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Russia Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 50 pages

Core Views

The outlook for domestic demand in Russia is grim in 2014, as tensions between Russia and the West over Ukraine in Q114 weigh on businesses’ and consumers’ confidence. Following a modest rebound in 2015 in growth, driven by subsiding geopolitical tensions, we reiterate our expectation for a moderate deceleration in private consumption growth and subdued pace of fixed investment growth over the next few years. Although inflation spiked to 7.3% y-o-y in April, up from 6.1% y-o-y in January, we reiterate our view that inflation will subside by yearend. Subsiding inflationary pressures will allow the Central Bank of Russia to cut the main policy rate from 7.50% to 7.25% by end-2014.
While the rouble might continue to pare its post-March 3 losses in the short term, we reiterate our long-term bearish outlook for the rouble. We forecast the currency to trade within a long-term depreciatory trend, and to average RUB35.20/USD in 2014 and RUB35.60/USD in 2015. The main drivers underpinning our view are the deteriorating outlook for Russia’s current account surplus, subdued demand for Russian real and financial assets and the planned transition of the Central Bank of Russia (CBR)’s exchange rate policy towards free float by 2015.

Major Forecast Changes

We have revised down our forecast for real GDP – to 1.0% in 2014, from 1.9% previously, and to 1.5% for 2015 from 2.1% previously on account of the worsening outlook for domestic demand in 2014 due to the Ukraine crisis. We expect fixed investment in Russia to contract in 2014 – by 1.5%, whereas previously we expected modest growth of 0.5%, as geopolitical tensions between Russia and the West over Ukraine in Q114 shattered Russia’s image in the investors’ eye.

We expect Russia’s current account surplus to moderately expand in 2014 on the back of the worsening outlook for imports on the back of the weaker outlook for domestic demand – to 1.8% for 2014, up from 1.6% in 2013, whereas previously we expected a modest expansion. Nevertheless, from 2015 onwards, the current account
will resume its narrowing trajectory, and reverse into deficit by 2017, driven by the deteriorating outlook for hydrocarbon exports, which are poised for structural deceleration both in volumes and prices.

Table Of Contents

Russia Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Major Forecast Changes ..5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics . 8
US Trade Sanctions Unlikely Without Invasion .8
The US will refrain from trade sanctions on Russia, unless the latter invades Eastern Ukraine. We think an invasion is still unlikely, as
the military, political, and economic costs to Russia would be too high.
Table: Politic al Over view .8
Foreign Policy 9
Russia And The West: Multi-Year Cool Period Ahead ..9
Russia's intervention in Ukraine will usher in a much cooler period in relations with the West for several years. A major improvement in
relations is unlikely until President Putin leaves office, and even then, military and security-related obstacles will prevail over diplomatic
opportunities.
Long-Term Political Outlook .. 13
Political Competition To Increase Over The Next Decade ..13
Russia's main political challenges over the coming decade will be implementing institutional and economic reform, managing the
country's demographic decline, containing the Islamist insurgency in the North Caucasus, and limiting the fall-out from a deterioration in
relations with the West.
Chapter 2: Economic Outlook . 17
SWOT Analysis 17
BMI Economic Risk Ratings 17
Economic Activity . 18
Ukraine Crisis Darkening Russia's Growth Outlook 18
The outlook for domestic demand in Russia is grim in 2014, as tensions between Russia and the West over Ukraine in Q114 weigh on
businesses' and consumers' confidence.
table: Economic Activity 18
Fiscal Policy .. 20
Questionable Long-Term Fiscal Sustainability ..20
Russia's low public debt and deficit levels mean no threats to the government's financing needs over the next two years. However, the
state's sizeable footprint in the economy will continue to underpin elevated spending, which along with accumulated contingent liabilities
and running down savings funds raise questions over Russia's long-term fiscal sustainability.
table: Fiscal policy ..20
Monetary Policy .. 21
Monetary Easing By End-2014 ..21
Following a spike in inflation in Q114 driven by sharp rouble depreciation, we forecast inflation to abate in H214. Subsiding inflationary
pressures will allow the Central Bank of Russia to cut the main policy rate from 7.50% to 7.25% by end-2014.
table: Monetary Policy 22
Balance Of Payments .. 23
Current Account Expansion In 2014 To Be Short-Lived 23
While we expect Russia's current account surplus to moderately expand in 2014 on the back of the worsening outlook for imports, we
maintain that it is poised to turn into deficit by 2017. Russia's ability to avoid a balance of payments crisis will depend crucially on its
ability to ramp up net financial inflows, which remains uncertain given its history of scant levels of foreign direct investment and high
private capital outflows.
table: Current Account ..23
Currency Forecast . 25
RUB: Tactically Bullish, Strategically Bearish 25
TABLE: BMI CURRENCY FORECAST ..25
Chapter 3: 10-Year Forecast . 27
The Russian Economy To 2023 27
Major Long-Term Growth Challenges ..27
We forecast Russian growth to slow markedly over our 10-year forecast horizon, with average real GDP growth of just 2.7% between
2016 and 2023. During this period the economy will shift increasingly towards domestic demand, with private consumption to account
for 57.1% of total GDP in 2023, up from 49% in 2012. While we expect Russia to converge towards developed standards of wealth,
structural risks including a weak business environment, poor institutional capacity and declining population pose major challenges to
long-term growth.
tABLE: Long-Term Macroeconomic Forecasts .27
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings .. 29
Business Environment Outlook 30
Institutions . 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 30
TABLE: BMI LEGAL FRAMEWORK RATING .31
TABLE: LA BOUR FORCE QUAL ITY ..32
TABLE: EMERGING EUROPE - ANNUAL FDI INFLO WS ..33
Infrastructure 34
TABLE: TRADE AND INVESTMENT RATINGS 34
Market Orientation . 35
TABLE: Top Export Destinations .36
Market Orientation . 37
Chapter 5: Key Sectors 39
Defence 39
TABLE: Defence Expenditure 39
Freight Transport 42
TABLE: Rail Freight .45
TABLE: Road Freight ..45
TABLE: Inland Waterw ay Freight .45
TABLE: Air Freight 46
TABLE: Maritime Freight .46
Other Key Sectors . 47
table: Oil and Gas Sector Key Indicators .47
table: Telecoms Sector Key Indicators .47
table: Infrastructure Sector Key Indicators 47
table: Food and Drink Sector Key Indicators ..48
table: Pharm a Sect or Key Indic ators ..48
table: Autos Sector Key Indicators ..48
Chapter 6: BMI Global Assumptions .. 49
Global Outlook . 49
Growth Increasingly Polarised ..49
Table: Global Assumptions ..49
Table: Developed States , Real GDP Growt H, % 50
Table: BMI VERSUS BLOO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, % .. 50
Table: Emerging Markets , Real GDP Growth , % ..51

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