Russia is by far the largest country in Emerging Europe. Its economy has become increasingly dependent on hydrocarbons exports in recent years, leaving it vulnerable to shocks in the global economy. After a decade of political stability and economic prosperity in the 2000s, Russia is entering a more turbulent period that could distract policymakers from tackling the country's immense structural challenges.

At BMI, we ensure our clients make sound business decisions in Russia, using our risk-assessed total analysis model. Our research teams keep our clients abreast of the latest market moves and political developments as part of our 'top-down' and 'bottom-up' perspective. Our expert views are supported by our interactive data and forecasting. We also provide in-depth analysis on 24 of Russia’s most important industries. Our analysts will make sure you, as our client, are always ahead of the curve in Russia.

Country Risk

Russia Country Risk

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Core Views

  • President Vladimir Putin's near-record popularity belies the rapidly rising medium-term risks he faces, mostly stemming from economic weakness. Once the 'high' of the Ukraine conflict wears off, and ordinary citizens' livelihoods suffer, Putin will become vulnerable to opposition protests, or even internal rivals, meaning that he will not be guaranteed re-election in 2018.

  • Russia's economic weaknesses will constrain its much touted geopolitical 'revival'. Russia will still defend its perceived vital interests, militarily if necessary, but the costs of doing so will increase. For the next few years, we expect a cool period to prevail in Russia-West relations, which will result in Russia building closer ties with China. However, we think that a genuine strategic partnership between Moscow and Beijing is unlikely to materialise, because the two are ultimately rivals...

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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 good educational standards and strong 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 63 out of 100 for Labour Market risks, putting it in third place in the Emerging Europe region...

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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 . 2 out of 100 in the overall BMI Crime and Security Risk Index, ranking it 2 ...

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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 2 2nd d out of 29 ...

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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:   Despite the launching of a new car scrappage scheme over Q314, which has started to slow the rate of falling new vehicle sales year-on-year ,   BMI maintains its bearish view of Russian auto sales for 2014 and 2015 .  

We believe that the scrappage scheme will yield unimpressive results owing to our downbeat private consumption outlook over 2014/2015. Private consumption will remain subdued at 2.8% in 2014 and 3.0% in 2015; far below the 5.5% and 6.3% growth seen in 2010 and 2011. In contrast to the accelerating growth in private sector lending from May 2010 to the end of 2011, credit growth has been slowing since H212 and is...

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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. 

Russia has exploited rising hydrocarbon prices to perform a long-overdue modernisation of its armed forces. That said, the ability of Russia to continue on its path of military modernisation was cast into doubt in early October 2014 when Putin's finance minister Anton Siluanov cast doubt on whether the country's finances could afford to honour the modernisation pledges made to the country's military. This is not the first occasion that there have been disagreements in Putin's cabinet over military spending levels, with Alexei Kudrin, Siluanov's predecessor resigning in 2011...

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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 forecast 1.2% real growth in Russia's construction industry in 2015 following an estimated contraction of 6.6% in 2014. Our forecast for 2015 is supported by low base effects, strong government support for infrastructure development and robust demand. However, we highlight that EU and US sanctions , following Russia's actions in Ukraine , have severely deteriorated the country's business environment, further deterring foreign investment.

Key Trend And D evelopments

  • Developments have prompted our Country Risk team to revise down our GDP growth forecasts for Russia. Russia's annexation of Crimea and perceived belligerence towards Ukraine throughout Q114 triggered...

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Insurance

Russia Insurance

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BMI View : Continuing steady growth in compulsory medical expenses insurance (CMEI) will underpin the rise in premiums in the non-life segment, while life premiums will rise rapidly from a very low base. Recent regulatory changes will boost motor insurance premiums. However, the changes will also boost claims - at a time that profitability is at the lowest level for six years.

As of late 2014, the latest developments in Russia's insurance sector confirm our expectation that non-life premiums will sustain steady mid-single digit growth through the forecast period. By contrast, we think that life premiums can rise by around 15-20% annually for much of the forecast period, as organised savings develops from a very low base.

Recent intervention by the government and the regulation has not been helpful. New rules that came into effect in October are...

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Medical Devices

Russia Medical Devices

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BMI 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 decision to restrict foreign companies' access to state procurement tenders .   Currently, the majority of high-tech medical devices are import...

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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 the aluminium sector returns to modest growth after extensive cuts and weak prices plague the steel sector . Beyond 2015, 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...

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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 positive outlook, the sector will struggle to come to terms with lower global mineral prices and the effects of western sanctions . 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...

