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page of 1 22
Country Reports - Russian Federation
27 Jan 2015 IHS Economics and Country Risk
Our take
Key pointsEconomic sanctions prompted by the annexation of
Crimea and continued fighting in Ukraine are negatively affecting
growth and investment.Stance towards Ukraine has damaged Russia's
international standing and carries moderate interstate war
risks.Russian president Vladimir Putin is maintaining a crackdown
on the opposition.The high-profile anti-corruption campaign remains
selective and largely ineffective.
AnalysisSix-Factor Country Risk - Russia
Risk Score Description
Political 3.00 SIGNIFICANT
Economic 3.25 SIGNIFICANT
Legal 2.75 MEDIUM
Tax 2.50 MEDIUM
Operational 3.75 HIGH
Security 3.25 SIGNIFICANT
Overall 3.07 SIGNIFICANT
12-Month Rating Trend Negative Trend
Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of
enhanced Country Analysis & Forecast suite of services.
Sovereign Risk Ratings - Russia
Medium-Term 40(BBB-) Supportive Credit Fundamentals
Sovereign Risk Outlook Negative
Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of
enhanced Economic and Sovereign Risk services.
Economic sanctions prompted by the annexation of Crimea and
continued fighting in Ukraine are negatively affecting growth and
investment. TheUnited States and the European Union have adopted a
series of sanctions against Russia as a result of its annexation of
Crimea and support for rebels insoutheast Ukraine. While the
effectiveness of the sanctions will depend on a solid multilateral
approach, the uncertainty created for the Russian economy
willaffect business and consumer confidence and worsen the
investment environment. The rouble has depreciated significantly
since the beginning of the year asa result of the slowing economy
and accelerating capital flight, and is likely to remain weak in
the year ahead. The house arrest of Vladimir Evtushenkov,chairman
of AFK Sistema, will raise concerns that private business will
again be under attack from the Kremlin.
Stance towards Ukraine has damaged Russia's international
standing and carries moderate interstate war risks. The annexation
of Ukraine's Crimearegion in March 2014 and the maintenance of a
large military presence close to the Ukrainian border have led to
widespread Western condemnation. Theyhave also raised the prospect
of Russia intervening militarily in eastern Ukraine if violence
there between pro-Russian separatists and the security
forcesescalates. Such a development would probably entail expansion
of the US- and EU-imposed sanctions. However, if the conflict in
Ukraine eases and the Minskagreement is upheld, there is likely to
be some amendment of the sanctions.
Russian president Vladimir Putin is maintaining a crackdown on
the opposition. This has included the launching of investigations
against leadingopposition activists and the implementation of
restrictive measures on civil-society organisations. The crackdown
also indicates the rising influence of thesiloviki faction
(comprising current and former members of the security services)
within government. In the event of a significant economic downturn,
thesuppression of opposition protests by state security forces
could result in a popular (and potentially violent) backlash across
the country and especially inMoscow.
-
2015IHS. page of 2 22
The high-profile anti-corruption campaign remains selective and
largely ineffective. The government has launched a series of
corruption investigationsagainst senior officials, and moved to
tighten anti-corruption laws. The implementation of similar
measures and dismissals of senior officials are likely tocontinue
over the coming year. However, this initiative is unlikely to
affect the still overall high levels of corruption in the
bureaucracy, as anti-corruption casesare likely to remain selective
and be politically motivated.
Forecast summaryThe Russian economy is faltering amid slack
investment activity, falling oil prices, and the threat of further
and broader economic sanctions. Theofficial estimate of GDP for the
third quarter put year-on-year (y/y) growth at just 0.7% and growth
in cumulative GDP in the first three quarters at 0.8%.
Mosthigh-frequency indicators suggest an even less promising result
in the fourth quarter,. A number of factors were already aligned,
even before the threat ofeconomic sanctions on Russia arose, to
ensure that Russian economic growth will disappoint in the near
term. The Russian economy remains overlydependent on energy export
revenues (fully 70.6% of total export earnings in 2013) to drive
domestic growth. Energy priceswhich have declined sharply inthe
most recent period on slowing global economic growth and abundant
oil suppliesare expected to remain far below recent peak levels in
the near tomedium term, while physical exports will stagnate at
best. In addition, the policy interest rate has been boosted
dramatically to dampen inflationary pressures,help stem the flow of
capital from the country, and relieve some of the downward pressure
on the rouble. Strong inflation, propelled by a weakening rouble,
iscutting into household purchasing power. With the rouble and
equity prices already losing ground in early 2014 as investors
looked for safer havens, theimposition of economic sanctions due to
Russia's annexation of the Crimean region of Ukraine as well as
perceived Russian intervention in Ukrainian affairshas only
worsened the Russian business and investment environment. The
ongoing erosion of business confidence has caused investment
activity to contract.Estimates are that net capital outflow in 2014
exceeded USD150 billion, compared with USD61.0 billion in full-year
2013. Accordingly, we have cut ourestimate for 2014 GDP growth to
only 0.4%. We now have GDP contracting by 4.0% in 2015 and
declining a further 0.3% in 2016. A modest recovery is seento take
hold in 2017 with growth at 1.5%.
The currency, which suffered in early 2014 from sell-offs of
rouble assets, has come under further pressure from accelerated
capital flight in thewake of the tensions over the annexation of
Crimea and pro-Russian unrest in eastern Ukraine, the economic
sanctions imposed by the UnitedStates and the European Union, and a
dramatic slide of world-market oil prices. The rouble has suffered
periodically in the last two years as turmoil hitinternational
capital markets. Further concerns were raised in early 2014 by
disappointing growth in several of the BRIC countries and by
tapering ofquantitative easing by the US Federal Reserve. As Russia
sent forces into Crimea in early March 2014 and the West
subsequently levied economic sanctionsagainst Russia, the rouble
dived once again. Concerned about financial stability and the
impact on inflation, the Central Bank of Russia (CBR) has
intervenedheavily in the local foreign currency market and hiked
its key policy interest rate by 1,150 basis points total in March
and in mid-December 2014, yet roubleexchange rates against the
dollar and the euro have descended to new historical lows. Plunging
oil prices in the fourth quarter added new downward pressureon the
currency and prompted the further increase of 250 basis points in
the key interest rate, followed by an unprecedented midnight
decision on 15December for a new increase of 650 basis points in an
effort to put a floor under the plummeting rouble. The perception
of Russia as a risky environment forinvestment will continue to
provide for large-scale net capital outflow at least through
2016.
Fiscal revenues are slipping, owing to slowing economic growth
and reduced receipts from the energy sector, and will not cover
mountingexpenditure commitments for 201517. In the face of
expansive social spending and public-sector investment programs,
the Russian fiscal position isparticularly vulnerable to a
protracted downward movement in world-market commodity prices as
well as the impact on tax revenues of a slowing economy.The
recently approved three-year fiscal framework assumes average oil
prices at around USD100 per barrel in 201517, with an average
fiscal deficit over theperiod of 0.6% of GDP and thus will
necessarily be revised. While the new plan is to cut expenditures
across the board by 10%, large-scale investment inexpanded military
capabilities are not to be touched.
Changes since last forecastJanuary interim forecast versus
December interim forecast
GDP DOWN We have decreased projected GDP in 2015, with the
decline now at 4.0%, thanks to our more downbeat forecast for
world-market oil prices.
Consumer price
index
UP We have raised our projection for end-December year-on-year
inflation to 17.0% in 2015. This revision is due to the
impact of a dramatically weaker rouble on import prices.
Gross fixed capital
formation
DOWN We have cut our projection of the change in gross fixed
capital formation in 2015 by 3.0 percentage points to -7.2%
given the ongoing credit crunch and plummeting oil prices.
Selected data and charts: Data (forecasts)
-
2015IHS. page of 3 22
Political summary
Presidential elections Next contest: 2018 March; Last contest: 4
March 2012.
Legislative elections (Lower chamber) Next contest: 2016
December; Last contest: 4 December 2011.
President: Vladimir Putin (since 7 May 2012)
Chair of the Council of Ministers: Dmitry Medvedev (since 7 May
2012)
First Deputy Chair: Igor Shuvalov (since 12 May 2008)
Source: IHS and CIRCA People in Power
Key Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) 4.3 3.4 1.3 0.6 -5.0 -0.5 1.5 2.7 3.0
Nominal GDP (US$ bil.) 1,903.7 1,999.4 2,078.2 1,875.2 1,042.5
1,088.0 1,171.2 1,267.9 1,358.5
Nominal GDP Per Capita (US$) 13,272 13,965 14,550 13,162 7,336
7,677 8,286 8,996 9,669
Consumer Price Index (% change) 8.4 5.1 6.8 7.8 19.0 11.5 8.7
7.1 6.6
Exchange Rate (LCU/US$, end of period) 32.20 30.37 32.73 56.24
71.00 68.00 69.00 70.22 71.80
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Country risk - overall statement
OverallRussia continues to be a relatively risky destination for
foreign investment, ranking as Significant Risk overall in IHS's
country risk rankings and languishingmore than half-way down the
global list of countries. Its scores are worst on security and
operational risks and better on legal and tax risks. The scores
forpolitical and economic risks place it well below most Western
European countries, as well as some of its BRIC competitors.
Nevertheless, Russia has emergedfrom its turbulent post-Soviet
period with confidence and strong economic potential, as well as
aspirations to restore its prominence as one of the world's
majorpower centres. As expected, Vladimir Putin returned to
presidential office for a third term after he won March 2012's
election. Despite the unprecedented streetprotests leading up to
the election, Putin remains the most popular politician in Russia.
