1. Market Research
Russia Country Report Nov16 - November, 2016

Russia Country Report Nov16 - November, 2016

  • December 2016
  • 109 pages
  • ID: 4579425
  • Format: PDF
  • Emerging Markets Direct Media Holdings

Summary

Table of Contents

Russia's economy remains in recession and will likely contract by

between (official estimate) 0.6% and (bne consensus) 0.8% in 2016 before

returning to mild growth in 2017. While there is still no consensus on just how

much growth there will be in 2017 no one is talking about anything more than

about 1.5% with the bne consensus at 1%. The long-term growth potential --

assuming no drastic structural reforms which are unlikely until after the 2018

presidential election -- is capped at 2.4%.

Having said that the economy is clearly starting to recover . Inflation fell

below 6% for the first time ever in modern history in recent months.

Unemployment is also at record lows under 6%. Industrial production remains

underwater, but only just, while some sectors -- notably manufacturing and

agriculture -- are now growing. Even more encouraging was a strong

improvement in the PMI manufacturing index.

Russia became a world leader in grain exports this year on the back of a

bumper harvest and grain has overtaken arms in exports in dollar terms. And

with labour cost now lower than China's the talk of non-oil exports with products

like Russian-made cars may appear in 2017. On the flip side there is still little

progress with significant import substitution in any sector other than food

processing, but this takes time to build up. Presidential economics advisor Alexi

Kudrin suggested that Russia could return to 4% GDP growth if non-oil export

volumes doubled every year - which remains an extremely ambitious target and

has not been formally adopted as a governmental goal.

Politically Russia remains tense. Rosneft CEO Igor Sechin is now

operating with little restriction in his sector . He has successfully captured

Bashneft and is poised for his company to buy a 19.5% stake in itself using

money lent by Rosneft's parent company Rosneftegaz in a totally pointless deal

that brings no fresh money to the budget. Minister of Economics Alexei

Ulyukayev publically opposed the deal and was subsequently arrested for

receiving a bag of $2mn cash in it -- a bag given to him by Sechin personally,

according to bne sources.

However, socially things are calmer. Putin's popularity is currently at an all

time high of 84%. The polls also show the population think the worst is passed.

While retail borrowing has only made a modest return to growth and no one is

planning big ticket purchases, the bne Watcom index shows retail traffic has

recovered to 2014 levels and mild consumption will support growth next year.

The bank sector is now back in profit, but state owned Sberbank still

makes up some 70% of the sector's profits, although its share is starting to fall

again. Mortgage lending is booming with volumes expanding by a third y/y in the

third quarter, but corporate lending remains very depressed so the sector cannot

be called "healthy."

The securities markets are also doing well. The bond market continues to

see growing number of issues with spreads down by about 100bp since the

start of the year. The equity market has also come back to life with the RTS up

about a quarter YTD and the MICEX index up about 13%.

At a microlevel the big companies are back in profit and taking

advantage of the recession to consolidate their market share through

acquisition and organ expansion with many of the leading chains foreign and

domestic rolling out ambitious new store plans that double their network in some

cases. Retail sales remain negative overall, with a 4.4% contraction in October,

and real disposable incomes also contracting, even if real and nominal incomes

are growing.

Russia continues to run a double trade and current account surplus, but

these are down by about a third on 2015 thanks to the low prices of oil. At the

end of December OPEC announced a production cut that will support prices, but

as Russia's budget breaks even at $70 oil and prices are unlikely to rise much

above $50 there is still a hole to fill.

At the macroeconomic level containing the budget deficit at around 3%

this year is main challenge the government is facing -- and failing to solve. The

deficit is likely to end this year at about 3.7%, barring a last minute privatisation.

The official plan is to reduce the deficit by 1% each year thereafter to 2019, but

this goal is entirely dependent on the government sticking to its large scale

privatisation plans. Currently between Sechin's shenanigans at Rosneft and the

political problems Russia faces with the west finding investors to unload many

billions of dollars worth of shares in huge companies looks like a pipedream.

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