Our comprehensive assessment of Russia's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Russia, as well as the latest industry developments that could impact Russia's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Russia before your competitors.

Country Risk

Russia Country Risk

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Core Views

  • The fallout from the Ukraine crisis has worsened the domestic demand outlook in Russia, and we expect real GDP growth to slow to 0.6% y-o-y in 2014, from 1.3% in 2013. With the government taking steps towards fiscal consolidation, net exports will be the main driver of growth in 2014-2015.  

  • Although inflation spiked to 7.8% y-o-y in June, up from 6.1% y-o-y in January, we reiterate our view that inflation will subside by year-end. Subsiding inflationary pressures will allow the Central Bank of Russia to cut the main policy rate from 8.00% to 7.75% in Q115.

  • Rouble weakness will benefit Russia's public finances in 2014-2015, ensuring Russia's budget deficit will remain modest over this time frame. In addition, the government has recently announced plans aimed at fiscal consolidation, which we believe are...

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Russia Operational Risk Coverage (9)

Russia Operational Risk

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BMI View:   Investors will benefit from the country's large and highly educated workforce, the result of high enrolment rates at the primary, secondary, and tertiary levels. Additionally, Russia is proceeding with trade integration, having acceded to the WTO in 2012. A well-developed banking sector facilitates economic activity, and a highly developed rail infrastructure provides logistical links throughout the country and across all major borders. Major challenges remain, however, including a high incidence of corruption and bureaucratic delays that pose challenges to businesses, especially those relying on export and import of goods. Additionally, we see a medium-to-high degree of risk of an interstate conflict involving Russia in the next five years, and the country has been subject to terrorist attacks emanating from the Islamist insurgency...

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Russia Crime & Security

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Russia poses considerable security risks for foreign business travellers, expatriates, and tourists, with street crime and indiscriminate terrorism being the most pertinent dangers. The most probable risk faced by foreigners in terms of crime is pick-pocketing, robbery, and ATM fraud. Reporting crimes to the police is made complicated by the lack of English language skills on the part of the police and public officials in general. On a more positive note, violent crime is generally unlikely to affect short-term visitors.

Russia faces a high risk of terrorism, which emanates from the predominantly Muslim republics of North Caucasus, where an Islamist insurgency has been under way since the mid-1990s. Although the frequency of high-profile mass-casualty terror attacks has declined, Moscow's Domodedovo International Airport saw a suicide bombing as recently as January 2011 that killed almost 40 people.

Russia also faces a...

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Russia Labour Market

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Russia ' s very large and highly skilled urban labour force is a significant incentive for investors from a range of different sectors. The country's high educational standards and enrolment rates from pre-primary through to tertiary level ensure that investors can expect a high level of literacy and numeracy across the country. That said, health risks are high in Russia, raising the possibility of lengthy absenteeism, incurring significant costs for employers. For these reasons, the country scores 66.3 for Labour Market risks, putting it in a leading position regionally.

With its large labour force, urbanised population and good primary education system, there is a very high availability of labour with a consistent level of basic skills. Furthermore, the size of Russia's labour force is increased by a high female labour force participation rate of...

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Russia Logistics

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Russia's logistics sector is characterized by a large and rapidly growing market, which drives export and import growth and increases the pressure on the single-most important means of transport: Russia's rail system. This poses several risks to investors as the reliance on one means of transport to cater for the supply chains of such a large country is dangerous as there is no other transport sector, which can absorb the fallout. The road network is poorly designed and thus cannot funnel significantly more freight volumes. It is also doubtful how Russia's roads are going to cope with the expected increase in tourists in the wake of the Ice Hockey World Cup in 2016 and the FIFA World Cup in 2018. On a positive note, risks with regards to utilities costs and availability are very low in Russia because of the country's richness in natural resources. Therefore, Russia scores 55.1 out of 100 in our Logistics Risks Index, which puts the country on 11 th...