That said, the strengthening of the opposition, especially those
whorepresent the young professional middle class, is likely to
influence Putin's domestic policies in the medium term. Russia's
economy has been growing at itsslowest pace since 2009 due to
subdued consumer demand and lower levels of investment in the wake
of the 2014 crisis in Ukraine, and the subsequentimposition of
Western sanctions. Economic growth is also being negatively
affected by falling oil prices. Prior to the sanctions, the
government was keen tomake the country more attractive for foreign
investors by promises of new privatisation schemes, creating the
world's best tax code, and fighting corruption.However, the
September 2014 arrest of billionaire Vladimir Evtushenkov has
sparked fears that private business will again be under attack and
it will probablyscare away foreign investors from Russia in the
medium term. The operational and security environment varies from
region to region, but continued terroristacts committed by Islamist
militants based in the North Caucasus are likely. Internationally,
the annexation of Crimea in March 2014 and ongoing maintenanceof
political and military pressure on Ukraine, including the threat of
further military intervention into eastern Ukraine, has led to
vociferous international criticismand the imposition of global
sanctions, damaging its international standing.
Economic: Country risk statementRussia's economy slowed further
in the first quarter of 2014 in the face of moderating private
consumption and slack investment activity. The Russianinvestment
environment remains highly unsatisfactory and massive net capital
outflows have continued, taking a toll on the rouble and Russian
asset markets.The business and investment environmentalready judged
unattractive by many foreign and domestic investors, due to a
far-reaching and corruptbureaucracy, weak standards of transparency
and corporate governance, and the lack of an independent
judiciaryhas been exacerbated by the threat ofeconomic sanctions
against Russia and retaliation against US and European interests in
return. In an effort to soften the impact on the rouble and impetus
toinflation, the Central Bank of Russia found it necessary to hike
its key interest rate by 200 basis points at a time when the
government and business leadershad been pressing for lower
commercial interest rates to restore momentum to the economy.
Meaningful sanctions on selected Russian sectors in response
toRussian moves in Ukraine could push the economy into recession
for the full year. We suspect the economy was already in a
technical recession in the secondquarter of 2014. While the
government may be tempted to engage in stimulative spending, it
would necessarily violate the recently adopted fiscal rule that
capsexpenditures based on the historical path of world-market oil
prices.
-
2015IHS. page of 4 22
Short-term outlook
Key points
The Russian economy is faltering amid slack investment activity,
falling oil prices, and the threat of further and broader economic
sanctions.The currency, which suffered in early 2014 from sell-offs
of rouble assets, has come under further pressure from accelerated
capital flight in the wake ofthe tensions over the annexation of
Crimea and pro-Russian unrest in eastern Ukraine, the economic
sanctions imposed by the United States and theEuropean Union, and a
dramatic slide of world-market oil prices.Fiscal revenues are
slipping, owing to slowing economic growth and reduced receipts
from the energy sector, and will not cover mounting
expenditurecommitments for 201517.
Analysis
The Russian economy is faltering amid slack investment activity,
falling oil prices, and the threat of further and broader economic
sanctions. Theofficial estimate of GDP for the third quarter put
year-on-year (y/y) growth at just 0.7% and growth in cumulative GDP
in the first three quarters at 0.8%. Mosthigh-frequency indicators
suggest an even less promising result in the fourth quarter,. A
number of factors were already aligned, even before the threat
ofeconomic sanctions on Russia arose, to ensure that Russian
economic growth will disappoint in the near term. The Russian
economy remains overlydependent on energy export revenues (fully
70.6% of total export earnings in 2013) to drive domestic growth.
Energy priceswhich have declined sharply inthe most recent period
on slowing global economic growth and abundant oil suppliesare
expected to remain far below recent peak levels in the near
tomedium term, while physical exports will stagnate at best. In
addition, the policy interest rate has been boosted dramatically to
dampen inflationary pressures,help stem the flow of capital from
the country, and relieve some of the downward pressure on the
rouble. Strong inflation, propelled by a weakening rouble,
iscutting into household purchasing power. With the rouble and
equity prices already losing ground in early 2014 as investors
looked for safer havens, theimposition of economic sanctions due to
Russia's annexation of the Crimean region of Ukraine as well as
perceived Russian intervention in Ukrainian affairshas only
worsened the Russian business and investment environment. The
ongoing erosion of business confidence has caused investment
activity to contract.Estimates are that net capital outflow in 2014
exceeded USD150 billion, compared with USD61.0 billion in full-year
2013. Accordingly, we have cut ourestimate for 2014 GDP growth to
only 0.4%. We now have GDP contracting by 4.0% in 2015 and
declining a further 0.3% in 2016. A modest recovery is seento take
hold in 2017 with growth at 1.5%.
The currency, which suffered in early 2014 from sell-offs of
rouble assets, has come under further pressure from accelerated
capital flight in thewake of the tensions over the annexation of
Crimea and pro-Russian unrest in eastern Ukraine, the economic
sanctions imposed by the UnitedStates and the European Union, and a
dramatic slide of world-market oil prices. The rouble has suffered
periodically in the last two years as turmoil hitinternational
capital markets. Further concerns were raised in early 2014 by
disappointing growth in several of the BRIC countries and by
tapering ofquantitative easing by the US Federal Reserve. As Russia
sent forces into Crimea in early March 2014 and the West
subsequently levied economic sanctionsagainst Russia, the rouble
dived once again. Concerned about financial stability and the
impact on inflation, the Central Bank of Russia (CBR) has
intervenedheavily in the local foreign currency market and hiked
its key policy interest rate by 1,150 basis points total in March
and in mid-December 2014, yet roubleexchange rates against the
dollar and the euro have descended to new historical lows. Plunging
oil prices in the fourth quarter added new downward pressureon the
currency and prompted the further increase of 250 basis points in
the key interest rate, followed by an unprecedented midnight
decision on 15December for a new increase of 650 basis points in an
effort to put a floor under the plummeting rouble. The perception
of Russia as a risky environment forinvestment will continue to
provide for large-scale net capital outflow at least through
2016.
Fiscal revenues are slipping, owing to slowing economic growth
and reduced receipts from the energy sector, and will not cover
mountingexpenditure commitments for 201517. In the face of
expansive social spending and public-sector investment programs,
the Russian fiscal position isparticularly vulnerable to a
protracted downward movement in world-market commodity prices as
well as the impact on tax revenues of a slowing economy.The
recently approved three-year fiscal framework assumes average oil
prices at around USD100 per barrel in 201517, with an average
fiscal deficit over theperiod of 0.6% of GDP and thus will
necessarily be revised. While the new plan is to cut expenditures
across the board by 10%, large-scale investment inexpanded military
capabilities are not to be touched.
Assumptions
Oil prices will remain far below the historical peak reached in
2012 through the end of the decade.We anticipate only halting
progress at best on market-oriented institutional and structural
reform under President Vladimir Putin.Required adjustment of
administered prices and the continued loose fiscal stance in the
next several years will limit progress on disinflation.
Currentofficial targets for bringing down inflation rates to the
neighborhood of 4% in the medium term strike us as very
optimistic.The state will continue to play an active role in the
economy by means of controlling stakes in large enterprises in
"strategic sectors and naturalmonopolies." The scope, schedule,
and, most critically, the transparency of a proposed new wave of
privatization remain in question.The central bank will attempt to
limit its intervention to support the rouble to periods in which it
deems financial stability is threatened.
Changes since last forecast
-
2015IHS. page of 5 22
January interim forecast versus December interim forecast
GDP DOWN We have decreased projected GDP in 2015, with the
decline now at 4.0%, thanks to our more downbeat forecast for
world-market oil prices.
Consumer price
index
UP We have raised our projection for end-December year-on-year
inflation to 17.0% in 2015. This revision is due to the
impact of a dramatically weaker rouble on import prices.
Gross fixed capital
formation
DOWN We have cut our projection of the change in gross fixed
capital formation in 2015 by 3.0 percentage points to -7.2%
given the ongoing credit crunch and plummeting oil prices.
Alternative scenarios
Effective trade and financial sanctions: Further Russian
incursions into Ukraine to support militant separatists trigger
ever more severe and coordinatedsanctions directed against Russia
by the United States and the European Union. Incoming foreign
direct investment and external borrowing are blocked,export
earnings are reduced substantially, and the rouble and asset values
continue to tumble, pushing the Russian economy further into
recession froman already disappointing near-term trajectory.Higher
oil prices: Because of regional military conflict, action by
terrorists or insurgents, or a natural disaster, global
oil-production capacity could besubstantially diminished.
World-market oil prices could rebound and even surpass peak levels
seen in early 2012 as a result, buoying the rouble andproviding
additional revenues for the state and private sectors but further
delaying efforts at economic and institutional reform.Accelerated
reform: An increased push for reform and restructuring in the
Russian economy, in an effort to entice investors back and spur
productivitygrowth, results in improved competitiveness of the
manufacturing sector. At the same time, the maintenance of cautious
monetary policy and a tightenedfiscal stance help to stabilize the
currency and reduce inflationary pressures, reinvigorating domestic
and foreign investment and boosting growthprospects in the medium
and long term.
