russia is by far the largest country in Emerging Europe. Its economy has become increasingly dependent on hydrocarbons exports in recent years, leaving it vulnerable to shocks in the global economy. After a decade of political stability and economic prosperity in the 2000s, Russia is entering a more turbulent period that could distract policymakers from tackling the country's immense structural challenges.

At BMI, we ensure our clients make sound business decisions in Russia, using our risk-assessed total analysis model. Our research teams keep our clients informed of the latest market moves and political developments as part of our 'top-down' and 'bottom-up' perspective. Our expert views are supported by our interactive data and forecasting. We also provide in-depth analysis on 24 of Russia’s most important industries. Our analysts will make sure you, as our client, are always ahead of the curve in Russia.

Country Risk

Russia Country Risk

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Core Views

  • President Vladimir Putin's popularity remains near record highs. We expect this to suffer moderate declines as the reality of economic hardship beings to be realised by the general public. Despite the deterioration in economic conditions and high inflation we do not expect any mass uprising in response to the deteriorating economy.

  • Prolonged lower oil prices during 2015 will have a negative impact on economic activity. High inflation will negatively affect consumer's purchasing power resulting in a reduction in private consumption.

  • This reduction in private consumption is reflected in our balance of payments forecast. Though we expect exports to decrease, due to a significant fall in imports we expect to see a current account expansion during 2015.

  • Monetary policy will remain...

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Russia Operational Risk Coverage (9)

Russia Operational Risk

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BMI View: A downturn in its economy and increasingly frosty relationship with the West will be the key risks that damage Russia's attractiveness to investors and severely impact the country's crime and security and trade and investment scores in the BMI Operational Risk Index. The annexation of Crimea and the accusation by Western states of Russia's involvement in ongoing hostility in the East of Ukraine has led to sanctions, the effect of which are not only impacting the country's growth outlook (with real GDP set to decline by 5.2% in 2015) but hitting every aspect of Russia's operational risk and leading to a just above global average score of 53.7 out of 100, placing it 17 thout of 31 Emerging Europe states.

The greatest risk...

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Russia Crime & Security

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BMI View: A deteriorating interstate environment, the ongoing risk of terrorism and high crime levels lead to Russia's lowest score in the BMI Operational Risk Index of 35.2 out of 100. The country's Crime and Security Risk score isn't just well below the global average, but it also places Russia in a very uncompetitive position regionally. The score of 35.2 ranks the country 23 out of 31 Emerging Europe states, placing it between Armenia and Bosnia.

Petty crime, such pick pocketing, robbery and ATM fraud and the most likely crimes to be experienced by expatriates, business travellers and tourists. The reporting of these crimes can be time consuming, as there are high levels of bureaucracy and the police force is considered corrupt. Violent crime, while well publicised due to the high profile murders of politicians and business people is unlikely to impact day to day business operations. Crime...

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Russia Labour Market

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BMI View: Russia's very large and highly skilled urban labour force is a significant incentive for investors from a range of different sectors. The country's good educational standards and strong enrolment rates from pre-primary through to tertiary level ensure that investors can expect a high level of literacy and numeracy across the country. That said, health risks are high in Russia, raising the possibility of lengthy absenteeism and incurring significant costs for employers. For these reasons, the country scores 63.0 out of 100 for Labour Market risks, putting it in third place...

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Russia Logistics

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BMI View : Russia's logistics sector is well developed and caters for the needs of the country. Its focus on commodities has gradually shifted toward also catering for the logistics demands of the country's growing consumer base. This sector is not, however, without its risks, the most pertinent being the drop in infrastructure investment due to the downturn in the Russian economy. This investment is much needed to ensure the modernisation of Russia's utilities and transport network and protect against the growing threat to investors from shortages and congestion. Russia scores above the global average in the...

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Russia Trade & Investment

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BMI View: As one of the world's major emerging markets, investment opportunities in Russia are potentially lucrative, but we caution that the trade and investment climate remains fraught with risk. The government continues to impose restrictions on trade flows and limits on foreign direct investment (FDI) in certain sectors, while state-owned institutions are prevalent in all areas of the economy. Corruption is also rampant and the judiciary is weak and subject to political interference, which undermines trust in the legal system. Furthermore, the overall tax burden is considerable and some bureaucratic procedures remain plagued by delays. The ongoing Ukraine crisis has also resulted in heightened risks, as Western sanctions against Russian economic targets have disrupted trade flows, restricted access to financing and inhibited growth. Although business-friendly reforms are driving some improvements in the...