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Russia Trade & Investment

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As a BRIC member state, investment opportunities in Russia are lucrative, but the trade and investment climate is still fraught with risk and total foreign investment is low. The key downside risks include corruption, weak rule of law, and political risk. This is most evident from the Ukraine crisis which has resulted in sanctions against Russian leaders. There are a number of upside risks however, and if the Kremlin executes proposed reforms, Russia will become increasingly investor-friendly.

Russia exhibits moderate levels of risk with regards to Economic Openness and Government Intervention. Progress in the judicial system has been slower than investment policy and economic liberalisation, and Legal Risk Remains the weakest pillar in the Trade and Investment Index, for which Russia scores 48.7 out of 100. 

The volumes of international trade and foreign investment into Russia are still...

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Russia Industry Coverage (24)

Agribusiness

Russia Agribusiness

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BMI View:   We are very positive about growth potential in the Russian agricultural sector and see tremendous opportunities in the grains and dairy segments in particular . We view the livestock sector positively as well , even though the dominance of the market by domestic players and the high barriers to entry could limit investment and productivity gains in the medium term. Government investment into the dairy and livestock sectors will aid domestic production out to the end of our forecast period in 2018.

Agribusiness Market Value
BMI Market Value By Commodity (2010-2018, % of total)
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Autos

Russia Autos

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BMI View: This quarter, BMI has revised down its forecasts for the Russian auto sector. We now anticipate a 9% drop in the passenger car segment, from a 5% decline previously, and a 9.4% decline in light commercial vehicle (LCV) sales, from 5.4% previously. Accordingly, we expect total light vehicle sales to decline 9.0% in 2014.

Our decision to revise down our forecasts comes against a backdrop of a worsening domestic political and economic situation. On the political side, the ongoing crisis in Ukraine has hit consumer confidence and led to the imposition of economic sanctions by Western nations. This in turn has fed into what was already a fairly bleak economic outlook, with ongoing weakness in private consumption of particular concern to the autos sector.

Over H114, light vehicle sales declined by 7.6% year-on-year (y-o...

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Commercial Banking

Russia Commercial Banking

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Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Consumer Electronics

Russia Consumer Electronics

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BMI   View:   We expect to see growth in Russian Consumer Electronics driven by demand for digital lifestyle products such as smartphones, smart TVs and tablets/ultra-thin notebooks. Penetration of these devices still remains low by developed market standards but with local players such as YotaDevices , Explay and FLY beginning to make an impact in the market, we expect strong uptake to continue. However, our outlook has weakened slightly given the unstable domestic economic environment and uncertainty surrounding the situation in Crimea. Indeed, we forecast real GDP growth to slow to 1...

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Defence & Security

Russia Defence & Security

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BMI View : Despite the dissolution of the Soviet Union and the Warsaw Pact over two decades ago, Russia remains an important international actor both in the Eurasian region and in the world at large. The country retains some of the world's biggest armed forces, and has its largest nuclear arsenal. 

BMI expects Russia's defence budget to reach USD89.5bn in 2014. The levels of Russian defence spending have increased in recent years as the country has taken advantage of its growing economy, and of the global demand for gas and hydrocarbons. During the final two years of the forecast period, we expect the defence budget to reach USD104.2bn and USD110.1bn in 2017 and 2018 respectively.

Although Russia in the past has not imported large quantities of military equipment from abroad, this trend is changing as the Russian armed...

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Food & Drink

Russia Food & Drink

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BMI View:   M ost food & drink companies will suffer from an uncertain political and economic environment in the coming months in Russia . We are quite cautious about the outlook for private consumption in the country on the back of the ongoing conflict between Russia and Ukraine over the former Soviet power's influence on its neighbour. The recent sanctions adopted by the US and EU will only exaggerate already harsh credit conditions, potentially further limiting consumer purchasing power. As a result, we have lowered our growth forecast for household consumption to 3.2% in 2014 from 4.0% previously, and to 3.3% in 2015 from 3.5% previously.

Headline Industry Data:

  • 2014 per capita food consumption (local currency...