Data
-
2015IHS. page of 6 22
Key Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) 4.3 3.4 1.3 0.6 -5.0 -0.5 1.5 2.7 3.0
Nominal GDP (US$ bil.) 1,903.7 1,999.4 2,078.2 1,875.2 1,042.5
1,088.0 1,171.2 1,267.9 1,358.5
Nominal GDP Per Capita (US$) 13,272 13,965 14,550 13,162 7,336
7,677 8,286 8,996 9,669
Consumer Price Index (% change) 8.4 5.1 6.8 7.8 19.0 11.5 8.7
7.1 6.6
Policy Interest Rate (%) 8.00 8.25 5.50 17.00 10.50 7.50 6.25
7.00 7.00
Fiscal Balance (% of GDP) 1.5 0.4 -0.2 -0.8 -3.0 -2.9 -1.5 -1.7
-0.9
Population (mil.) 143.44 143.17 142.83 142.47 142.10 141.73
141.35 140.94 140.50
Unemployment Rate (%) 6.6 5.5 5.5 5.2 6.6 6.7 5.8 5.3 5.3
Current Account Balance (% of GDP) 5.1 3.6 1.6 3.1 0.5 0.0 -0.2
-0.4 -0.5
BOP Exports of Goods US$bn 515.4 527.4 523.3 496.7 356.4 367.1
381.7 397.0 412.9
BOP Imports of Goods US$bn 318.6 335.8 341.3 308.0 270.3 281.9
292.7 303.8 315.3
Exchange Rate (LCU/US$, end of period) 32.20 30.37 32.73 56.24
71.00 68.00 69.00 70.22 71.80
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Medium- and long-term outlook
Key points
Through the medium term, Russian economic growth will continue
to depend on developments in world-market prices for fuels and
other basiccommodities.Providing investment capital for the medium
and long terms will be critical for propping up economic growth,
yet the investment environment hasbecome increasingly unattractive
while foreign policy goals have overridden efforts to become more
integrated with the developed economies.Russia needs to achieve
sustainable, diversified growth decoupled from developments in
world-market prices of key export commodities.Russian policymakers
will have to give greater priority in the future to lowering
inflation rates, acknowledging that this is a critical factor in
improving theenvironment for investment.
Analysis
Through the medium term, Russian economic growth will continue
to depend on developments in world-market prices for fuels and
other basiccommodities. Growth rates will remain well below earlier
peaks since external economic and financial conditions are less
favorable than prior to the greatrecession of 200809. Beyond the
near-term recession, brakes on a robust recovery will include the
underdeveloped domestic banking sector and heightenedinvestor
aversion to risk in Russia. President Vladimir Putin, who has been
blaming the recent notable economic slowdown on actions by the
United States andEuropean Union, admitted that there is a
home-grown dimension reflecting a poor investment environment and
slow growth of labor productivity. Domestic andexport demand will
continue losing momentum in the near term; aggregate output is
estimated to have nearly stagnated in 2014, thanks largely to the
effects ofheightened geopolitical tensions over the annexation of
Crimea and support of pro-Russian separatists in eastern Ukraine as
well as a depressed global oilprice. In the following year, GDP is
projected to contract a hefty 4.0%, with a further 0.3% decline in
2016. A modest recovery at best is projected for 2017 withgrowth of
1.5%, as business and consumer confidence remains shaky. Should the
tensions with Western powers over Ukraine escalate or the
trajectory of oilprices become even more unfavorable, recession
could extend beyond 2015. Through the medium term, however, growth
can be expected to return to the justunder the 3% range, settling
below that range after 2020. In the remainder of the forecast
period, Russia will face shortages of labor due to its shrinking
andaging population as well as increasingly capital-intensive
nature of development of energy resources, which will constrain the
pace of economic growth,keeping annual GDP growth rates in the
neighborhood of 2%.
Providing investment capital for the medium and long terms will
be critical for propping up economic growth, yet the investment
environment hasbecome increasingly unattractive while foreign
policy goals have overridden efforts to become more integrated with
the developed economies.Injections of both foreign and domestic
capital into the Russian economy will be critical for sustainable
growth. Some of the most important industrial branchesin both
manufacturing and the natural-resource-extraction sector are facing
effective capacity constraints. In natural-resource extraction in
particular, realgrowth has slowed markedly and exploitation is
increasingly capital intensive. After a continued net outflow of
capital from Russia in 201013, the central bank
-
2015IHS. page of 7 22
looked forward to slowing outflow going forward and reversal in
the next several years. Capital flight in 201415 looks to overmatch
that of the global crisis yearof 2009, and it is now doubtful that
a complete reversal of the situation could take place within the
medium term because the political and international
financialsituations will remain unsettled, the Russian environment
for investment will remain relatively unattractive, and the
perception of risk in Russia will remainacute.
Russia needs to achieve sustainable, diversified growth
decoupled from developments in world-market prices of key export
commodities. To becompetitive, productive capacity needs to be
modernized and infrastructure expanded and rehabilitated. Some of
the additional fiscal expenditure in the nextfive years is aimed at
increasing the competitiveness of the Russian manufacturing sector
and relieving anticipated bottlenecks represented by
infrastructure.Should structural and institutional reform proceed
more rapidly than we currently expect, Russia could enjoy more
robust growth than we have projected in ourbaseline. On the other
hand, should the environment for investors worsen as the government
retains or even enhances its dominance in major sectors of
theeconomy, Russia will have to continue to rely on energy and
other key export commodities to drive growth. In either case, we do
not see any reduction inreliance on fuels and metals to sustain
exports and growth any earlier than 2020.
Russian policymakers will have to give greater priority in the
future to lowering inflation rates, acknowledging that this is a
critical factor inimproving the environment for investment. While
increases in regulated tariffs have been limited for 201415 in an
effort to rein in inflation, further upwardadjustment of regulated
prices will be necessary in the future in an effort to reduce the
burden of subsidies on the state budget. Indeed, the process
ofdisinflation will only be more complicated because the government
now plans to channel some of the earlier accumulated oil and gas
tax revenue windfallthrough to the domestic economy, depleting
fiscal reserves. Given an already tight labor market despite the
considerable output gap in the economy, resultingupward pressure on
wages will feed inflationary pressure. Thus, despite a greater
focus on macroeconomic stability on the part of the monetary
authorities,progress in reining in inflation will be very gradual,
continuing to negatively impact the investment climate.
Data (forecasts)
Key Macro-Economic Indicators
2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP (% change) 8.5 5.2 -7.8 4.5 4.3 3.4 1.3 0.6 -5.0
Nominal GDP (US$ bil.) 1,299.7 1,660.8 1,222.6 1,524.9 1,903.7
1,999.4 2,078.2 1,875.2 1,042.5
Nominal GDP Per Capita (US$) 9,157 11,746 8,679 10,864 13,272
13,965 14,550 13,162 7,336
Consumer Price Index (% change) 9.1 14.1 11.8 6.8 8.4 5.1 6.8
7.8 19.0
Policy Interest Rate (%) 10.00 13.00 8.75 7.75 8.00 8.25 5.50
17.00 10.50
Fiscal Balance (% of GDP) 6.0 4.9 -6.3 -3.4 1.5 0.4 -0.2 -0.8
-3.0
Population (mil.) 141.94 141.39 140.87 140.37 143.44 143.17
142.83 142.47 142.10
Unemployment Rate (%) 6.1 7.8 8.4 7.5 6.6 5.5 5.5 5.2 6.6
Current Account Balance (% of GDP) 5.6 6.3 4.1 4.4 5.1 3.6 1.6
3.1 0.5
BOP Exports of Goods US$bn 346.5 466.3 297.2 392.7 515.4 527.4
523.3 496.7 356.4
BOP Imports of Goods US$bn 223.1 288.7 183.9 245.7 318.6 335.8
341.3 308.0 270.3
Exchange Rate (LCU/US$, end of period) 24.55 29.38 30.24 30.48
32.20 30.37 32.73 56.24 71.00
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Growth
GDP
Key points
Russian domestic consumption will be the only mainstay of
domestic demand while investment activity is slack, but strong
inflationary pressures arenevertheless pinching household
budgets.The central bank cannot address slower growth with monetary
easing as long as the rouble is weakening and inflation is
stubbornly strong.The Russian economy remains overly dependent on
movements in world-market commodity prices and the extraction and
export of natural resources todrive growth.
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2015IHS. page of 8 22
Analysis
Russian domestic consumption will be the only mainstay of
domestic demand while investment activity is slack, but strong
inflationary pressuresare nevertheless pinching household budgets.
A slump in both investment activity and industrial production is
continuing. Growth in the first quarter of 2014came in at just 0.9%
while GDP grew just 0.1% quarter on quarter (q/q). Growth in GDP
for the second quarter came in at 0.8% y/y and seasonally
adjustedq/q data put the increase in the second quarter at 0.2%.
The official estimate of third-quarter growth came in at 0.7% year
on year, while GDP was stagnantaccording to seasonally adjusted q/q
data. The addition of broader economic sanctions following the
downing of Malaysian Airlines flight MH-17 over easternUkraine,
together with falling global oil prices, is sending the economy
toward recession in 2015, with a decline of 4% projected for the
year as a whole. Wehave cut our projection for 2016 as well, from
0.7% growth to a decline of 0.3%. A recovery should begin to take
hold in 2017 at 1.5%, with growth ratesprojected to recover
thereafter to near the 3.0% level through the medium term. The
investment climate remains highly unsatisfactory. Capital continued
toleave the Russian private sector on a net basis through 2013, to
the tune of USD61.0 billion, according to the Central Bank of
Russia. Sell-offs of Russianassets in 2014 led to the net outflow
of an additional USD150 billion. A minimum of USD100 billion is
projected for 2016. This is taking a heavy toll on therouble, in
turn contributing to higher inflationfurther dampening private
consumptionand to strong inflationary expectations.