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Russia Industry Coverage (24)

Agribusiness

Russia Agribusiness

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BMI View: Growth in the Russian agricultural sector will remain weaker over the next few years relative to previous years as a result of the poor economic situation. A poorer fiscal outlook will subsequently reduce government support to key areas of the agricultural sector, namely the dairy industry and in subsidies for crop producers. That said, the country's ban on agricultural imports from certain countries will provide a boon to production over the coming months, as domestic producers take advantage of the lack of competitive imports. Grain production will decline considerably year-on-year in 2015/16 due to much lower yields owing to a large rise in agricultural input costs.

Agribusiness Market Value
BMI Market Value By...

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Autos

Russia Autos

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BMI has become even more negative on the near-term outlook for the Russian autos sector over the past quarter. A worsening mix of falling consumer confidence, currency fluctuations, growing unemployment and falling fixed investment will force down vehicle sales and production in 2015 and keep sales volumes weak through to the end of our five-year forecast period in 2019. We are now targeting a 29.1% fall in sales and an 18.9% fall in production in 2015.

Looking forward, BMI believes that Russia's automotive industry will experience a sharper sales slowdown in 2015 than the 10.3% slump in vehicle sales seen in 2014. The government's announced efforts to buoy the market - such as the extension of the car scrappage scheme and subsidised auto loans scheme - will fail to address the key problems in the industry. The most pressing of these problems being: (a) rising vehicle prices, (b...

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Commercial Banking

Russia Commercial Banking

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Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Consumer Electronics

Russia Consumer Electronics

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BMI View: We downgraded the outlook for 2015 in the Q3 2015 update due to our in-house Country Risk team's weaker economic outlook for Russia, particularly the rouble - which we now forecast will weaken from an average of RUB38.6/USD in 2014 to an average of RUB58/USD in 2015. This will erode Russian purchasing power in global markets, hitting demand for consumer electronics devices, but we expect a recovery to begin in 2016 with rouble stabilisation, before an acceleration in growth in 2017. One trend that we expect to be accelerated by sanctions and heightened price sensitivity is the share of sales captured by local low cost vendors such as Yota Devices , ...

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Defence & Security

Russia Defence & Security

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BMI View:  Despite the dissolution of the Soviet Union and the Warsaw Pact over two decades ago, Russia remains an important international actor both in the Eurasian region and in the world at large. The country retains some of the world's biggest armed forces and has its largest nuclear arsenal. 

Russia has exploited rising hydrocarbon prices to perform a long-overdue modernisation of its armed forces. That said, the ability of Russia to continue on its path of military modernisation was cast into doubt in early October 2014 when Putin's finance minister Anton Siluanov cast doubt on whether the country's finances could afford to honour the modernisation pledges made to the country's military. This is not the first occasion that there have been disagreements in Putin's cabinet over military spending levels, with Alexei Kudrin, Siluanov's predecessor resigning in 2011 over...

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Food & Drink

Russia Food & Drink

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BMI View: On the back of the increasingly poor outlook for consumers and high frequency data we now expect that private consumption will register an 8.5% contraction during 2015 and expand by 0.3% in 2016. Domestic demand will be negatively affected by deteriorating consumer confidence, increased debt servicing costs, rising unemployment and declines in real wages.

Headline Industry Data

  • 2015 per capita food consumption (local currency) = +7.7%; forecast compound annual growth rate (CAGR), 2014 to 2019 = +7.4%.

  • 2015 beer volume sales = -6.0%; forecast CAGR to 2019 = 0.4%.

  • 2015 mass grocery retail sales (local currency) = +16.2%; forecast CAGR to 2019 = +16.5%.

Key Company Trends

...

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Freight Transport

Russia Freight Transport

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BMI View: Over 2015, the freight sector will record contractions across the transport modes given the frail outlook for the economy. The outperforming freight mode in terms of year-on-year (y-o-y) tonnage growth is set to be the rail freight sector, which will record the smallest contraction of 1.2% for the year. The other modes will record more significant declines, with road at -2.5% and air freight volumes set to contract by 3.7% y-o-y. This is reflective of the wider economic picture, with real GDP forecast to contract by 5.2% in 2015 as private and public consumption losses weigh on demand for freight services.

Russia's Q1 2015 real GDP contracted by 2.2% year-on-year (y-o-y), marking a downward revision from the previous estimate for the quarter...

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Information Technology

Russia Information Technology

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BMI View: We downgraded our forecast for Russian IT market growth in the Q315 update to reflect the weaker economic outlook - with recession and sharp rouble depreciation forecast to result in local currency contraction, and a sharp fall in the IT market in US dollar terms. We expect growth to return in local currency terms from 2016, but accelerate from 2017 as the economic environment becomes more supportive. There is, however, downside risk to this scenario, with political factors having the potential to generate...