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Freight Transport

Russia Freight Transport

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Following a year in which BMI believes saw mixed growth dynamics across Russia's freight transport modes, 2014 will signal improvement, with one of the country's major ports finally recovering its pre-downturn volumes.

Total trade is projected to pick up with our Country Risk desk forecasting a year-on-year (y-o-y) increase of 3.75% in 2014 following an estimated growth of 4.05% in 2013.

Rail freight is to continue to dominate the sector in terms of turnover and is projected to grow by 1% in 2014. We are seeing a consolidation of players in this freight transport mode, with major mining and steel producing firms selling their transport subsidiaries and major private logistics players developing in Russia's rail freight system.

We also highlight the impact that the Sochi 2014 Winter Olympic and Paralympic Games will have on this year's results. All freight modes are set to...

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Information Technology

Russia Information Technology

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BMI View:   Investment in the Russian data centre and cloud computing market has been strong in the first half of 2014, backed by a well-developed telecoms sector, skilled IT professionals, large internet population and opportunities for outsourcing. This is indicative of our strong medium-term outlook for Russia's IT market, as we see growth potential in devices and enterprise solutions. State intervention is helping to promote IT development but excessive regulation of the internet could also result in the industry losing its lustre. Similarly, joining the WTO and the Information Technology Agreement (ITA) should help the industry, but Russia lags behind in terms of IPR enforcement and online piracy has been, and remains, a significant problem in Russia. Our short-term outlook is weaker following our macroeconomic and IT forecast downgrades in the Q214 update. Pressure on...

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Infrastructure

Russia Infrastructure

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BMI View:   We have downgraded our forecast for construction industry value real growth in Russia from -0.5% to -3.7% year-on-year ( y-o-y ) . This is on the back of official reports citing weaker than expected growth in 2013 as well as a deteriorating business environment . Russia's actions in Ukraine have prompted the European Union to impose sanctions that will constrain the country's access to capital for infrastructure projects . This be arish outlook is exacerbated by falling private investment,...

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Insurance

Russia Insurance

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BMI View: As of mid-2014, the main change that has occurred in Russia's insurance sector is that life premiums have been a lot stronger than we had been expecting: we will be revising our forecasts upwards in the coming weeks and months. In particular, Sberbank, the giant state-owned savings bank, appears to have had very good success in distribution of traditional life products through its own network. Many of the other leading Russian insurers have also reported strong growth in life premiums - thanks, in part, to exploitation of bancassurance relationships. This represents an important change.

Previously, households' and businesses' lack of understanding of life insurance, and lack of trust in the local groups, had severely constrained the development of the segment. Conversely, recent developments confirm our view that the present situation and prospects of the non-life segment are...

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Medical Devices

Russia Medical Devices

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Espicom Industry View: The Russian medical device market is expected to grow by a CAGR of 4.2 % over the 2013-2018 perio d. Russia was one of the fastest growing markets in the region for ma ny years, but the Ukraine crisis has adversely affected the economy and this is expected to have an impact on market growth , as is the Ministry of Industry and Trade's recent decision to restrict foreign companies' access to state procurement tenders . Currently, the majority of high-tech medical devices are import ed, but the domestic industry should be able to...

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Metals

Russia Metals

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BMI View: The Russian metals sector will face headwinds over coming quarters as European and US demand remain s weak and global oversupply w eighs on metal prices. We expect production of key metals to remain modest , with company investment plans focusing on improving plant efficiency and reducing costs rather than building new plants or expanding production capacity. Despite weak growth, Russia will remain one of the world's largest producers of base and industrial metals including nickel, steel and aluminium.

Steel, Aluminium & Nickel Supply Glut To Hinder ...

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Mining

Russia Mining

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BMI View: Despite boasting rich mineral deposits, a mining boom is unlikely to catch up with Russia anytime soon. A growing number of domestic miners will be forced to put the brakes on investment as mineral prices continue to trend lower, while foreign investors struggle to establish a foothold due to restrictive regulations.