The central bank cannot address slower growth with monetary
easing as long as the rouble is weakening and inflation is
stubbornly strong. TheCentral Bank of Russia (CBR) had been anxious
to build its inflation-fighting credibility with an eye to floating
the rouble in 2015, and resisted monetaryloosening while inflation
was above target, despite considerable pressure from the government
and business elite to cut rates. Bank rhetoric late in 2013,
undernew bank chairman Elvira Nabiullina, had suggested less
complacency about risks to economic growth and seemed to leave open
the possibility of a rate cutin the coming months, but continued to
emphasize the importance of managing inflationary expectations.
Unfortunately, inflation in early 2014 remained farabove the new 5%
target, with the prospect of a more extended period of high
inflation due to a weaker rouble causing the bank to hike its key
interest rate by150 basis points in March, and by another 50 points
each in April and July. New economic sanctions in September and
falling world-market oil pricesrepeatedly pushed the exchange rate
beyond the intervention trigger against the basket of dollars and
euros in succeeding weeks. After a further150-basis-point hike in
the banks key rate, the rouble was set afloat in November, ahead of
the planned date of 1 January 2015. The bank has reserved theright
to intervene to support the currency if financial stability is
threatened and intervened heavily in succeeding weeks to no avail.
In a desperate move inmid-December, the CBR raised its key interest
rate a further 650 basis points to an eye-popping 17.0%.
The Russian economy remains overly dependent on movements in
world-market commodity prices and the extraction and export of
naturalresources to drive growth. Exports of fuels and metals now
account for nearly four-fifths of total Russian exports, and the
gas and oil sector is responsible forslightly more than 50% of
federal budget receipts. Yet the natural-resource extraction
sector, which currently represents 25% of the entire Russian
economy,faces significant capacity constraints because of an
extended period of insufficient investment. Moreover, capacity
needed to replace depleted older deposits istypically associated
with more difficult geologic, logistic, and climatic conditions,
and hence is far more capital intensive to develop and expensive to
exploit.Moreover, the technology required to tackle many of these
problems remains concentrated in the hands of the multinational
energy companies that arecurrently prohibited from cooperating in
Russia on high-tech energy projects by economic sanctions.
Data
-
2015IHS. page of 9 22
Economic Growth Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) 3.4 1.3 0.6 -5.0 -0.5 1.5 2.7 3.0
Real Consumer Spending (% change) 7.8 5.0 1.9 -4.7 -1.8 1.0 1.5
1.6
Real Government Consumption (% change) 2.6 1.1 0.5 -5.0 0.5 2.5
2.2 2.3
Real Fixed Capital Formation (% change) 6.6 1.4 -2.5 -15.0 -5.0
3.0 3.0 3.0
Real Exports of Goods and Services (% change) 1.4 4.2 -2.0 -4.0
4.0 3.0 2.9 -1.5
Real Imports of Goods and Services (% change) 8.8 3.6 -6.8 -1.5
-1.0 2.5 1.5 -1.7
Nominal GDP (US$ bil.) 1,999.4 2,078.2 1,875.2 1,042.5 1,088.0
1,171.2 1,267.9 1,358.5
Nominal GDP Per Capita (US$) 13,965 14,550 13,162 7,336 7,677
8,286 8,996 9,669
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Consumer demand
Key points
Russian consumer demand is driven by gains in domestic
purchasing power and stubborn inflation is dampening it.Consumer
demand is expected to grow at a more moderate pace than in the
pre-recession period through the medium term.
Analysis
Russian consumer demand is driven by gains in domestic
purchasing power and stubborn inflation is dampening it. Russian
workers had beencatching up rapidly after the hit on real wages
that they took following the financial crisis of 1998. More
recently, real incomes have benefited from stronggrowth in nominal
wages due to a relatively tight labor market, while affordable
consumer credit from domestic banks is expanding again. The latter
had beeninstrumental in revitalizing domestic passenger automobile
production after a severe slump following the global recession.
While consumers benefited in thefirst half of 2012 from post-Soviet
record-low inflation rates, the delayed adjustment of regulated
prices in July 2012, higher global and domestic food prices,and new
rounds of administered price increases in January and July 2013
eroded some of that advantage. Inflation received new impetus in
2014 as aweakening rouble increased the domestic cost of imported
goods. This took a bite out of households purchasing power. In the
first 10 months of 2014, theaverage monthly wage was up only 0.3%
year on year in real terms after an extended period of robust
growth in real incomes. Stubbornly high inflation,buoyed by food
prices as Russia bans imports from the United States, Canada,
Australia, Norway, and the European Union, will continue to pinch
householdbudgets in 2015. This has convinced us to downgrade the
projected growth of private consumption in each of the two years in
our latest forecast.
Consumer demand is expected to grow at a more moderate pace than
in the pre-recession period through the medium term. After
recovering from themost recent economic downturn with very strong
growth in consumption fed by improved household finances, renewed
consumer lending, and pent-updemand, slower growth in real wages
due to lagging productivity, reduced profitability of enterprises,
and stubborn inflation is slated to continue to take some ofthe
wind out of the sails of Russian consumers beyond the near term.
The strongest increase in consumer demand over the medium term will
be for services,as that area remains underdeveloped, having been
given the lowest priority under the old Soviet development model as
well as having taken the most severebeating during the steep
recession in 2009.
Capital investment
Key points
Investment in fixed capital in Russia will rise at a much more
moderate pace than in the pre-recession period through the medium
term. The Central Bank of Russia (CBR) projects net capital outflow
will moderate beyond 2013 and will be reversed thereafter, but this
would depend ondevelopments in the investment
environment.Investment in modernization is much-needed as natural
resource extraction becomes more capital-intensive.
Analysis
-
2015IHS. page of 10 22
Investment in fixed capital in Russia will rise at a much more
moderate pace than in the pre-recession period through the medium
term. Fixedinvestment must be driven by ongoing improvements in the
financial situation of Russian enterprises, as well as by
recovering business confidence, affordablecredit terms, and
much-needed enhancement of the Russian investment environment.
Financial-market turmoil has also dampened the flow of capital into
thecountry, and capital continued to leave Russia on a net basis
through mid-2014 at an estimated USD61 billion in 2013, and this
even accelerated in the firstthree quarters of 2014, to USD85.2
billion. Moreover, expenditure on fixed capital investment has been
moderately lower year on year (y/y) to date in 2014, asit was the
preceding year. This reflects, in part, reduced profitability of
domestic enterprises and, more recently, heightened geopolitical
tensions, includingsome that have limited access to external
financing.
The Central Bank of Russia (CBR) projects net capital outflow
will moderate beyond 2014 and will be reversed thereafter, but this
would depend ondevelopments in the investment environment. In
reality, this will also depend on the overall appetite for risk on
the part of investors, and prospects indeveloped countries and
other emerging markets. Uncertainty has been heightened by the
threat of increasingly harsh sanctions on Russia from the
UnitedStates and European Union in reaction to Russian support of
militant separatists in Ukraine and retaliation by Russia. High
commercial lending rates andfragile business confidence at home are
also helping to restrain the pace of investment activity,
exacerbated by the domination of credit markets by
largestate-controlled banks and perceived risk due to the lack of
transparency and poor governance typical of Russian
enterprises.
Investment in modernization is much-needed as natural resource
extraction becomes more capital-intensive. Over-burdened
infrastructure, andoutmoded plant and equipment constrain
diversification of the economy away from the energy sector,
moreover. Strong growth in investment prior to therecession had
been from a very low base. The level of fixed investment in 2003 by
our estimates was only slightly more than one-third of that in
1991. Theextended period of insufficient investment that
accompanied a transition to the market has resulted in capacity
constraints in a number of key sectors.
Labor markets
Key points
After reaching a record low in May 2014, little further progress
in reducing unemployment going forward can be expected; the labor
market looks actuallyto be a constraint on potential
output.Public-sector employment should be reduced in the medium
term.Amid demographic challenges and public-sector layoffs, total
employment will grow slowly in the medium term.
Analysis
After reaching a record low in May 2014, little further progress
in reducing unemployment going forward can be expected; the labor
market looksactually to be a constraint on potential output. From a
low 5.2% of the economically active population, the jobless rate by
International Labour Organization(ILO) standards sank to a historic
low of 4.9% in the third quarter of 2014, despite the considerable
output gap in the Russian economy. While the rateincreased to 5.2%
by November, this was strictly a seasonal development. The labor
market situation points to a structural problem that, along with
slowgrowth of labor productivity and investment, helps to explain
the sharp deceleration of GDP growth. We do not expect the rate of
unemployment to movesubstantially lower in the near term, apart
from seasonal fluctuation. In fact, the manufacturing and service
sectors report in recent surveys that they have beenshedding labor
as new business has slowed. The recent tight labor market had
provided for robust increases in real wages, although strong
inflation has noweroded them. We could see substantial
restructuring in the next several years given a drive to diversify
the economy that would provide for redundancies,particularly if
much-delayed privatization plans eventually proceed.
Public-sector employment should be reduced in the medium term.
Any reform of the so-called "natural monopolies" could be expected
to boost joblessnumbers. There is also a need to trim the bloated
public administrative bureaucracy. The plan under former president
Medvedev had been for a slimmed-downand more qualified bureaucracy,
but administrative reform is apparently on the back burner for
now.
Amid demographic challenges and public-sector layoffs, total
employment will grow slowly in the medium term. The overall
population will beshrinking as mortality rates exceed birth rates.
