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.
Russia Country Risk
The ruling United Russia party will retain its parliamentary majority in legislative elections on September 18, benefiting from President Vladimir Putin's high approval ratings, patriotic fervour, and a weakened opposition. This will override dissatisfaction with poor economic conditions in the near term. The main political risk for Putin remains a challenger from within his circle, although he remains the frontrunner ahead of presidential elections in March 2018.
Russia's economy is emerging from prolonged recession in H216 but we forecast growth in 2017 and 2018 to be relatively subdued when considering the scale of the downturn since 2014. Rising oil prices are acting as a short-term boost, but will reduce the urgency to implement badly needed structural reforms, thus maintaining the country's commodity dependence.
Russia Operational Risk Coverage (9)
Russia Operational Risk
Russia Operational Risk
BMI View: As one of the largest emerging markets globally, 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 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. Western sanctions imposed against Russian economic targets in response to the Ukraine crisis have disrupted trade flows, restricted access to financing and inhibited growth. Although business-friendly reforms are driving some improvements in...
Russia Crime & Security
Russia Crime & Security
BMI View: Russia's security environment has deteriorated as the government has pursued an increasingly assertive foreign policy agenda, which has resulted in involvement in conflicts in Ukraine and Syria. While these actions do not pose a direct threat to business interests in Russia, they have heightened the risk that the country will be dragged into a wider conflict or subject to retaliatory terrorist attacks. In addition, businesses face considerable risks from criminal gangs, which have exacerbated issues with corruption and other financial crimes. Cybercrime is another concern, as Russia is an active cyberpower and businesses may be targeted or suffer from collateral damage as part of cyberconflicts. These myriad risks have significantly raised security costs for companies in Russia, and undermined the appeal of the...
Russia Labour Market
Russia Labour Market
BMI View: Russia's labour market boasts a number of strengths which increase its appeal as a location for investment. Primarily, these stem from its large, well educated and highly urbanised labour force, as well as its competitive wage costs in relation to other European states. Businesses will continue to encounter challenges in the labour market, as labour costs are increased by mandatory social security contributions, and the shrinking labour force causes recruitment difficulties. Many companies will nonetheless be prepared to overcome these barriers in order to access the huge Russian market. Overall, Russia scores 64.8 out of 100 in the BMI Labour Market Risk Index, placing it in a competitive third position in the Emerging Europe region out of 31 countries.
|Strong Education Base Offsets High Labour Costs|
|Russia And Regional Average - Labour Market Risk...|
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...
Russia Trade & Investment
Russia Trade & Investment
BMI View: As one of the largest emerging markets globally, 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. Western sanctions imposed against Russian economic targets in response to the Ukraine crisis have disrupted trade flows, restricted access to financing and inhibited growth. Although business-friendly reforms are driving some improvements in the operating environment, Russia will...
Russia Industry Coverage (22)
BMI View: Russia's poultry and pork sectors will perform strongly as consumer demand is growing and domestic production is looking to bridge the gap left by EU imports, which will not resume until the end of 2017. Wheat will outperform the grains complex out to 2020 due to elevated farmgate prices in rouble terms and strong opportunities on the domestic and export markets, which will maintain production incentives. The Russian dairy sector will benefit from growth momentum until 2018 ...
BMI View: Declining real wages coupled with high inflation will drag on passenger vehicle sales as consumer purchasing power is eroded. Although we maintain a broadly negative outlook for the domestic vehicle industry to 2020 as it remains below its previous peak level, total vehicle sales will return to positive growth in 2017 and continue growing to 2020.
|Passenger Car and Light Commercial Vehicle Sales|
|e/f = BMI estimate/forecast. Source: AEB, BMI|
Russia Commercial Banking
|Date||Total assets||Client loans||Bond portfolio||Other||Liabilities and capital||Capital||Client deposits...|
Russia Consumer Electronics
BMI View: Russia's consumer electronics market moved into negative territory in 2014 and then there was a sharp contraction in spending in 2015 as an intensification of economic crisis hit sentiment and resulted in steep rouble depreciation against the US dollar. The squeeze on Russian consumer purchasing power is evident in the deterioration of the household income profile, which is only forecast to partially recover previous highs by 2020. This underpins our relatively weak outlook for device sales growth considering the extent of declines in 2015 and pent-up device upgrade/replacement spending. Our core scenario envisages a consumer electronics spending CAGR of 5.6% over 2016-2020, but there is substantial uncertainty where a faster and sustained rise in oil prices offers upside, yet this should be balanced against...