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Infrastructure

Russia Infrastructure

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BMI View: We have further downgraded our construction industry forecast for Russia in 2015 from -5.4% to -7.1% this quarter. This is on the back of a worse than expected industry contraction in 2014 and the increasing impact of international sanctions and falling oil prices on Russia's economy.

Key Trend And Developments

  • Developments have prompted our Country Risk team to revise down our GDP growth forecasts for Russia to a 5.2% contraction in 2015. Russia's annexation of Crimea and perceived belligerence towards Ukraine, in addition to falling oil prices, have triggered significant rouble volatility and massive private net capital outflows. The flight of capital, which could have otherwise been deployed to...

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Insurance

Russia Insurance

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BMI View: Russia boasts the largest insurance market in Central and Eastern Europe (CEE), both in terms of penetration as well as overall size; however, the sector is heavily lop-sided towards the non-life segment which is underpinned by the expansion of the compulsory medical expenses insurance (CMEI) market. That said, the life segment, driven by the expansion of home ownership by way of mandatory life policies for mortgagers, has been the clear outperformer in terms of premiums growth in recent years, a trend which we expect to continue.

Among the BRICS, Russia has the lowest insurance penetration of 2.6% of GDP. In comparison, South Africa is the most penetrated insurance market among the BRICS, at 14.6%. While this highlights the...

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Medical Devices

Russia Medical Devices

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BMI Industry View: We expect the Russian medical device market to contract by a CAGR of 2.9% over the 2013-2018 period. The financial sanctions imposed by the West due to Russia's involvement in the Ukraine crisis, as well as the weakened currency and high inflation are expected to cause a deep recession in 2015, which will adversely affect medical device market growth, as less money is made available for healthcare. Import restrictions introduced in February 2015 may also reduce demand.

Headline Industry Forecasts

  • In 2013, the Russian...

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Metals

Russia Metals

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BMI V iew: The Russian metals sector will post weak growth over the remainder of 2014 as the aluminium sector returns to modest growth after extensive cuts and weak prices plague the steel sector. Beyond 2015, growth will pick up as we see higher prices for aluminium and global demand growth for steel improves. Still, we expect companies' investment plans to focus on improving plant efficiency and reducing costs rather than building new plants or expanding production capacity. Despite only modest growth, Russia will remain one of the world's largest producers of base and industrial...

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Mining

Russia Mining

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BMI View: Russia's mining sector growth will remain solid over the coming years. Gold and coal production will outperform PGM's and iron ore output growth. However, production growth will be hindered due to global mineral price weakness and Western sanctions. Furthermore, the country's limited access of foreign mining investment into the sector will limit the sector's investment attractiveness.

We believe Russia's mining sector will experience solid, but not rapid growth over the coming years. Russia has significant growth potential due to its rich mineral deposits, including coal, iron ore, gold and platinum. Additionally, a...

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Oil & Gas

Russia Oil & Gas

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BMI View: Russian crude production has remained resilient in the face of low oil prices and sanctions over H115. Production of crude and condensate will fall from 2016 and drop below 10mn b/d in 2020. Russia will continue to focus investment on projects to support its diversification of exports away from Europe to China.

...
Headline Forecasts (Russia 2013-2019)
2013 2014e 2015f

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Petrochemicals

Russia Petrochemicals

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Negative risks are set to hit petrochemicals production in 2015 with end use markets such as the construction and automotive industries contracting sharply. BMI's latest Russia Petrochemicals Report warns that petrochemicals projects will be delayed and could be cancelled altogether as a result of the crisis, if it persists into next year. Already, producers are revising project timelines and capacities.

A number of projects have been pushed back due to the economic crisis affecting Russia. New polymer plants are planned, although no major expansion is planned in 2015. Some delays have been accompanied by revisions in planned capacities, often upward revisions. These plans could be revised further, depending on the depth and longevity of the country's economic recession. In turn, this will be affected by political events, notably the Ukraine crisis which has prompted EU and US sanctions against Russia...

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Pharmaceuticals & Healthcare

Russia Pharmaceuticals & Healthcare

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BMI View: Multinational pharmaceutical companies will experience greater challenges over the coming year as Russia's grim economic outlook will have a significant impact on consumer demand for pharmaceuticals. Furthermore, government measures, such as the introduction of further price controls, will hurt revenues of innovative and generic drugmakers. Russia will increasingly become a second-tier emerging market (EM) compared to its EM peers, such as China, due to the poor business and operating environment and the worsening growth prospects for multinationals.

Headline...