It will also be aging and the burden on workers of support for
pensioners will be growing. The United Nationsestimates that the
population aged 1559 will decline by an alarming 27.4% between 2015
and 2050, while the 60+ age cohort will be growing. Thegovernment
has expressed concerns about looming labor shortages and is
striving to provide incentives to increase the birth rate. It is
also likely thatretirement ages will have to be increased. Labor
shortages may force the government to more actively discourage
discrimination against foreign guest workersand relax the waiting
period for resident aliens to become Russian citizens.
Inflation
Key points
The Russian authorities have set unrealistic near- to
medium-term targets for bringing down the rate of inflation.The
central bank has struggled to stem inflation as the currency has
weakened.
Analysis
The Russian authorities have set unrealistic near- to
medium-term targets for bringing down the rate of inflation.
Inflation headed higher in 2014 dueto the weakening of the rouble
exchange rate. By the end of December 2014, year-on-year (y/y)
consumer price inflation stood at11.4%. Together with the
-
2015IHS. page of 11 22
effects of a much weaker rouble on the cost of imported goods,
the ban on food imports from many Western countries, instituted to
retaliate for sanctionsimposed on Russia, will send food prices
surging even higher in the near term. To help stem inflationary
pressures, the government will limit the indexation ofregulated
utilities prices in 2015, despite concerns raised by utilities. It
is also threatening to impose price controls on some food items,
although this actionwould likely affect only the course of official
indices while prices would surge in the informal economy. The
Central Bank of Russia (CBR) earlier set inflationtargets at 5% y/y
for 2014, 4.5% for 2015, and 4.0% for 2016. As a result of the new
surge in inflationary pressures, these targets are well out of
reach; thebank still hopes to eventually put the economy on a
trajectory to hit 4% annual inflation within the medium term, but
even this could still be wishful thinking.Recent inflationary
pressures will have a longer-lasting impact, as they have also
boosted inflationary expectations.
The central bank has struggled to stem inflation as the currency
has weakened. As of its regularly scheduled February 2014 policy
meeting, the CBR hadheld rates steady for 17 months. In early March
2014, the bank was forced to hike its key rate by 150 basis points
to retain capital and slow the rouble sell-offand resulting
inflationary pressure. Further 50-point increases came at the April
and July meetings. The weakening rouble and its impact on domestic
priceselicited yet another 150-basis-point increase in the key rate
in early November, a 100-basis-point increase in early December,
and another startling650-basis-point hike in mid-December as the
plunging exchange rate put the CBR in panic mode.
Data
Inflation Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Consumer Price Index (% change) 5.1 6.8 7.8 19.0 11.5 8.7 7.1
6.6
Wholesale-Producer Price Index (% change) 6.9 3.2 6.7 6.5 6.6
7.1 7.0 5.6
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Exchange rates
Key points
The rouble lost 40.6% of its value against the dollar in the
course of 2014, and 34.1% of its value against the euro in
2014.There will be less support for the exchange rate from
foreign-exchange earnings.All remaining restrictions on capital
account transactions have now been removed, but there is a chance
they will be renewed in some form if theexchange rate does not
respond to intervention or monetary policy tightening.
Analysis
The rouble lost 40.6% of its value against the dollar in the
course of 2014, and 34.1% of its value against the euro in 2014.
According to the CentralBank, in real effective terms, the rouble
slumped 27.2%.In the near term, financial market volatility,
falling oil prices, and an increasingly negative perception
ofRussian risk (including the likely downgrade of sovereign
obligations to junk status by at least one international ratings
agency) will continue to affect therouble, despite
still-substantial foreign-exchange earnings. Sell-offs of
rouble-denominated assets caused 10% depreciation against the
dollar between
-
2015IHS. page of 12 22
October 2013 and April 2014. A new round of Western sanctions in
September sent the exchange rate to new record lows. In
mid-November, the Central Bankof Russia moved forward its planned
float of the rouble, reserving the right to intervene if financial
stability were threatened. This was an attempt to increasethe risk
for speculators. The move helped temporarily stabilize the rouble.
The bank announced a further massive interest-rate hike in
December, to little avail.The slide is seen continuing into 2015 so
long as there is downward pressure on world oil prices, while
capital flight continues on a massive scale. Evenbeyond the turning
point for oil prices, the relatively high rate of domestic price
inflation will drive the nominal course of the rouble down against
majorcurrencies.
There will be less support for the exchange rate from
foreign-exchange earnings. We believe world-market oil prices will
remain far below 2012 peaklevels in the medium term. This will
reflect slowing global energy demand and rising output from new
sources of supply, including unconventional. Russianphysical export
volumes will grow slowly at best, given an anticipated slump in
investment activity. Periods of greater weakness can also be
expected becauseof scheduled large-scale redemptions of Russia's
considerable private-sector external debt.
All remaining restrictions on capital-account transactions have
now been removed, but there is a chance they will be renewed in
some form if theexchange rate does not respond to intervention or
monetary policy tightening. Full convertibility of the rouble was
established in July 2006. Despiteseveral years of net capital
outflow, the commitment to full convertibility continues to be
enunciated at the highest political levels. Yet, if monetary policy
andmarket intervention fail to stabilize the currency, capital
controls could prove the only answer to the crisis.
Data
Exchange Rate Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Exchange Rate (LCU/US$, end of period) 30.37 32.73 56.24 71.00
68.00 69.00 70.22 71.80
Exchange Rate (LCU/US$, period avg) 31.08 31.85 38.46 69.36
69.50 68.50 69.61 71.23
Exchange Rate (LCU/Euro, end of period) 40.07 45.14 68.27 75.26
76.84 86.25 92.69 96.07
Exchange Rate (LCU/Euro, period avg) 39.94 42.29 51.02 74.77
75.90 81.33 89.72 94.82
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Policy
Monetary policy
Key points
-
2015IHS. page of 13 22
Amid a severe economic recession, there will be increasing
pressure on the Central Bank of Russia (CBR) to cut interest rates,
but the rouble andinflation remain overarching concerns.The CBR had
announced a free float of the rouble ahead of schedule, aimed at
fending off speculative attacks on the currency, but
continuedintervention in the market will be required when financial
stability is threatened.
Analysis
Amid a severe economic recession, there will be increasing
pressure on the Central Bank of Russia (CBR) to cut interest rates,
but the rouble andinflation remain overarching concerns. The bank
had kept the refinancing rate unchanged for 17 months as of
February 2014. The bank, however, has nowtaken the one-week minimum
repo auction rate as its new key policy lever in an effort to make
its actions more transparent. The refinancing rate, currently
at8.25%, is now largely symbolic, as the Lombard rate is no longer
tied to it. The need to staunch the export of capital and support
the rouble caused the bank toraise its new key rate by 150 basis
points in March to 7.00% and further to 7.50% in April, despite the
expected negative impact on the domestic economy.With inflation
hitting 7.8%, a further 50 basis-point increase to 8.00% was
instituted in July. As the weakening exchange rate lent further
support to risingconsumer prices, the CBR announced a further hike
in the key rate by 150 basis points to 9.50% at its November 2014
meeting. A 100-basis-point increase atthe December meeting was
followed shortly by an extraordinary hike of a further 650 basis
points, bringing the key rate to a startling 17.0%. The
bankmaintains that if risks to the rouble and inflation strengthen
further, it will not hesitate to increase rates again.
The CBR had announced a free float of the rouble ahead of
schedule, aimed at fending off speculative attacks on the currency,
but continuedintervention in the market will be required when
financial stability is threatened. The heretofore dual focus of
monetary policy had made achieving theaims vis--vis the exchange
rate and inflation more difficult. To limit intervention in the
foreign-currency market and move toward the float of the currency,
thebank created a moving rouble trading band. The bank planned to
no longer engage in targeted intervention and to move the trading
corridor more often as itapproached a float of the rouble at the
outset of 2015. When a further rate hike did little to stabilize
the rouble, however, the bank moved up the float tomid-November.
The CBR has continued to intervene in the foreign currency market,
though, in an effort to punish speculation and preserve financial
stability,but as of yet, with limited success.
Data
Monetary Policy Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Policy Interest Rate (%, end of period) 8.25 5.50 17.00 10.50
7.50 6.25 7.00 7.00
Short-term Interest Rate (%, end of period) 9.10 9.47 10.85
22.32 18.13 14.22 8.10 7.40
Long-term Interest Rate (%, end of period) 6.12 6.14 6.15 5.83
5.78 5.72 6.60 6.40
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Fiscal policy
Key points
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2015IHS. page of 14 22
Key points
Government spending on social programs and public-sector
investment will be aimed at bolstering the popularity of the Putin
regime, countering theeffect of Western economic sanctions, and
kick-starting more robust, diversified growth.The downward
correction in world-market oil prices in the face of populist
spending programs will boost the deficit above current projections
in the nextseveral budget years.
Analysis
Government spending on social programs and public-sector
investment will be aimed at bolstering the popularity of the Putin
regime, counteringthe effect of Western economic sanctions, and
kick-starting more robust, diversified growth. While the Ministry
of Finance saw a cash deficit of just0.5% of GDP in 2013, we
estimate the non-oil deficit that year at 10.3% of GDP. This
underlines the fiscal vulnerability of Russia to any protracted
declines inworld market oil prices. The 2013 budget had a breakeven
point of USD105 per barrel average for Urals crude, but the deficit
excluding revenues from oil andgas remains wide and we see oil
prices sliding modestly through 2015.The international financial
institutions have recommended that by 2015 this non-oil gapshould
be trimmed to no more than 4.7% of GDP. A new fiscal rule has been
adopted that limits borrowing by the federal government to 1% of
GDP annually.Nevertheless, there remains the possibility of funding
additional spending by drawing down the governments massive fiscal
reserves. Given the poorperformance of the economy in the first
half of 2014 and blows to business confidence from economic
sanctions, the government will engage in additionaldeficit spending
in an effort to stimulate growth. Financing expenditures from
fiscal reserves would be viewed as an alternative to borrowing, but
these havebeen targeted at filling the gap in the pension fund,
which will widen through the medium term.
