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Russia Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views
The fallout from the Ukraine crisis has worsened the domestic demand outlook in Russia, and we expect real GDP growth to slow to 0.6% y-o-y in 2014, from 1.3% in 2013. With the government taking steps towards fiscal consolidation, net exports will be the main driver of growth in 2014-2015. Although inflation spiked to 7.8% y-o-y in June, 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 8.00% to 7.75% in Q115.

Rouble weakness will benefit Russia's public finances in 2014-2015, ensuring Russia's budget deficit will remain modest over this time frame. In addition, the government has recently announced plans aimed at fiscal consolidation, which we believe are credible, further bolstering Russia's fiscal accounts outlook over this forecast period.

Major Forecast Changes
We have recently revised down our forecast for real GDP growth in Russia for 2014 and 2015 as the fallout from the Ukraine crisis has dampened the outlook for domestic demand to a greater degree than we had previously anticipated. We expect real GDP growth to slow to 0.6% y-o-y in 2014, from 1.3% in 2013. With the government taking steps towards fiscal consolidation, net exports will be the main driver of growth in 2014-2015.

Recent developments in Russia have prompted us to slightly modify our forecast for the monetary policy trajectory this year – whereas before we expected a 25 basis points (bps) cut to the Central Bank of Russia's benchmark interest rate by year-end, now this view is likely to materialise in Q115. The CBR governorship appears to be more
politically independent and inflation expectations more pronounced than we previously expected.

Table Of Contents

Russia Business Forecast Report Q4 2014
Executive Summary 5
Core Views...5
Major Forecast Changes.5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
SWOT Analysis 7
BMI Political Risk Ratings.. 7
Foreign Policy.. 8
Emerging Scenarios: Multi-Month Conflict Ahead....8
The Russia-Ukraine conflict will last for at least several more months, and will escalate in the near term, as neither side can afford to be
seen to back down. Overall, Kiev will eventually have to agree to some form of federalisation of Ukraine, in order to end the conflict.
Table: Political Overview8
Long-Term Political Outlook. 11
Kremlin Facing Tougher Challenges Over 2014-2024.11
The Kremlin will face tougher political challenges over the coming decade, as a result of a deterioration in relations with the West, a
weaker economy, ongoing demographic decline, and the Islamist insurgency in the North Caucasus. Although President Vladimir Putin's
popularity stood at a record 87% in August 2014, the likelihood of economic disruption means that his support will fall, and that he will
face increased opposition later this decade.
Chapter 2: Economic Outlook.. 15
SWOT Analysis... 15
BMI Economic Risk Ratings.. 15
Economic Activity... 16
Harsher Western Sanctions Darkening Domestic Demand Outlook...16
The fallout from the Ukraine crisis has worsened the domestic demand outlook in Russia, and we expect real GDP growth to slow to
0.6% year-on-year (y-o-y) in 2014, from 1.3% in 2013. With the government taking steps towards fiscal consolidation, n et exports will
be the main driver of growth in 2014-2015.
Table: Economic Activity16
Fiscal Policy... 18
Tentative Steps Towards Fiscal Consolidation Likely.18
Rouble weakness will ensure Russia's budget deficit remains modest in 2014-2015. These will be further facilitated by government
efforts at fiscal consolidation.
Table: Fiscal Policy18
Monetary Policy.. 19
Easing No Earlier Than Q115.19
Whereas previously we expected the Central Bank of Russia (CBR) to cut rates by year-end, we now expect easing to begin in Q115.
The CBR governorship appears to be more politically independent and inflation expectations more pronounced than we previously
expected.
Table: Monetary Policy..19
Balance Of Payments... 21
Current Account Expansion In 2014 To Be Short-Lived...21
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.22
Chapter 3: 10-Year Forecast 25
The Russian Economy To 2023. 25
After The Ukraine Crisis - Assessing The Damage25
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...25
Chapter 4: Business Environment 27
SWOT Analysis... 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook. 28
Institutions 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS....28
TABLE: BMI LEGAL FRAMEWORK RATING....29
TABLE: LABOUR FORCE QUALITY..30
Infrastructure. 31
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS....31
TABLE: TRADE AND INVESTMENT RATINGS32
Market Orientation... 33
Table: Top Export Destinations 34
Operational Risk. 35
Chapter 5: Key Sectors... 37
Pharmaceuticals and Healthcare... 37
table: Pharmaceutical Sales, Historical Data And Forecasts38
Table: Healthcare Expenditure Trends, Historical Data And Forecasts 39
Table: Government Healthcare Expenditure Trends, Historical Data And Forecasts... 39
Table: Private Healthcare Expenditure Trends, Historical Data And Forecasts .. 39
Telecommunications.... 42
Table: Telecoms Sector - Mobile - Historical Data and Forecasts. 43
Table: Telecoms Sector - Wireline - Historical Data and Forecasts . 44
Other Key Sectors... 45
table: Oil and Gas Sector Key Indicators..45
table: Defence and Security Sector Key Indicators....45
table: Infrastructure Sector Key Indicators..45
table: Food and Drink Sector Key Indicators....46
table: Autos Sector Key Indicators..46
table: Freight Key Indicators46
Chapter 6: BMI Global Assumptions. 47
Global Outlook.... 47
US Revision Drags Down Forecast.47
Table: Global Assumptions47
Table: Developed States, Real GDP GrowtH, %..48
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 48
Table: Emerging Markets, Real GDP Growth, %.49

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