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Russia Country Risk Report Q4 2016

  • August 2016
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views

The ruling United Russia party will retain its parliamentary majorityin legislative elections on September 18, benefiting from PresidentVladimir Putin’s high approval ratings, patriotic fervour, and a weakenedopposition. This will override dissatisfaction with poor economicconditions in the near term. The main political risk for Putin remainsa challenger from within his circle, although he remains the frontrunnerahead of presidential elections in March 2018.Russia’s economy is emerging from prolonged recession in H216but we forecast growth in 2017 and 2018 to be relatively subduedwhen considering the scale of the downturn since 2014. Rising oilprices are acting as a short-term boost, but will reduce the urgencyto implement badly needed structural reforms, thus maintaining thecountry’s commodity dependence.Russia’s long-term growth potential is subdued, closer to that ofmature developed economies rather than a higher growth emergingmarket. This is due to the highly centralised nature of the economicmodel and large government footprint in key sectors, reliance onenergy exports, poor business environment, weak investment growthand lack of structural reform momentum.Russia’s external position will remain a bright spot for the economydespite a fall in the price of its main commodity exports, with thecurrent account surplus remaining in relatively robust surplus in thecoming years as imports remain subdued. Over the coming quarterswe expect little financing pressure to emerge in the economy as itslarge international reserves position remains sufficient to entirelycover maturing external obligations.While Russia’s fiscal position is bolstered by very low public debtratios and fiscal reserves at its disposal, the sovereign profile willdeteriorate in the coming years and major fiscal reforms – such asan overhaul of the pension system – will be necessary to ensurelong-term sustainability of the public finances in light of lower commodityprices.

Major Forecast Changes
We have upgraded our real GDP growth forecast for 2016 from-1.2% to -0.8%.We now expect additional rouble appreciation against the US dollarin 2017, forecasting an average exchange rate over the year ofRUB58.0/USD.

Table Of Contents

Russia Country Risk Report Q4 2016
Executive Summary.. 5
Core Views...5
Major Forecast Changes.5
Key Risks.5
Chapter 1: Economic Outlook.. 7
SWOT Analysis... 7
BMI Economic Risk Index.. 7
Economic Growth Outlook 8
Recession Ending, But Recovery Will Be Subdued.8
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.
GDP By Expenditure Outlook.. 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS...11
TABLE: FIXED INVESTMENT FORECASTS..11
TABLE: NET EXPORTS FORECASTS11
Fiscal Policy And Public Debt Outlook.. 12
Budget Outlook Improving But Long-Term Challenges Prominent.12
The Kremlin appears to be taking positive steps towards boosting long-term fiscal sustainability, while rising oil prices and a successful
eurobond issuance in 2016 have eased short-term budget constraints. Nevertheless, weak growth will remain a key impediment to
fiscal consolidation, and we remain sceptical that a nascent privatisation drive will result in a major shift in the state-led structure of the
economy.
Structural Fiscal Position 14
TABLE: MAIN REVENUE and EXPENDITURE CATEGORIES 2015.14
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...14
Monetary Policy 15
Taming Inflation Will Take Time, Despite Hawkish Policy15
The Central Bank of Russia's hawkish policy stance will bolster its inflation fighting credibility and, over time, help to anchor private
sector inflation expectations. However, the bank's ability to tame price growth and bring it in line with the 4.0% inflation target in the
short-term will be hampered by still-high expectations and government stimulus.
Monetary Policy Framework 17
TABLE: RUSSIA MONETARY POLICY FORECASTS17
Currency Forecast 18
RUB: Oil And High Real Interest Rates To Drive Appreciation.18
We forecast the Russian rouble to appreciate in the coming quarters on the back of high real interest rates, delayed Fed rate hikes,
gradual economic recovery and rising oil prices. The structural weaknesses in the economy will be more important factors over the long
term, and we thus expect steady depreciation beyond 2017.
TABLE: BMI CURRENCY FORECAST18
External Trade And Investment Outlook 20
External Surplus Remains Key Source Of Stability...20
Russia's current account and net international investment position surpluses will continue to bolster the country's sovereign risk profile in
the coming years, reducing risks associated with a recent rise in gross external debt ratios.
TABLE: EXTERNAL DEBT SUSTAINABILITY RATIOS..20
Outlook On External Position.. 21
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.21
TABLE: CURRENT ACCOUNT BALANCE FORECASTS...22
TABLE:TOP 5 GOODS IMPORTS 2015 .22
TABLE: TOP 5 GOODS EXPORTS.22
Chapter 2: 10-Year Forecast... 25
The Russian Economy To 2025.. 25
Long-Term Economic Stagnation Without Reforms..25
Russia's growth potential is much lower in the next decade than it has been in the previous 10 years, dragged down by the country's
commodity dependence, rapidly ageing population, and prolonged slump in investment. However, the biggest drag on growth will remain
the state's tight grip on key sectors of the economy and society more broadly, and lack of meaningful progress towards a more liberal
economic system.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.25
Chapter 3: Political Outlook... 29
SWOT Analysis. 29
BMI Political Risk Index... 29
Foreign Policy... 30
World Events Shifting In Moscow's Favour, For Now...30
Recent developments on the international stage could potentially benefit Russia in the near term, by allowing Moscow to strengthen its
influence in Europe and beyond. In particular, political shifts in Europe will lead to less adversarial stances towards Moscow, paving the
way for EU sanctions to be eased in 2017.
Domestic Politics 32
Ruling Party Assured Of Election Victory, Despite Recession.32
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.
TABLE: POLITICAL OVERVIEW 32
Long-Term Political Outlook... 34
Long-Term Political Outlook: Putin Facing Far Greater Challenges Over 2016-202534
President Vladimir Putin 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 Putin's popularity
stood at near record highs through much of 2015, economic disruption means that his support will fall, and that he will face increased
opposition later this decade.
Chapter 4: Operational Risk... 39
SWOT Analysis. 39
Operational Risk Index 39
Operational Risk... 40
TABLE: OPERATIONAL RISK.40
Market Size And Utilities.. 41
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISKS..41
Labour Costs 44
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE... 46
Chapter 5: BMI Global Macro Outlook... 49
Global Macro Outlook.. 49
Brexit To Hit Global Growth.49
TABLE: GLOBAL ASSUMPTIONS..49
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %50
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...51
TABLE: MACROECONOMIC DATA and FORECASTS..53

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