The downward correction in world-market oil prices in the face
of populist spending programs will boost the deficit above current
projections in thenext several budget years. World-market oil
prices have been exhibiting a significant downward correction as
the global oil demand/supply situation is seenby markets to be
easing even further. Together with additional spending programs
aimed at fulfilling the pledges made by Vladimir Putin during his
presidentialcampaign, the fiscal deficit could easily go higher
than the Finance Ministry currently foresees, although it can be
readily financed from fiscal reserves. Therecently promulgated
fiscal framework calls for an average federal budget deficit of
0.6% of GDP during 201517, but assumes an average price of a barrel
ofUrals crude oil of USD100. Given slowing global growth and
rapidly rising supplies of unconventional oil, this is clearly
overoptimistic.
Data
External sector
Key points
Russian trade surpluses will decrease as Russias energy export
earnings decline, although the weakening rouble has also put a dent
in imports.Russia's external payments surpluses will no longer
approach the peak reached in 2008.
Analysis
Russian trade surpluses will decrease as Russias energy export
earnings decline, although the weakening rouble has also put a dent
in imports.Energy and metals dominate Russian exports, typically
accounting for around three-fourths of their total value (the share
hit 78.4% in full-year 2013). Ournear-term baseline forecast is for
oil prices to remain far below the peak reached in early 2012,
while energy exports in physical terms will stagnate, at best.
In2013, the Central Bank of Russia estimates cumulative export
earnings dipped 0.8% year on year, while imports continued to
expand at 2.1%. Exportsdeclined in 2014. Imports, although from a
lower statistical base, were cut back even more sharply in 2014,
because of slack aggregate demand and aweakened exchange rate. We
expect the trade surplus came in very near its 2013 level of
USD181.9 billion in 2014, but will drop substantially in 2015 as
theprice of Brent oil is expected to average just USD66 per
barrel.
Russia's external payments surpluses will no longer approach the
peak reached in 2008. In addition to the stabilization of the
merchandise trade surplus,deficits on other subcomponents of the
current account, such as non-factor services and income items, will
widen further, helping to erode the current-accountsurplus
substantially. The downwardly revised most recent estimate of the
2012 surplus came in at USD72.0 billion. The revised estimate of
thecurrent-account surplus in 2013 came in at just USD34.1 billion,
down approximately USD37 billion from a year earlier. Although the
Central Bank estimatesthe surplus in 2014 rebounded to USD56.7
billion on improvements in subaccounts other than merchandise
trade, we see the current-account surplus slippingsubstantially in
2015 and beyond. Current accounts will be much nearer balance.
Data
-
2015IHS. page of 15 22
Trade and External Accounts Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Exports of Goods (US$ bil.) 527.4 523.3 496.7 356.4 367.1 381.7
397.0 412.9
Imports of Goods (US$ bil.) 335.8 341.3 308.0 270.3 281.9 292.7
303.8 315.3
Trade Balance (US$ bil.) 191.7 181.9 188.7 86.0 85.1 89.1 93.2
97.6
Trade Balance (% of GDP) 9.6 8.8 10.1 8.3 7.8 7.6 7.4 7.2
Current Account Balance (US$ bil.) 71.4 33.0 58.0 5.0 0.0 -2.0
-5.1 -6.2
Current Account Balance (% of GDP) 3.6 1.6 3.1 0.5 0.0 -0.2 -0.4
-0.5
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Key indicators and forecasts
Data (forecasts)
-
2015IHS. page of 16 22
Detailed Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) 4.3 3.4 1.3 0.6 -5.0 -0.5 1.5 2.7 3.0
Nominal GDP (US$ bil.) 1,903.7 1,999.4 2,078.2 1,875.2 1,042.5
1,088.0 1,171.2 1,267.9 1,358.5
Nominal GDP Per Capita (US$) 13,272 13,965 14,550 13,162 7,336
7,677 8,286 8,996 9,669
Nominal GDP Per Capita (PPP$) 22,494 23,724 24,437 25,002 24,157
24,539 25,439 26,740 28,208
Real Consumer Spending (% change) 6.8 7.8 5.0 1.9 -4.7 -1.8 1.0
1.5 1.6
Real Fixed Capital Formation (% change) 9.1 6.6 1.4 -2.5 -15.0
-5.0 3.0 3.0 3.0
Real Government Consumption (% change) 1.4 2.6 1.1 0.5 -5.0 0.5
2.5 2.2 2.3
Real Imports of Goods and Services (% change) 19.9 8.8 3.6 -6.8
-1.5 -1.0 2.5 1.5 -1.7
Real Exports of Goods and Services (% change) 0.4 1.4 4.2 -2.0
-4.0 4.0 3.0 2.9 -1.5
Industrial Production Index (% change) 5.0 3.4 0.4 1.7 -7.0 -1.3
1.7 2.4 2.5
Consumer Price Index (% change) 8.4 5.1 6.8 7.8 19.0 11.5 8.7
7.1 6.6
Wholesale-Producer Price Index (% change) 17.7 6.9 3.2 6.7 6.5
6.6 7.1 7.0 5.6
Policy Interest Rate (%) 8.00 8.25 5.50 17.00 10.50 7.50 6.25
7.00 7.00
Short-term Interest Rate (%) 8.45 9.10 9.47 10.85 22.32 18.13
14.22 8.10 7.40
Long-term Interest Rate (%) 6.74 6.12 6.14 6.15 5.83 5.78 5.72
6.60 6.40
Fiscal Balance (% of GDP) 1.5 0.4 -0.2 -0.8 -3.0 -2.9 -1.5 -1.7
-0.9
Population (mil.) 143.44 143.17 142.83 142.47 142.10 141.73
141.35 140.94 140.50
Population (% change) 2.2 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3
-0.3
Unemployment Rate (%) 6.6 5.5 5.5 5.2 6.6 6.7 5.8 5.3 5.3
Current Account Balance (US$ bil.) 97.3 71.4 33.0 58.0 5.0 0.0
-2.0 -5.1 -6.2
Current Account Balance (% of GDP) 5.1 3.6 1.6 3.1 0.5 0.0 -0.2
-0.4 -0.5
Trade Balance (US$ bil.) 196.9 191.7 181.9 188.7 86.0 85.1 89.1
93.2 97.6
Trade Balance (% of GDP) 10.3 9.6 8.8 10.1 8.3 7.8 7.6 7.4
7.2
BOP Exports of Goods US$bn 515.4 527.4 523.3 496.7 356.4 367.1
381.7 397.0 412.9
BOP Imports of Goods US$bn 318.6 335.8 341.3 308.0 270.3 281.9
292.7 303.8 315.3
Exchange Rate (LCU/US$, end of period) 32.20 30.37 32.73 56.24
71.00 68.00 69.00 70.22 71.80
Exchange Rate (LCU/Yen, end of period) 0.41 0.35 0.31 0.47 0.58
0.54 0.54 0.56 0.57
Exchange Rate (LCU/Euro, end of period) 41.66 40.07 45.14 68.27
75.26 76.84 86.25 92.69 96.07
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated on the 15th ofSource:each month from monthly forecast
update bank (GIIF). Written analysis may include references to data
made available after the release of the GIIF bank.
Debt Indicators
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Foreign Exchange Earnings (US$ bil.) 442.6 574.2 590.6 593.9
632.7 660.2 685.8 716.2 748.0 ..
Portfolio Investment, Net (US$ bil.) -5.4 -4.4 -21.6 -12.3 -13.3
-14.4 -15.7 -17.0 -18.4 ..
Portfolio Investment, Net (% of GDP) -0.4 -0.2 -1.1 -0.6 -0.7
-0.7 -0.7 -0.7 -0.7 ..
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2015IHS. page of 17 22
Foreign Direct Investment, Net (US$ bil.) -9.4 -11.8 1.8 -15.6
0.0 18.0 11.9 11.3 10.8 ..
Foreign Direct Investment, Net (% of GDP) -0.6 -0.6 0.1 -0.7 0.0
0.9 0.5 0.4 0.4 ..
Foreign Exchange Reserves, Excl. Gold (US$ bil.) 443.6 454.0
486.6 469.6 420.6 437.5 455.0 468.6 466.3 ..
Import Cover (Months) 16.6 13.3 13.1 12.0 10.9 10.7 10.4 10.2
9.6 ..
Total External Debt (US$ bil.) 488.9 541.9 636.4 728.9 688.5
711.7 771.8 834.6 873.0 ..
Total External Debt (% of GDP) 32.1 28.5 31.8 34.8 34.3 34.0
33.7 33.0 32.3 ..
Total External Debt (% of forex earnings) 110.5 94.4 107.8 122.7
108.8 107.8 112.5 116.5 116.7 ..
Short Term External Debt (US$ bil.) 60.2 68.2 81.5 85.3 79.0
80.0 85.0 90.1 92.3 ..
Short Term External Debt (% of total external debt) 12.3 12.6
12.8 11.7 11.5 11.2 11.0 10.8 10.6 ..
Short Term External Debt (% of international reserves) 13.6 15.0
16.7 18.2 18.8 18.3 18.7 19.2 19.8 ..
Total External Debt Service (US$ bil.) 56.6 64.3 98.2 77.6 82.1
55.1 50.8 45.3 42.7 ..