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Power

Russia Power

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BMI View : A severe economic contraction will destroy demand for electricity in Russia and weigh heavily on investment and profitability in the utilities sector in 2015. A combination of a weakened currency and rising inflation will suffocate consumer demand, while tight credit conditions in reaction to this inflationary pressure will restrict funding for projects in the power sector.

The outlook for domestic and foreign utilities operating in the Russian power market in 2015 is bleak and the operating environment will remain challenging. Our Country Risk team forecast the economy will contract by 5.2% in 2015 as a combination of a weakened...

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Real Estate

Russia Real Estate

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BMI View:  The considerable long-term potential of Russia commercial real estate sector is being undermined by the current economic and geopolitical headwinds facing the country. Falling foreign investment combined with an increasingly cautious private sector are leading rental costs to stagnate across the market, with limited supply providing an important buffer against   a contraction in rates.  

A slowing economy and export market are among the major challenges facing Russia's commercial real estate sector as we move into 2015. Over recent years, the market has enjoyed a sustained period of growth, driven by rising income levels and private spending and increased foreign demand an investment. Rental rates, particularly those in the retail and industrial segments, have risen to match those of Western...

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Renewables

Russia Renewables

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BMI View: We maintain our muted outlook for the Russian non-hydro renewables sector this quarter, due to a weakening rouble and international sanctions deterring investors from entering the market. Furthermore, stringent local content requirements coupled with macroeconomic instability will limit reinforces stagnating growth, as companies will look elsewhere to grow their businesses. We therefore forecast non-hydro renewables to make up only 0.5% of power generation by...

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Retail

Russia Retail

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BMI View: Western sanctions paired with low oil prices pushed the Russian economy into a recession. Real GDP is set to decline by 5.0% this year and inflation is expected to average 14.0%. We anticipate the consumption of non-food goods and services to drop drastically this year. Groceries retail will show resilience as the market's biggest players will continue developing massive expansion plans.

Contraction is the only certain outlook for the Russian economy in 2015. While we currently forecast the real GDP in rouble terms to shrink by 5.2%, the direction of the economy remains subject to the rouble's exchange rate, oil prices and Western sanctions. Rouble reached its record low against dollar in Q1 2015 and has managed to regain some of the...

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Shipping

Russia Shipping

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BMI View: Russia's two bellwethers, the port of St Petersburg, the country's main box facility, and the port of Novorossiysk, one of Russia's largest ports in terms of total throughout, will be hit hard as a result of the Russian economy's forecast sharp contraction in 2015, as we continue to forecast a decline of 5.2% for the country's economy during the year.

Although, despite the recent depreciation of rouble, we expect Russia's consumer story to remain attractive over the medium term, helping container throughput growth at the country's ports, prolonged lower oil prices during 2015 will have a negative impact on economic activity. High inflation will negatively affect consumer's purchasing power resulting in a reduction in private consumption.

The tonnage and container throughput at both ports are...

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Telecommunications

Russia Telecommunications

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BMI View: A key trend in the Russian mobile market has been consolidation. The merger of Tele2 and Rostelecom has been finalised, and BMI believes that there is further consolidation and rationalisation in the pipeline. Although market saturation reached nearly 170% in Q115, BMI believes that there is still scope for growth as some of these subscribers will be discounted as inactive SIM-cards get deactivated, but towards the end of our forecast growth will plateau. LTE services continue to offer opportunities for more value-add data products to add revenue as...

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Tourism

Russia Tourism

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BMI View: The geo-political and economic instability that has afflicted Russia over the past year and a half has also had a negative effect on the country's tourism market. Major decreases in inbound arrivals have punished the industry, and falling occupancy levels combined with increasing import costs have hit margins. Whilst things look to be stabilising somewhat, there will still need to be a great deal of work done before the country reaches its 2013 zenith.

Over the past few years investment from international hotel groups had been encouraging, particularly in the high-end luxury sectors in Moscow and St Petersburg, and almost all the international hotel players have plans to increase capacity in the medium to long term. The instability seen in the country is undoubtedly concerning these groups however, particularly given the decline of the ruble in comparison to the dollar, and a number of projects have...

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Water

Russia Water

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BMI View: Overall we believe the Russian water and sanitation sectors are showing steady improvement in the quality of the service offering; however, the high costs and limited revenues, in conjunction with poor infrastructure in many regions, will continue to render them an unappealing investment option.

Falling private investment, stubbornly high inflation and slowing economic growth support our overall bearish outlook for Russia's water infrastructure industry, in spite of much needed modernisation, replacements and expansions of existing facilities and networks - much of which is likely to be shelved given the current economic climate. However, one bright spot is the Russian focus on developments in Crimea; key among these are water infrastructure developments for supply, distribution and...

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