We believe Russia's mining industry is set to experience modest growth over the coming years. In line with the dimming outlook in the global mining space, few projects and expansion plans have been announced in Russia over recent quarters. While Russia is home to rich deposits of resources including coal, iron ore, gold and platinum, a mining boom is unlikely to catch up with the country anytime soon. Apart from a gauntlet of bureaucratic hurdles, the escalation of cash costs and softening of commodity prices will see a...

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Oil & Gas

Russia Oil & Gas

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BMI View:   Russia remains rich in oil and gas potential and we see production upside especially in refined oil and gas ahead, despite the threat of western sanctions against further investment into its oil and gas sector. The biggest obstacle in the way of further growth is the dominance of a few large local and state-backed players in the market, which makes project s vulnerable to these firms' growing financial commitments.

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Headline Forecasts (Russia 2012-2018)
  2012e 2013e

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Petrochemicals

Russia Petrochemicals

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Sanctions are rapidly eroding Russia's business climate and domestic demand. Petrochemicals producers are now facing the prospect of zero or even negative growth rates over coming months and possible delay or cancellation of major expansion projects in the medium-term, according to BMI's latest Russia Petrochemicals Report.

At end-July 2014, the EU tightened sanctions against Russia for backing Ukraine's separatists, who were accused by the West of shooting down a Malaysia Airlines passenger plane on July 17. EU sanctions, announced in July, directly target Russia's state finance, energy and arms sectors, which are linked to the politically powerful oligarchs around President Putin. Russian state banks are now excluded from raising long-term loans in the EU, exports of dual-use equipment for military use in Russia are banned, future EU-Russia arms deals are banned and the EU will not export a wide range of oil industry technology, though gas...

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Pharmaceuticals & Healthcare

Russia Pharmaceuticals & Healthcare

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BMI View: Pharmaceutical companies will act to further localise pharmaceutical production in Russia over the medium term. We see further protectionist measures on the horizon in the wake of the Crimea crisis, as the government wishes to end its reliance on imports and have more direct control over its pharmaceutical supply. Over the longer term, the country's ageing population and significant disease burden will act to underpin pharmaceutical expenditure growth. However, we are increasingly concerned about the sustainability of Russia's healthcare expenditure given the economic reliance on government oil and gas revenues.

Headline Expenditure Projections

  • Pharmaceuticals: RUB786.50bn (USD24.68bn) in 2013 to RUB896.67bn (USD25.47bn) in 2014; +14.0% in local currency terms and 3.2% in US dollar terms....

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Power

Russia Power

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BMI View : The risks to our already-subdued o utlook for the Russian economy - and by extension demand for power - remain firmly to the downside for 2014. Investor confidence has been damaged by the Ukraine crisis and we expect FDI in the power sector to slow. An electricity tariff freeze and retaliatory measures against Western thermal power turbine-supply companies further darken the outlook for investment.

The outlook for domestic demand in Russia is bleak, as tensions with the West over the Ukraine crisis weigh on business and consumer confidence. International outrage over the downing of passenger jet MH17 in Ukrainian airspace will heighten negative investor sentiment. Sanctions will ratchet up the pressure on the Russian...

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Real Estate

Russia Real Estate

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BMI View: While we believe that there is significant potential in the long term in Russia's commercial real estate market, in the short term political and economic concerns will limit investment and growth in the sector. A history of undersupply has pushed rental rates up, and Moscow in particular has high rental rates, something we believe will continue for the foreseeable future.

Slow economic growth at present, with GDP growth only expected to reach 2.7% in 2017, will limit investment in commercial real estate in the medium term. Meanwhile, consumer and business confidence have both been dented by rising inflation and interest rates, which will have an impact on demand for and investment in commercial real estate. In international terms, the ongoing crisis in Ukraine and rouble volatility has led to investor uncertainty, and although we do not expect interest to dry up, we do expect to see...

