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Russia Business Forecast Report Q1 2015

  • November 2014
  • -
  • Business Monitor International
  • -
  • 56 pages

Core Views

President Vladimir Putin’s near-record popularity belies the rapidly rising medium-term risks he faces, mostly stemming from economic weakness. Once the ‘high’ of the Ukraine conflict wears off, and ordinary citizens’ livelihoods suffer, Putin will become vulnerable to opposition protests, or even internal rivals, meaning that he will not
be guaranteed re-election in 2018.
R ussia’s economic weaknesses will constrain its much touted geopolitical ‘revival’. Russia will still defend its perceived vital interests, militarily if necessary, but the costs of doing so will increase. For the next few years, we expect a cool period to prevail in Russia-West relations, which will result in Russia building closer ties with China.
However, we think that a genuine strategic partnership between Moscow and Beijing is unlikely to materialise, because the two are ultimately rivals in Central Asia.
The plunge in oil prices throughout H214 has further darkened the macroeconomic outlook for Russia, which is already under severe pressure from geopolitical tensions with the West, prompting us to revise down our growth forecasts for 2014-2016. Nevertheless, there are some mitigating factors which underpin our slightly above-consensus forecasts – of 0.5% and 1.0% for 2014 and 2015, respectively, such as the suppression of import growth. Higher import prices have suppressed import growth, flattering the headline real GDP growth figure, and have boosted somewhat demand for domestic production.

Major Forecast Changes

W e expect Russian inflation to increase again over Q414, due to unprecedented rouble depreciation, which will lead the Russian Central Bank to raise its policy rate for the fourth time in 2014. However, underlying fundamentals within the economy will bring inflation in line over the medium term. We have revised upward our inflation forecast to 7.8% from 7.1% previously.

Table Of Contents

Russia Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Risk To Outlook 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
Putin's Popularity Masks Rising Medium-Term Risks 8
President Vladimir Putin's near-record popularity belies the rapidly rising medium-term risks he faces, mostly stemming from economic
weakness. Once the 'high' of the Ukraine conflict wears off, and ordinary citizens' livelihoods suffer, Putin will become vulnerable to
opposition protests, or even internal rivals, meaning that he will not be guaranteed re-election in 2018.
Table: Politic al Overvi ew 8
Foreign Policy 10
Economic Weakness To Constrain Geopolitical 'Revival' 10
Russia's economic weaknesses will limit its geopolitical 'revival' over the long term. For the next few years, Russia's relationship with
China will strengthen, but a genuine alliance with Beijing will be prevented by the rivalry between the two, especially in Central Asia.
Long-Term Political Outlook 13
Kremlin Facing Tougher Challenges Over 2014-2024 13
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 88% in October 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 17
SWOT Analysis 17
BMI Economic Risk Index 17
Economic Activity 18
Oil Prices Aggravating An Already Grim Macro Outlook 18
The plunge in oil prices throughout H214 has further darkened the macroeconomic outlook for Russia, which is already under severe
pressure from geopolitical tensions with the West, prompting us to revise down our growth forecasts for 2014-2016.
table: GDP By Expenditure 18
Balance Of Payments 20
Balance Of Payments Crisis Risks Rising 20
Falling oil prices, restricted access to Western capital and lack of reform are pushing Russia towards a balance of payments crisis. A
near-term crisis will probably be averted as tensions with the West ease over the next few quarters, but the damage done to investor
perceptions of Russian stability will be lasting.
Table: Current Account 21
table: Chang es To Priv atis ation Sch edu le 22
Fiscal Policy 23
Modest Fiscal Deficits Masking Vulnerabilities 23
Russia's budget shortfall will rem ain modest in 2015-2016, but the policies envisioned in the 2015-2017 budget plan will further
exacerbate Russia's fiscal vulnerabilities. Tapping Russia's rainy day and pension funds, and cutting education and infrastructure
spending, among other measures, will limit the country's growth prospects and ability to generate non-oil public revenues in the years
ahead.
table: Fiscal Policy 23
Monetary Policy 25
Return To Easing in 2015 25
We expect Russian inflation to increase again over Q414, due in part to the unprecedented rouble depreciation. In light of the recent
rate hike by the Russian Central Bank, we do not see any further monetary tightening by end-2014. In the longer term we believe poor
underlying fundamentals within the economy will bring inflation in line over the course of 2015.
table: Monetary Policy 26
Currency Forecast 27
Rouble To Find Temporary Strength 27
The current selloff of the rouble is becoming overdone and we expect the currency to consolidate against the US dollar going into 2015.
Beyond this we expect the rouble to return to a long-term trend of gradual depreciation owing to lack of structural reform, high inflation
and a deteriorating current account position.
table: CURRENCY FORECAST 27
Chapter 3: 10-Year Forecast 29
The Russian Economy To 2023 29
Structural Deficiencies Weighing On Growth 29
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 29
Chapter 4: Operational Risk 31
Russia Aggregate SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
table: Operational Risk 32
Transport Network 33
table: Emerging Eu rop e - Transpo rt Network Risks 34
Economic Openness 38
table: Europe - Economic Openness Risk 39
table: Top 5 Product Imports (USDmn) 40
table: Top 5 Trade Partners - Product Exports (USDmn) 41
Chapter 5: Key Sectors 43
Infrastructure 43
table: Construction And Infrastructure Industry Data 44
table: Construction And Infrastructure Industry Data 45
Oil and Gas 48
Other Key Sectors 53
table: Pharma Secto r Key Indic ato rs 53
table: Telecoms Sector Key Indicators 53
table: Defence and Security Sector Key Indicators 53
table: Food and Drink Sector Key Indicators 54
table: Autos Sector Key Indicators 54
table: Freight Key Indic ato rs 54
Chapter 6: BMI Global Assumptions 55
Global Outlook 55
Reality Check: Uncertainty Reigns 55
Table: Global Assumptions 55
Table: Develop ed States, Real GDP GrowtH, % 56
Table: BMI VER SUS BLOOMBER G CONSENSUS REAL GDP GROWTH FORE CASTS, % 56
Table: Emerging Markets , Real GDP Growth , % 57

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