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Oil & Gas

Russia Oil & Gas

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BMI View:   Russia continues its attempts to thwart US and EU sanctions, though will struggle to develop more technically challenging shale and offshore prospects. That said, there is progress with onshore field developments in East and West Siberia that will be crucial to mitigating heavy declines from maturing conventional fields.   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.

Headline Forecasts (Russia 2012-2018)
  ...

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Petrochemicals

Russia Petrochemicals

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BMI's latest Russia Petrochemicals Report has a bearish outlook for the industry in 2015 due to the effects of sanctions on the domestic economy which will hamper growth in petrochemicals consumption. Given the recent growth in capacities and the move towards import-substitution, this could have a major impact on Russian petrochemicals output and profitability.

With sanctions applied in July 2014 as well as base effects, strong growth in the first half of the year diminished in the second although output was supported by capacity expansion in some segments. BMI estimates petrochemicals growth of 2% in 2014 with the likelihood of stagnation in 2015 as economic recession bites.

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...

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Pharmaceuticals & Healthcare

Russia Pharmaceuticals & Healthcare

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BMI View: Russia's recent economic malaise will cont inue to act as a drag on foreign investment and limit the commercial opportunity for drugmakers. W e continue to believe that Russia's ageing population and significant disease burden will act to underpin pharmaceutical expenditure growth over the long term.

Headline Expenditure Projections

  • Pharmaceuticals: RUB786.50bn (USD24.68bn) in 2013 to RUB857.79bn (USD23.79bn) in 2014; +9.1% in local currency terms and -3.6% in US dollar terms.

  • ...

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Power

Russia Power

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BMI View :   The deterioration of the Russia n economy will cap demand for electricity and weigh on utilities' revenues in 2015 . A downward revision to our forecasts for real GDP growth amid falling global oil prices, negative investor sentiment, as well as an electricity tariff freeze, will hit   earnings at companies like Fortum, Gazprom and Inter Rao - discouraging investment in the replacement of aging generation capacity.    

The outlook for the Russian economy - and by extension demand for power - has darkened further this quarter and we have revised down...

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Real Estate

Russia Real Estate

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BMI View:   The considerable long-term potential of Russia commercial real estate sector is being undermined by the current economic and geopolitical headwinds facing the country. Falling foreign investment combined with an increasingly cautious private sector are leading rental costs to stagnate across the market, with limited supply providing an important buffer against   a contraction in rates.  

A slowing economy and export market are among the major challenges facing Russia's commercial real estate sector as we move into 2015. Over recent years, the market has enjoyed a sustained period of growth, driven by rising income levels and private spending and increased foreign demand an investment. Rental rates, particularly those in the retail and industrial segments, have risen to match those of...

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Renewables

Russia Renewables

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BMI View: We have maintained our forecasts for the Russian renewables industry this quarter, as our fundamental assumptions for the market remain relevant. Despite a wealth of potential, the prospects for the industry remain muted owing to the inhibitive regulatory environment for renewable energy and the lack of investor interest in the market.

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

  • In September 2014, it was announced that Xinjiang Goldwind Science & Technology was in negotiations with  PJSC E4 Group over joint wind power...

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Retail

Russia Retail

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BMI View:   Despite consistent growth of private consumption during the last three years, the Russian retail sector faces threat of Western sanctions which will reverberate through most of the sub-sectors. Bans on imports and weakening rouble will seriously harm consumers' purchasing power and prudent actions will be needed from the government to tackle growing inflation. We anticipate that international relations will remain a major determinant of retail sales and a threat to growth of the sector in Russia.

The recent developments in the Ukraine conflict, Western sanctions and slumping oil prices threaten Russia with another large-scale economic crisis. In its attempts to control the depreciation of rouble, the Central Bank of Russian Federation decreased its foreign currency reserves by USD67 billion during first three quarters in 2014. Despite that, the Russian...

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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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BMI View:   Negative developments in the Russian tourism market, starting in 2014, are likely t o continue into 2015 and beyond . The Ukraine crisis in particular has damaged Russia's reputation amongst key tourist source markets in the EU and North America and the exchange of sanctions between Russia and the EU in particular is likely to inflict further damage on tourist arrivals to Russia if sustained. The FIFA World Cup in 2018 will provide an opportunity for the country to regain ground lost since 2014. The associated investment is sorely needed in a country with an outdated accommodation sector and aging transport infrastructure.

The ongoing crisis in Ukraine is the primary reason for our view that the Russian tourism industry will continue to contract in coming years, especially if there is no rapid resolution of the conflict or a significant...

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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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