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Renewables

Russia Renewables

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BMI View: The successful completion of Russia's second auction and the allocation of additional renewables capacity marks significant progress for Russia's underdeveloped renewables industry. However, our forecasts are still bearish relative to the government's ambitious renewables targets, as a number of barriers still stand in the way of the industry's expansion, including the government's content requirement regulation and damaged investor confidence in light of the Ukraine crisis.

Russia has also adopted an energy policy, the 'Energy Strategy 2030', which aims to diversify the country's electricity mix away from conventional thermal energy sources by expanding its, as yet, underdeveloped non-hydropower renewables sector.

Key Trends And Developments

  • It was announced in January 2014...

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Retail

Russia Retail

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BMI View: While Russia's retail market remains an attractive investment area as the largest consumption market in Europe and with 40% of its population estimated to reach the middle income bracket by 2020, it still faces significant concerns due to disappointing growth figures and growing concerns about the impact of recent international sanctions.

Russia's retail industry is a $300bn market that is bolstered by a rapidly growing middle class. The market is forecasted to continue its growth as the percentage of households falling into the middle-income wage bracket of USD10,000+ is expected to exceed 90% by 2018. With this growth, there will be an increase in aspirational purchasing, with clothing and footwear, household goods and personal care and effects all set to see average growth of 6.2%, 6.4% and 5.5% over the 2014-2018 forecast period.

The...

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Shipping

Russia Shipping

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Russia's two bellwethers, the port of St Petersburg, Russia's main box facility, and the port of Novorossiysk, one of the country's largest ports in terms of total throughout, are set to hold their respective positions in Russia's maritime sector in 2014. Although we expect Russia's consumer story to remain attractive over the next few years, helping container throughput growth at the country's ports, economic growth will be modest in 2014 and 2015 as the main driver of growth over the past decade - household consumption - continues to weaken.

St Petersburg is expected to post a year of growth both in tonnage and containers in 2014, while Novorossiysk is forecast to post growth in box throughput.

Over the medium term we project further growth at the port of St Petersburg both in terms of tonnage and box throughput and growth in container throughput at the port of Novorossiysk.

...

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Telecommunications

Russia Telecommunications

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BMI View: Russi a's telecoms market is increasingly showing signs of consolidation among the largest four operators and the smaller regional players. As penetration has reached around 170% in the mobile market as of Q114, this allows the major operators to continue to grow subscriber bases where organic growth opportunities are beginning to become saturated. The fixed-line segment is declining at a slower rate than in neighbouring markets and the broadband market has expanded rapidly. Healthy competition and the demand for coverage provide good growth opportunities.

Key Data

  • The mobile market saw an overall net decline of 1.34mn subscribers in Q114, a further sign of slowing growth compared to...

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Tourism

Russia Tourism

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BMI's report for the Russian tourism market looks at the opportunities and risks presented by this increasingly popular destination. While increases are expected in terms of inbound and outbound travel, transport infrastructure capacity remains a concern, and sustainable investment is key to the long-term health of this expanding tourism destination. Tourism is likely to remain a key focus for the Russian government and will benefit from an announced RUB4.4bn investment in 2014.

Tourism to Russia has been increasing steadily in recent years, with the country becoming more accessible to visitors from a range of source markets. Economic recovery in Europe following the global credit crunch has been key, as inbound travel is currently dominated by countries in Europe and any return to economic decline could impact on the Russian tourism market. Thanks to increasing economic stability in Europe, and to thriving economies in the Asia Pacific...

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Water

Russia Water

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As the Russian government strives to make the necessary improvements to the country's water sector, private investment continues to increase at a very promising rate. To ensure long-term growth, much work is needed, especially in developing the water infrastructure and the next five years is expected to see the water equipment market almost double. With the government's Clean Water Programme aiming to severely improve the water sector, the country is expected to see great improvements in terms of access to water and the lowering of pollution levels. For years, the water sector has seen massive levels of underfunding due largely to a certain amount of neglect from the government, very little private investment and incredibly low tariffs that provide next to nothing to be put back into the system. The entire network and infrastructure is in need of an upgrade and there are still many areas of the country that have no access to mains water or any kind of sewage...

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