Defence & Security
Russia Defence & Security
BMI View: Russian defence spending will increase by 2% in 2016 amid declining international oil prices. New procurement will be driven by the need to control the country's borders, the fight against internal terrorism, the ongoing involvement in Ukraine and the Syrian civil war, and the need to modernise the armed forces. Moscow also continues to see the expansion of the EU and NATO close to its Western borders as a...
Food & Drink
Russia Food & Drink
BMI View: Key economic indicators showed little signs of improvement in August 2015. Households will continue to struggle in coming months, while business investment will not pick up until interest rates and demand conditions improve. While Russia's food, drink and mass grocery retail sectors have undoubted potential in the longer term, headwinds will undermine any short-term opportunities.
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%.
Russia Freight Transport
BMI View: The difficulties Russia is facing in modernizing its transport system will impact the dynamics in the freight market over our forecast period until 2020. Both road and rail infrastructure need substantial investment to realize its transit potential, however the tight fiscal situation in Russia and Western sanctions will limit the Russian government's capacity to fund infrastructure projects. Sanctions prohibit the European Bank for Reconstruction and Development to lend money to Russia and thereby hindering Russia's capability to finance infrastructure projects.
Persistently low oil prices, weak investment growth and declining real incomes will prevent a swift recovery in the Russian economy in 2016. Russia will maintain a current account surplus in 2016 and 2017 as imports...
Russia Information Technology
BMI View: In contrast to Russian IT spending, which declined sharply in 2015 as the economic environment deteriorated, the local industry received some benefit from the decline in affordability for imports and the government's stand-off with the West through preferential treatment in some product categories. The overall impact was still negative due to the depth of the economic crisis and the extent of rouble depreciation, and we forecast a further contraction in 2016 and only modest recovery over the medium term with total IT spending expected to record a CAGR of 7.1% over 2016-2020 to a value of RUB1.2trn. There is however significant uncertainty surrounding the outlook, with political risks a source of downside, but a faster than expected recovery in oil prices could accelerate economic recovery...
BMI View : Russia's poor macroeconomic fundamentals, including a weak rouble exacerbated by international sanctions and a fiscal deficit driven by lower oil revenue, underpin our bearish outlook for the country's construction sector. Russia's residential and non-residential construction sector will be the primary victim of Russia's economic weakness and emerge as the clear underperformer, while the growth prospects for Russia's infrastructure sector are comparatively brighter on the back of a raft of high-value pipeline and transport projects.
Latest Updates And Structural Trends
International sanctions, which were renewed by the EU in June for a period of six months, continue to weigh...
BMI View: In the short term, Russia's insurance industry faces significant challenges from the weak domestic economy and currency movements, which means we expect to see sharp double-digit contractions in both life and non-life gross premiums written in 2015. While we do expect to see a return to growth in 2016, this is predicated upon a return to more positive economic territory - any further escalation in regional tensions or more extensive sanctions could derail this growth potential. Underneath these challenges, Russia's long-term growth potential is substantial...
Russia Medical Devices
BMI Industry View: We expect the Russian medical device market to contract by a 2009-2014 CAGR of 3.4% in US dollar terms, due to the continued depreciation of the Russian rouble over the forecast period. The financial sanctions imposed by the West due to Russia's involvement in the Ukraine crisis, together with the weakened currency caused by falling oil prices and high inflation, which is reducing consumer purchasing power, are having a negative impact on...
BMI View: Russia's gold and coal production growth will be the sector's relative bright spots, while PGM's and iron ore output growth will grind to a halt. Low metal prices, the country's inadequate infrastructure and Western sanctions will continue to limit the sector's production growth.
Oil & Gas
Russia Oil & Gas
BMI View: Oil production continues to outperform as a weak rouble allows for maintained capex and lower operating costs. Gas production has been steady though exports, particularly to Europe, are up 14% over H116.
BMI View: Forthcoming investment projects focusing on import substitution should address the supply/demand imbalance and move Russia to self-sufficiency; in some segments Russia will become a net exporter. With domestic market growth slower than capacity growth coupled with a weak rouble and low feedstock costs, Russia is likely to lead to far higher levels of exports than previously expected.