Interest Payment Arrears (US$ bil.) 0.1 0.1 0.0 0.0 0.0 0.0 0.0
0.0 0.0 ..
External Liquidity Gap (% of forex earnings) 3.5 -0.8 10.4 13.8
6.6 3.3 4.6 3.9 2.8 ..
Historical data from selected national and international data
sources. All forecasts provided by IHS Global Insight. Table
updated live from quarterlySource:Sovereign Risk forecast bank
(SRS).
Key facts and demographicsArea: 17,075,000 sq km (6,592,664 sq
miles)
Population: 143,300,000 (Federal State Statistics Service,
2013)
Language: Russian (official). Many other languages are spoken
throughout the federation.
Religion: Russian Orthodox, Islam, Judaism and others
Time Zone: The country covers 11 time zones. Moscow time is GMT
+3, Vladivostok is GMT +10.
Neighbours: Azerbaijan, Belarus, China, Estonia, Finland,
Georgia, Kazakhstan, Latvia, Lithuania, Mongolia, North Korea,
Norway, Poland and
Ukraine
Capital City: Moscow
Primary Ports: St Petersburg, Novorossiysk, Murmansk,
Vladivostok, Primorsk (oil terminal)
Primary
Airport:
Moscow Domodedovo Airport
Currency: Rouble (RUB)
External trade
OverviewRussian exports overwhelmingly consist of fuels and
metals, accounting for more than three-fourths of total annual
export revenue, while machinery andequipment, food and agricultural
products, and chemicals dominate imports. After the collapse of the
special trade relationships within the old Comecon (ormore
properly, CMEA) and the disintegration of the Soviet Union, the
locus of Russian external trade has shifted dramatically toward the
West, the EU inparticular. Nevertheless, Russian import demand is
still crucial for most of the other CIS economies. Russia is
seeking to diversify its exports in terms ofcommodities and, in an
effort to open markets abroad and spur competitiveness at home, it
has sought membership in the World Trade Organisation
(WTO),acceding in December 2012. Temporarily, Russia had linked its
bid for the WTO to those of Belarus and Kazakhstan, as the three
countries prepared to form acustoms union, but the joint approach
was unacceptable to the WTO. The "troika" customs union of Russia,
Belarus, and Kazakhstan, however, has goneforward and is intended
to be the first step in promoting economic integration among the
members of the CIS.
Data
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2015IHS. page of 18 22
DataRussia: Major Trading Partners, 2013
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD
Percent Share
Netherlands 53.6 10.7 China 54.9 16.5
Germany 41.0 8.2 Germany 41.6 12.5
China 34.1 6.8 Ukraine 17.3 5.2
Italy 27.4 5.5 Belarus 16.4 4.9
Ukraine 24.8 5.0 Italy 14.6 4.4
Turkey 24.3 4.9 United States 14.2 4.3
Belarus 20.4 4.1 Japan 12.5 3.8
Japan 20.0 4.0 Kazakhstan 11.6 3.5
Poland 18.9 3.8 France 11.4 3.4
United States 17.2 3.4 South Korea 11.2 3.4
Source: IMF, Direction of Trade
Russia: Major Trading Partners, 2000
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD
Percent Share
Germany 9.2 9.0 Germany 3.9 11.5
United States 8.0 7.7 Belarus 3.8 11.1
Italy 7.3 7.0 Ukraine 3.6 10.8
Belarus 5.5 5.4 United States 2.7 8.0
China 5.2 5.1 Kazakhstan 2.2 6.5
Ukraine 5.0 4.9 Italy 1.2 3.6
United Kingdom 4.7 4.5 France 1.2 3.5
Poland 4.5 4.3 Finland 1.0 2.8
Netherlands 4.3 4.2 China 0.9 2.8
Switzerland 4.0 3.9 United Kingdom 0.9 2.5
Source: IMF, Direction of Trade
Economic development
OverviewCompared with most other Soviet-era transition
economies, the collapse in Russia's official output due to the
transition to a market-orientedeconomy was the most dramatic. Under
the leadership of President Boris Yeltsin and Prime Minister Yegor
Gaydar, Russia undertook liberalization of pricesand trade,
macroeconomic stabilization, privatization, and structural change
early in the post-Soviet period. Due to a huge budgetary deficit
directly financed bythe Central Bank of Russia (CBR), however, the
country approached hyperinflation in 1992. The first wave of
privatization proceeded quickly. Some 65% offirms ended up
controlled by insiders, who proved reluctant to restructure them,
and many remained inefficient. Yeltsin's strengthened political
position and anew CBR chairman made stricter monetary and fiscal
policies possible by 1995. By the end of 1996, the exchange rate
was stabilized and set on a predictabledepreciation path. No
equivalent progress was made with reforming the tax system. The
fiscal gap was financed by short-term bonds. Increasing
debt-servicingcosts and dwindling tax revenues proved disastrous,
and in September 1998, the Russian sovereign defaulted on its debt
and the exchange rate collapsed.
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2015IHS. page of 19 22
The rouble's massive devaluation provided a competitive
advantage, and from 1999 through 2008, GDP growth was robust and
stable, aided byrising oil prices. Output also received a boost
from domestic demand as growing real wages led to higher levels of
private consumption. Investment growthsurged as the financial
situation of firms improved. In addition, foreign-exchange reserves
soared and the debt burden has fallen so that the sovereign is now
anet creditor vis--vis the rest of the world. Inflation had been
reined in to single digits by the end of 2006, although subsequent
monetary growth andmuch-needed upward adjustment of regulated
tariffs and prices provided for moderate setbacks on the inflation
front in the following years. As thestrengthening currency
presented a major challenge to the competitiveness of Russian
manufacturing enterprises, the dual focus of the CBR on both
inflationand the exchange rate caused the bank to consistently miss
its end-year inflation targets. The burden of macro stabilization
fell on fiscal policy. Russia ranlarge fiscal surpluses in the
years prior to the 2009 recession and accumulated windfall
oil-based revenues in a stabilization fund. Until 2009, these
fiscalreserves were tapped primarily to retire ahead of schedule
nearly the entire debt to the Paris Club of official creditors
inherited from the Soviet Union. Theeconomic dynamism that was
spurred by high energy prices has, however, helped to stave off
structural reform so that the economy remains overly dependenton
the energy sector to drive growth. The plunge in world-market
energy prices in the fourth quarter of 2008 and the credit crunch
that accompanied turmoil inglobal financial markets subsequently
resulted in a very sharp contraction of aggregate economic activity
in Russia. This caused federal budget revenues todwindle while the
government instituted major fiscal stimulus initiatives and
fortified social spending. The resulting huge federal budget
deficit was funded fromthe Reserve Fund and the National Wealth
Fund, which are the successors to the oil stabilization fund
accumulated during the period of record-highworld-market energy
prices. Going forward, while fiscal reserves are being replenished
as oil prices remain above the fiscal break-even point, the
governmentplans to continue to run a substantial non-oil deficit
aimed at raising living standards and modernizing and diversifying
the economy through public-sector andpublic-private programs.
In contrast to the ambitious market-oriented reform agenda
presented at the outset of Putin's first term in 2000, the
government now seeks to"control the commanding heights" of the
economy by building dominant state-controlled enterprises in
strategic sectors. These include gas, oil,automotive
machine-building, aviation, and metallurgy Rather than break up
giant Gazprom as laid out in the original agenda, the company has
been.strengthened by acquisition of assets at bargain prices
through state manipulation, has spread into non-core activities,
and has been given statutory monopolyover gas exports and control
over the gas pipeline network. Picking up the assets of the defunct
YUKOS integrated oil company, Rosneft grew from a smallstate-owned
oil producer to the largest oil company in Russia, the state
champion in the upstream oil sector. While former President
Medvedev had espousedlimiting the influence of the state in the
economy, all indications are that President Putin will not pursue
that course. Although progress has been made incleaning up the
banking sector, which could shore up its role in financial
intermediation, and steps have been taken to create a market for
electric power,liberalization of the gas market has not proceeded.
Russia nevertheless has pledged to the World Trade Organization
that the gas market in Russia would beliberalized in order to
accede to the organization, meaning that domestic enterprises would
have to pay market prices for their natural gas inputs, although
notimetable was put forward for restructuring the sector. WTO
accession was approved by the Duma in July 2012 by a relatively
narrow margin and a number ofindustrial interests pressured
deputies in light of their concern over the resulting increase in
competition. Russia acceded to the WTO in December 2012. ThePutin
regime is counting on WTO accession to open markets for Russian
exporters as well as to spur Russian producers to greater
efficiency, but Russia hasnegotiated exemptions to some WTO rules
and rather lengthy adjustment periods to protect certain vulnerable
sectors, agriculture in particular. Moreover, thecountry has
adopted legislation that erects new, non-tariff barriers to
imports, including a hefty recycling fee for imported automobiles
and bans on someimports of livestock products, purportedly over
hygienic and health concerns.
DataHuman Development Index (HDI)*
0.755 (rank 66th out of 187)
Inequality Adjusted (HDI)** 0.670 (rank 66th out of 187)
GDP Per Capita (2005 PPP USD) 13,611
Poverty gap at < USD2 (PPP) (%) 0
Income share held by highest 10% 32
Labour Force, total 75.6 million
Labour Participation rate (% of total unemployed) 63
Long term Unemployment (% of total unemployment) 35
Development strategyIn contrast to the ambitious market-oriented
reform agenda presented at the outset of Putin's first term in
2000, the government now seeks to"control the commanding heights"
of the economy by building dominant state-controlled enterprises in
strategic sectors. These include gas, oil,automotive
machine-building, aviation, and metallurgy. Rather than break up
giant Gazprom as laid out in the original agenda, the company has
beenstrengthened by acquisition of assets at bargain prices through
state manipulation, has spread into non-core activities, and has
been given statutory monopolyover gas exports and control over the
gas pipeline network. While former president Medvedev had espoused
limiting the influence of the state in the economy,all indications
are that President Putin will not pursue that course vigorously.
