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: 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 and incurring significant costs for employers. For these reasons, the country scores 66. 6 out of 100 for Labour Market risks, putting it in third place in the Emerging Europe region .

With its large labour force, urbanised population and good primary education...

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Russia Crime & Security

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BMI View: Foreign workers and businesses are exposed to a high degree of security risks in Russia. Although criminal activity does not pose a major concern for business operations, a significant threat to foreign workers and business assets emanates from terrorist activity. Russia has been the subject of relatively frequent and large-scale terrorist attacks since the mid-1990s, due to the ongoing Islamist insurgency in the North Caucasus region. Investors also face a high degree of uncertainty at present due to the consequences of Moscow's actions in Ukraine, which have resulted in the US and the EU imposing economic sanctions, and heightened tensions between Russia and the West. The country therefore receives a low score of 3 7 .1 out of 100 in the overall BMI Crime and Security Risk Index, ranking it 22 nd out of 30 states in...

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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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BMI View: In the short term, Russia's logistics sector will pose a range of risks to investors. The country's economic outlook for 2014 and 2015 has been dampened by the Ukraine crisis and resulting sanctions, which are restricting foreign investment. This will potentially delay vital infrastructure projects which are needed to update ageing utilities and transport networks. Over the medium term, the picture for Russia's logistics sector is more sanguine, as its vast natural resources and rising consumer class will drive economic growth, and supply chains are set to benefit from extensive transport links, both internally and with the wider world. However, we highlight that large-scale investment will be necessary to cope with rising trade volumes and alleviate congestion. Russia scores above the regional average in the overall BMI Logistics Risk Index, with 55.2 out of 100...

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Russia Trade & Investment

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BMI View: 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 Western sanctions against Russian economic targets and political and business leaders. There are a number of upside risks , however, and if the Kremlin executes proposed reforms, Russia will become increasingly investor-friendly. Russia scores 48.7 out of 100 in the overall Trade and Investment Risk Index, ranking it 23rd out of 30 Emerging Europe states.

The volumes of international trade and foreign...

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Russia Industry Coverage (24)

Agribusiness

Russia Agribusiness

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BMI View:   We hold a very positive outlook regarding growth in the Russian agricultural sector and see tremendous opportunities in the grains and dairy segments in particular. We also believe the country's livestock sector will post strong production growth, despite dominance of the market by domestic players and the high barriers to entry which could limit investment and productivity gains in the medium term. Much of the growth across the country's agricultural sphere can be attributed to significant government investment, aimed to increase self-sufficiency and exports in various products.

On August 7, Russia introduced a one-year ban on imports of certain agricultural products from select countries. We outline the major implications of the trade sanctions below:

  • Multilateral food trade will, generally speaking,...

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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:   Following the imposition of sanctions against Russia in mid-2014 we have revised our outlook for consumer electronics spending growth. There will be minimal direct impact on supply chains and access to goods, but the economic consequences, including significant rouble depreciation, tighter credit conditions and an erosion of consumer confidence, will be a drag on spending. Although there is short-term downside, which we expect to translate to a contraction in market value in US dollar terms in 2014, w e expect to see growth in Russian Consumer Electronics over the medium term as the political and economic environment stabilises. Spending growth will be driven by demand for smartphones, smart TVs and tablets/ultra-thin notebooks and potentially...

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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 which BMI believes saw a mixed growth pattern across Russia's freight transport sector, 2014 will signal another tough year, with some of the freight modes forecast to decline or struggle to grow in terms of freight volumes. 

Total trade is projected to pick up with our Country Risk desk forecasting a 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, which is projected to grow by 6% 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...

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Information Technology

Russia Information Technology

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BMI View: T he outlook for Russian IT market spending growth weakened considerably in 2014 as a consequence of sanctions, which resulted in rouble depreciation and undermined domestic confidence levels. Meanwhile, another area where political factors are contributing to uncertainty is regulation of the internet , which could also result in the industry losing its lustre. Our short-term outlook is weaker following our macroeconomic and IT forecast downgrades , however our core view is for an easing of tensions over the medium term, which will allow the Russian economy and IT market to return to a stronger growth trajectory . Pressure on retail hardware sales as a result of competition from low-cost tablets, meaning value growth will fail...

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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 : We expect growth (in USD terms) in the Russian insurance sector to only pick up in 2015 as the depreciation of the Russian rouble weighs on 2014 performance . While non-life insurance will remain the dominant segment over the next five years, we expect life premiums to outperform as they grow from a low base. Although the recent increase in foreign capital quota represents an opportunity for multi-national insurers, we do not see strong interest fro m them in the near term due to profitability woes of t he non-life sector.

