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Russia Country Risk Report Q1 2017

  • November 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

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's long-term growth potential is subdued, closer to that of mature developed economies rather than a higher-growth emerging market. This is due to the highly centralised nature of the economic model and large government footprint in key sectors, reliance on energy exports, poor business environment, weak investment growth and lack of structural reform momentum. Russia's external position will remain a bright spot for the economy despite a fall in the price of its main commodity exports, with the current account surplus remaining in relatively robust surplus in the coming years as imports remain subdued.

Over the coming quarters we expect little financing pressure to emerge in the economy as its large international reserves position remains sufficient to entirely cover maturing external obligations. While Russia's fiscal position is bolstered by very low public debt ratios and fiscal reserves at its disposal, the sovereign profile will deteriorate in the coming years and major fiscal reforms – such as an overhaul of the pension system – will be necessary to ensure long-term sustainability of the public finances in light of lower commodity prices. Major Forecast Changes We have upgraded our real GDP growth forecast for 2016 from -1.2% to -0.7%. We now expect additional rouble appreciation against the US dollar in 2017, forecasting an average exchange rate over the year of RUB57.00/USD.

Table Of Contents

Russia Country Risk Report Q1 2017
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks5
Chapter 1: Economic Outlook7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Recovery Taking Hold But Upside Limited By Lack Of Reform 8
Russia's economic recovery will gather momentum in Q416 and 2017 as oil prices remain in an uptrend and the erosion of consumer
purchasing power runs its course That said, real GDP growth in 2017-2018 will be relatively weak considering the scale of the downturn
in 2014-2015, reflecting Russia's weak outlook for productivity and investment growth, and the challenges of diversifying away from its
commodity dependence
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS 10
TABLE: PRIVATE CONSUMPTION FORECASTS 11
TABLE: GOVERNMENT CONSUMPTION FORECASTS11
TABLE: FIXED INVESTMENT FORECASTS 11
TABLE: NET EXPORTS FORECASTS 11
Fiscal Policy And Public Debt Outlook12
Progress Towards Fiscal Consolidation 12
After widening for four consecutive years to an estimated 3 5% of GDP in 2016, the Russian federal budget deficit will begin narrowing
in 2017, according to our forecasts We estimate the deficit to fall to 2 8% of GDP in 2017 and further to 1 4% in 2019 In the
government's draft fiscal budget for the period 2017-2019, the deficit is instead projected to drop more significantly to 1 2% in 2019,
in line with the government's aim of reducing the budget deficit by about one percentage point each year and balancing the budget by
2020
Structural Fiscal Position 13
TABLE: MAIN REVENUE and EXPENDITURE CATEGORIES14
TABLE: FISCAL AND PUBLIC DEBT FORECASTS 14
External Trade And Investment Outlook 15
Strong External Position Despite Rising Uncertainty 15
Russia's current account surplus will rise with oil prices, supporting reserve accumulation and a stable net international investment
position surplus With respect to foreign investment, Russia will see a gradual increase in capital inflows on the back of improving
investor confidence and wide rate differentials with developed states, though this will be limited by ongoing uncertainty over Western
sanctions
Outlook On External Position 17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS18
TABLE: TOP FIVE GOODS IMPORTS 18
TABLE: TOP FIVE GOODS EXPORTS 18
Currency Forecast 19
RUB: Strong Fundamentals, But Upside Limited 19
Supported by improving fundamentals, rising oil prices and tight monetary policy, we forecast a stronger-than-consensus average
rouble exchange rate of RUB57 00/USD in 2017 However, we expect the unit to resume a depreciatory trend towards end-2017 as
policymakers look to limit gains and the country's weak growth outlook begins to weigh more heavily
TABLE: BMI CURRENCY FORECAST 20
Monetary Policy 22
CBR's Hawkish Policy Not Enough To Hit Inflation Target 22
The Central Bank of Russia will maintain a hawkish interest rate policy, with a strengthening rouble supporting the slowdown in price
growth Stubbornly high inflation expectations and government deficit spending will, however, hold inflation levels above the 2017
Contents
target of 4%, while the lack of structural reforms is set to undermine the central bank's goal of shifting the Russian economy towards an
investment-growth model
Monetary Policy Framework 23
TABLE: MONETARY POLICY FORECASTS 23
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 Index29
Domestic Politics30
Focus To Shift To 2018 Presidential Election30
President Vladimir Putin will increasingly focus on his own re-election campaign in March 2018 and on bringing a new generation of
officials to power following the landslide victory of his ruling United Russia party in parliamentary elections held on September 18 2016
TABLE: POLITICAL OVERVIEW 30
Foreign Policy 31
Trump Presidency: Implications For Russia And NATO 31
Donald Trump's victory opens the possibility of a significant improvement in US-Russia relations, albeit with some major caveats
Meanwhile, despite Trump's critical attitude towards NATO, he is unlikely to abandon the alliance
Long-Term Political Outlook 33
Putin Facing Far Greater Challenges Over 2017-2026 33
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 2016, economic disruption means that his support will eventually fall, and that he will face
increased opposition as Russia moves into the 2020s
Chapter 4: Operational Risk 37
Operational Risk 37
TABLE: OPERATIONAL RISK 37
Business Crime 38
TABLE: BUSINESS RESPONSE TO RISK IN RUSSIA 39
Government Intervention 41
TABLE: BUSINESS TAXES 42
Chapter 5: BMI Global Macro Outlook47
Global Macro Outlook 47
Austerity Has Peaked, But Populism Is Not Yet Policy 47
TABLE: GLOBAL ASSUMPTIONS47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 49
TABLE: MACROECONOMIC DATA and FORECASTS 51

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