The Russian petrochemicals industry is outperforming the overall economy with capacity utilisation rising amid economic conditions that are favourable to the sector. In the January-April period, polypropylene (PP) production grew 7.0% y-o-y and polyethylene terephthalate (PET) output rose 4.6%. Production was boosted by an increase in capacity, stronger domestic demand and a weak rouble that protected the economy from imports. This follows a stronger performance in 2015 when basic chemicals output rose 6....
Pharmaceuticals & Healthcare
Russia Pharmaceuticals & Healthcare
BMI View: Russia's healthcare market is in a precarious position due to a severe lack of funding and an escalating burden of disease. The country's economic recession will see further pressure placed on the population for provision of care. Amendments to Russia's pharmaceutical legislation will, however, favour domestically-produced medicines over foreign drugmakers and multinational drugmakers will be pressured to establish a domestic manufacturing presence to comply with related new regulations. Nonetheless, given its sheer market size and unmet potential, the country will remain attractive for investment by multinational pharmaceutical firms for long-term growth.
BMI View: A weak economic outlook, a weakened rouble and tight credit conditions in Russia will continue to halt utility investments in new domestic power capacity. In addition, a sustained period of contraction in the manufacturing sector will curb growth in electricity consumption. Diversifying energy export markets away from the West will see opportunites opening up towards China and Saudi Arabia, among others.
Russia Real Estate
BMI View: Rental rates and occupancy levels are both expected fall over the course of 2016, following a poor performance in 2015. We expect demand from foreign players to remain low and barriers to entry to remain high. The main catalysts for the downward trend across most of the real estate market are the weak economy and trade sanctions. Weak GDP figures and falling income levels are restricting consumer spending, and reducing the attractiveness of the Russian market to new players. We do not forecast a major turn-around over the course of our forecast period to 2020.
We expect only a modest recovery in GDP in 2016 as consumers remain under pressure, from both the sharp depreciation in the rouble and elevated inflation. Declining fiscal revenues mean the government will struggle to prop up the economy and we do not expect government consumption to be a significant driver of growth. We...
BMI View: High financing costs, currency volatility and continuing local content requirements (LCR) mean that growth in Russia's non-hydropower renewables segment will be limited over our 10-year forecast period. While the December 2015 tender provided another 365MW of projects, we expect these ongoing economic issues to result in the sector attracting limited investment, as investors will look elsewhere to grow their businesses, and likely project delays. The 2015 easing of wind project LCR still needs to show its positive effects on the market.
Considering the adverse impact of sanctions on the availability of international funding, coupled with mounting pressures on the government to cut costs as foreign exchange reserves are tapped to cover fiscal deficits, an expensive renewables segment will face a tough environment in the Russian market....
BMI View: Low oil prices will keep the economy in recession in 2016, while elevated inflation, currency weakness and government budget cuts will further erode household spending power. We forecast another difficult year for the retailers, with the total industry value contracting by double-digit figures for the second year in a row.
|Headline Household Spending|
|e/f = BMI estimate/forecast. Source: Rosstat, BMI|
Key Views And Developments
BMI View: The Russian mobile market rebounded in the last six months prior to September 2015, following declines relating to MTS cleaning-up its base off inactive users, and the tie-up between Tele2 and Rostelecom. With a penetration rate of 173.8%, we still think inactivity is an issue, as many users seem to have added a new SIM card while moving to 3/4G. The success of data services has been positive for operators, but this has come at great costs, with the overall economic environment at home and abroad leading some to consider tower outsourcing to reduce costs and focus more specifically on services.
The Russian mobile market has rebounded in Q2 and Q315, finishing September 2015 with 249.3mn subscribers and a penetration rate of 173.8%
For the first time in Q315, Rostelecom had more fibre...
BMI View: We expect the weaker rouble to bring back an increase in the number of tourism arrivals to Russia in 2016. Europe will remain the main market, owing to proximity, but the Asia Pacific will also rise as a regional source market as a result of increasing relations between Russia and China. The weak economy, however, will hamper these positive developments from having significant repercussions on the development of infrastructure (still hindered by issues related to EU economic sanctions) and international tourism receipts, the value of which will continue to fall due to economic circumstances. We expect the 2018 World Cup to provide new opportunities, however, for Chinese businessmen wishing to invest in Russia, unhindered by visa issues or economic sanctions.
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...