The life insurance industry in Russia remains small due to a traditional lack of trust among individuals to enter into long-term contracts with insurers. However, we expect life...

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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 V iew:   T he Russian metals sector will post weak growth over the remainder of 2014 as cuts continue in the aluminium sector and weak prices plague the steel sector . In 2015 and beyond, growth will pick up as we see higher prices for aluminium and global demand growth for steel improves. Still, we expect companies' investment plans to focus on improving plant efficiency and reducing costs rather than building new plants or expanding production capacity. Despite only modest growth, Russia will remain one of the world's largest producers of base and industrial metals including nickel, steel and aluminium.

Growth To Pick Up...

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Mining

Russia Mining

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BMI View:   Mineral production growth is set for solid performance in Russia over the coming years. Growth rates for coal and gold will remain more robust than for PGMs and iron ore. Despite our modestly positive outlook, the sector will struggle to come to terms with lower global mineral prices. Moreover, foreign investors will struggle to establish a foothold due to restrictive regulations.  

We believe Russia's mining industry is set to experience solid, but not rapid, growth over the coming years. 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 myriad of bureaucratic hurdles, the escalation of cash...

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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:   Russia's cooling of relations with the West is putting pressure on foreign investment in the country. With the EU and the US applying further sanctions, the business environment in the country is deteriorating . As the government push es   through protectionist measures, localisation by drugmakers will continue. However, we maintain that o ver the longer term the country's ageing population and significant disease burden will act to underpin pharmaceutical expenditure growth.

Headline Expenditure Projections

  • ...

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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: Despite vast natural potential for renewable energy generation and positive developments within the industry over the last year, we maintain our relatively bearish outlook towards Russia's renewables industry. There are still a number of barriers that are likely to hinder the expansion, including questions over transparency, corruption and market liberalisation. As such, we believe the country will continue to underperform its neighbouring countries in the CEE over our 10-year forecast period. 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 developments in the Russian renewables market include:

  • It was announced in January 2014 that German wind power developer...

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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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Two of Russia's major ports - 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, bouying 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, with the impact of Western sanctions adding to a structural slowdown in household lending in recent quarters, as banks started to ramp up loan-loss provisioning and the authorities took steps to rein in unsecured household lending.

The port of St Petersburg is expected to post a year of growth in tonnage and in 2014, while box volumes are forecast to contract. Novorossiysk is expected to post...

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Telecommunications

Russia Telecommunications

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BMI View: Although Russian mobile market is reaching consolidation, BMI believes that there is scope for revenue and customer base growth. Although the market saturation reached 170.6% in Q214, BMI   believes that some of these subscribers will be discounted as inactive SIM-cards get deactivated. Expanding LTE services offer opportunities for more value-add data products to add revenue, while rural areas could provide customer base growth. 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...

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Tourism

Russia Tourism

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Significant risks in the Russian tourism market will have a negative effect on arrivals over the forecast period. Sanctions from NATO countries as well as reputational damage caused by Russia's controversial foreign policy will have a severe impact on arrivals, particularly from NATO countries. There are positives, though, as outbound travel is likely to recover from this shock in 2014. In addition, the Russian government is prioritising investment in tourism and travel infrastructure ahead of the 2018 FIFA World Cup. Greater sustainable investment is needed, though, particularly outside of St Petersburg and Moscow.

Until recently, tourism had been on the rise in Russia for several years, but the events of 2014 are likely to cause lasting damage to the country's tourism industry. The crisis in Ukraine is the primary reason for our view that the Russian tourism industry is set to go backwards over the coming years. Sanctions from European...

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Water

Russia Water

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The Russian water sector is currently open to private investment, with significant increases also forecast over the coming years. Although the government is keen to develop all aspects of the sector, particular emphasis has been placed on the growth of infrastructure itself, to ensure more of the population has access to water, while also minimising wastage through leaks. This growth will see the market for water equipment double, as the need to develop more efficient machinery, better treatment plants and more extensive sewage networks continues. These wholesale improvements are all part of the governments 'Clean Water Programme', an initiative that aims to drastically improve the state of Russian drinking water. 

For years, the water sector has seen massive levels of underfunding due to a certain amount of neglect from the government, very little private investment and incredibly low tariffs that provide next to nothing to be reinvested...

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