Although progress has been made in cleaning up the banking sector,
which couldshore up its role in financial intermediation, and steps
have been taken to create a market for electric power,
liberalization of the gas market has notproceeded. Russia pledged
to liberalize its gas market in order to accede to the WTO,
although no timetable was put forward. WTO accession was approvedby
the Duma in July 2012 by a relatively narrow margin, and a number
of industrial interests pressured deputies in light of their
concern over the resultingincrease in competition. The Putin regime
is, however, counting on WTO accession to open markets for Russian
exporters as well as to spur Russianproducers to greater
efficiency.
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2015IHS. page of 20 22
Labor marketsThe Russian population is rapidly aging and
shrinking. Like most of Central and Eastern Europe, the Russian
population is dwindling and aging due to lowbirth rates and high
infant mortality in the late-Soviet and transition eras. According
to the 2010 revision of demographic projections by the UN, the
Russianpopulation aged 1559 will decline 31.7% between 2011 and
2050. Russian policymakers are concerned that labor shortages will
handicap the economybeyond the medium term and have struggled to
formulate policies to encourage a higher birth rate, particularly
among the Great Russian population, includingmaternity payments and
investment in expanded and improved child-care facilities. While
substantial numbers of migrant workers from other Commonwealth
ofIndependent States countries supplement the native labor force,
many of these are involved in retail trade and have been negatively
received by ethnicRussians. At the same time, the ranks of
pensioners will swell, placing a heavier burden of social taxation
on workers and employers. A reform of the pensionsystem, a very
politically sensitive issue, will certainly be necessary within the
medium term.
Soviet-style trade unions survived the collapse of the USSR, and
even though some reorganization has followed, the unions remain
relativelypowerful. Important new unions include the air-traffic
controllers, airline pilots, railroad engineers, and dockworkers.
Some two-thirds of the workforce isestimated to belong to either an
old or new union.
The Russian unemployment insurance system is complex and the
level of benefits is modest. Thus, there is not much incentive to
register asunemployed. In the Soviet system, the workplace acted as
provider of many social benefits, such as housing, medical
insurance, and child care. Firms havebeen slow to give up this
role, and, as a result, workers have remained on the payroll even
when not paid. This also contributed to a surprisingly
lowunemployment rate, which persisted for a long time in
independent Russia. Unemployment according to International Labour
Organization standards began torise again at the end of 2008, as
enterprises cut payrolls in an effort to preserve profit margins in
the worsening economic environment. Unemployment hassince fallen
well below the peak reached in early 2010 and stabilized in 2012 at
a fairly low level, indicating a relatively tight labor market.
Monetary systemIn light of movement toward macroeconomic
stability and rapid and sustained economic expansion since an
external liquidity crisis developed in 1998,confidence in the
Russian currency has grown, allowing the gradual introduction of
complete convertibility in July 2006. Foreign currency is no longer
used aslegal tender, as established by federal regulations. The
exchange-rate structure is unified. The exchange-rate regime is a
managed float within a movingtrading band with no pre-announced
path for the rate. The band is moved if the level of intervention
required to maintain its bounds exceeds a threshold. TheCentral
Bank of Russia (CBR) announces daily an official exchange rate,
determined on the basis of the interbank exchange rates. The
official rate is used foraccounting and taxation purposes. To
manage the rate, the CBR operates in both the interbank currency
exchanges and the over-the-counter interbankmarket. There are no
exchange subsidies. There is a forward market, with participation
allowed for authorized banks. The rouble was made convertible on
thecurrent account in mid-1992. Until July 2006, some restrictions
remained on capital account transactions. A law that came into
force in June 2004 on currencyregulation and currency control was a
major step in liberalizing currency movement on the capital
account. Under that law, all foreign currency paymentsbetween
Russian residents and non-residents that were not specified as
regulated operations could be made freely. (Regulated operations
consisted of: 1)settlements in connection with the use of
commercial credits in foreign trade over a specified period; 2)
acquisition of equity participations by residents fromnon-residents
and residents' contributions to foreign simple partnerships; and 3)
payments to be regulated exclusively by the Central Bank: debt
financing,securities, and banking operations between Russian
residents and non-residents.) That law also specifically prohibited
the introduction of an individualcurrency permit requirement. In
July 2006, virtually all restrictions on convertibility of the
rouble on the capital account were lifted in hopes of attracting
aninflow of capital, both from non-residents and by means of
residents repatriating capital that had earlier fled Russia at a
time when holding rouble assets wasunattractive. While net capital
flowed into Russia in 200607, increased aversion to risk and
turmoil in international capital markets and the perception
ofpotential investors that the environment in Russia was
unattractive for investment resulted in a resumption of net outflow
on a large scale in 2008 through thefirst quarter of 2013.
Financial systemAlthough there have been significant
improvements in the supervision of the banking sector in recent
years and the introduction of widespread depositinsurance has been
a positive step, the Russian banking sector still is inadequate for
the task of financial intermediation. The Russian banking sector
remainsrelatively small, weak, and segmented. Given continued
scarcity of skilled bank personnel and substantial non-transparency
with respect to the operation andownership of domestic
corporations, there is inadequate means to assess the
creditworthiness of clients, which increases the likelihood of bad
loans. In thewake of a worldwide credit crunch in 200809 and
contracting domestic economic activity, the share of non-performing
loans rose steadily and could havethreatened the banking system as
a whole if the central bank and the government had not stepped in
to support major institutions.
Prior to the introduction of the new deposit insurance system,
state banks, such as leader Sberbank, which alone had offered
deposit insurance previously,strengthened their dominant role in
the economy, while the commercial banking sector hardly existed as
a functioning system. In the absence of sophisticatedcapital
markets and a basic banking system for channeling savings into
investments and loans and with a growing, but still very limited,
presence of foreignbanks, Russian corporations relied on retained
profits from cash flow for their investment needs as well as
borrowing abroad in foreign currencies. Banking-and
financial-sector reform is lagging, but progress has been made. The
regulatory framework has been tightened, but structural weaknesses
remain.Vneshekonombank (VEB), which acts as both a bank and as the
state's foreign debt-servicing agent, will have these functions
split into two separate entities(Vneshekonombank Russia and
Vneshekonombank USSR), and the Central Bank of Russia (CBR) is
expected to eventually pare its 75.5% ownership ofRussia's
second-largest bank, Vneshtorgbank (VTB) to 50% plus one share. The
banking sector needs greater consolidation, as the market is
currentlypopulated by more than 1,000 banks, a number of which
serve one company alone and some of which are little more than
money-laundering fronts. A numberof banks, particularly small and
medium-sized institutions, also face problems because of troubled
loan portfolios. The market for domestic government
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2015IHS. page of 21 22
securities remains small and relatively weak. The stock market
has been developing rapidly in recent years, and its capitalization
surged and then fell alongwith the aggregate economy and oil major
earnings in early 2009. Equities have regained a good deal of
ground since then. Nevertheless, trends are largelydriven by the
large energy companies. There are securities exchanges in Moscow,
Saint Petersburg, and Novosibirsk.
Natural resourcesExploitation of Russia's vast natural resource
deposits was largely responsible for jump-starting the recovery of
the economy following the 1998 financialcollapse, but it ushered in
a second deep recession as energy prices plummeted in the final
quarter of 2008. World market oil prices recovered along withglobal
economic growth in the course of 2010 and rose further through 2011
and the first half of 2012, given only a very slight buffer of
excess productioncapacity on a global scale. Russia is the world's
largest country by area, stretching over 11 time zones. The
southern part of European Russia holds rich soilsand supports most
of the region's agriculture. The Ural Mountains contain important
mineral deposits: mineral fuels, iron ore, nonferrous metals,
andnonmetallic minerals. Also, the southern mountain systems,
notably, the Caucasus Mountains, contain valuable mineral deposits.
The northern and centralparts of the West Siberian Plain hold
important oil and natural gas deposits. The Central Siberian
Plateau is believed to contain important deposits of hard coal.Over
two-fifths of the country's area is covered by forestsaccounting
for nearly one-quarter of the world's forested areas.
Unfortunately, the natural resourceextraction sector is suffering
from an extended period of insufficient investment during the
country's economic transition. Moreover, new resource
depositsrequired to replace the dwindling capacity of older,
depleted deposits are generally associated with more difficult
geologic and climatic conditions andcomplicated logistics, making
them even more capital intensive to develop and exploit. Along with
necessary infrastructure to access newer natural resourcedeposits,
this will mean that huge investment resources will be required to
continue to benefit from Russias bountiful endowment.
Key sectorsManufacturing remains a significant sector in the
Russian economy. The most important branches of manufacturing
include machine building(locomotives, automobiles, agricultural
machinery, space vehicles, military weapons, and computers);
metallurgy (specialty steels and nonferrousmetals); and chemicals
(chemical fertilizers and industrial chemicals). Manufacturing
capacity is located mainly in western parts of the country and in
theUral Mountains region.Mining and energy production are the most
crucial export sectors. Russia is among the world's most important
nickel and aluminum producers. It isalso an important producer of
gold, silver, and diamonds as well as lead, copper, uranium ores,
iron, and zinc ores. Russia is the world's most importantproducer
of