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Companies: Rosneft, Gazprom, Lukoil, TNK-BP, Vneshtorgbank, MTS.
Statistics & Indicators
Russia's 39 Strategic Industries
After bottoming out during the economic crisis and default of
August 1998, the Russian economy has posted remarkable growth numbers
over the last few years and, along with India and China, has
consistently been one of the world’s best performing emerging markets
during a period when traditional powerhouse economies were falling on
hard times.
The country's GDP grew 7.3 percent in 2003 and 7.4 percent in 2004. In
2005, the economy grew 6.4 percent, but the stock market RTS went
up 88 percent and, for the first time, Russia posted a net capital
inflow. But much of this positive economic news is the result of high
world oil prices. Revenues from oil exports account for 25 percent of
total Russian GDP.
Another contributor to growth was the devaluation of the Russian ruble
following the 1998 crisis, which priced many imports out of the range
of Russian consumers and provided an advantage to domestic producers.
This effect has already, however, run its course and the country is now
experiencing real ruble appreciation.
A number of government reform initiatives are also commonly credited
with the recent performance, including a revamp of the personal tax
system that involved the introduction of a 13 percent flat income tax
rate, and a simplification and easing of the corporate tax system that
has made profit taxes less onerous.
Concerns remain that a drop in the world oil price may seriously crimp
the country’s growth and make it more difficult for Russia to continue
to meet its foreign debt responsibilities, part of the rationale behind
the establishment of a “stabilization fund”, supplied by receipts from
oil revenues. The country’s hard currency and gold reserves have also
grown considerably in recent years, providing the Central Bank with
much more latitude in regulating the value of the ruble. The inflation
rate, though down from 2002, was still at 12 percent.
In 2003 President Vladimir Putin declared that doubling the country’s
GDP in the space of 10 years was a primary state objective, and a
number of government proposals, including administrative reform and
badly needed bank reform, have been put forward as necessary in order
to achieve this goal. 2005's 6.4% and 2006's 6.7% fall short of the 7.2 percent mark that has been cited as the bare
minimum in yearly growth necessary to reach the stated objective.
Russia's strong fundamental macro numbers are constantly talked about,
however, having a year's worth of import cover as hard currency will
make no difference in the long run unless there is investment to ensure
the sustainability of growth. There is a cut off for necessary investment at about 20% of GDP. Below
this level a gradual degradation of capital assets takes place and eventually stagnation occurs as production gains are eaten away inflation (8% in 2006 but up in 2007 y-o-y) and wage rises. Fixed investment started to pick
up in 2006. It has been stuck at 12% for years, but increased to 15%
last year. In 2007 it is headed for 25%, putting Russia into
"Asian Tiger" levels of investment. Anything over 25% will ensure a long lasting boom. This number can be
taken as evidence that the reforms to the bank system are finally
starting to work as investment is a function of making the banks work
in their traditional capacity as financial intermediaries.
With the danger of a steep drop in world oil prices always present,
economic analysts have also identified the need for diversification
away from the raw-material focus of the economy, with a particular need
for development of the small and medium-sized business sector.
Government pronouncements have made this one of its commitments in the
short and long term.
Russia-US Bilateral Agreement:
The signing by Russia and the US of a bilateral accord on Russia's accession to the WTO effecively paves the way for Russia to join the WTO in the first half of 2007. The accord also raises the likelihood that the Jackson-Vanik amendment (which restricts Russia's exports to the US) will be abolished in the short term. The following comprise the major heads of agreement signed in Hanoi. Russia will cut its tariffs on a broad range of industrial and agricultural goods. Key US industrial exports (chemicals, aircraft, high technology, and medical, construction and agricultural equipment) will enjoy tariffs averaging 6.5%. Russia's overall bound tariff rate on industrial and consumer products will average around 8 percent.
The agreement includes a 'binding blueprint' for the protection and enforcement of intellectual property rights, including specific commitments to legally protect pharmaceutical data, fight copyright and internet piracy, ensure that illegal plants are closed, enact criminal penalties for IP crimes and ensure that the legislative regime, including Part IV of the Civil Code, is fully TRIPs compliant.
Russia agreed with the U.S. to extend its quotas on American agricultural imports until the beginning of 2009, with a possiblility to re-extend, as long as notification is given a year in advance.Russia will re-open its market to US beef and pork and the market will also open to American producers of wheat, corn, barley, apples, pears, grapes, raisins, almonds, walnuts, pistachio nuts, dairy, soybeans, soybean meal, soybean oil, pet food, wine and poultry.
Civil aircraft sales will be subject to phased-in tariff reductions from the current 20% to single digits, and tariffs will also be reduced on leased aircraft. Tariffs on civil aircraft parts will drop to an average of 5%. Russia has agreed sign the WTO's Information Technology Agreement (ITA), the plurilateral agreement under which WTO members commit to reducing their tariffs to zero on imports of high technology.
Perhaps most crucially, Russia has agreed to 100% foreign ownership of banks (click here for overview of Russian banking Sector), securities firms and insurance subsidiaries upon accession. Operation through branches will be allowed for insurance companies after a transition period, but not for banks. Russia has retained the right to impose a 50% equity cap on the banking and insurance sectors (current foreign capital in the Russian banking system is approximately 13%), meaning that new licences and additions to charter capital could be restricted once the threshold is reached.
New Appointment at Financial Markets Service: Vladimir Milovidov, a former aide to Prime Minister Fradkov
has been appointed head of the Financial Markets Service following the
resignation of Oleg Vyugin, who is believed to be taking up a position
with Goldman Sachs in Moscow. Kommersant quotes market participants as
expecting changes in market strategy under Mr Milovidov. Mr. Milovidov
served as the deputy head of the Federal Securities Commission, the
forerunner to Mr. Vyugin’s agency, from 2000 to 2003. Mikhail Fradkov
said he was sorry that Oleg Vyugin, who has been at the helm of the
agency since 2004, pushing forward investor-friendly reforms, is
leaving for the private sector.
FDI: Business New Europe (20/11/06) quotes the World Investment Report 2006,
stating that emerging European markets (including Russia) attract over
$13 billion more FDI than China ($86 billion compared to $63 billion)
in 2005.
The Russian ministry of economic development and trade has
upwardly revised its forecast for gas production in 2007 to 668 bln cu
m “on the back of the 2006 production figures and a revised forecast
for external and domestic demand provided by the Industry and Energy
Ministry and Gazprom,”
As of the end of 3Q06, the number of Visa cards issued in Russia exceeded 26 mln, up 41% against the same period 2005.
Construction: Housing construction in Russia rose 12% on the year Jan-Sept, producing 26 million square meters of floor space, or 292,100 apartments, according to the Federal Statistics Service. Moscow & moscow Region accounted for over 24%.
Coffee to Go: Starbucks: “Russia has one of the largest and fastest developing economies in Europe. This growth, combined with Russia's market size, growing coffee consumption, and affinity for western brands make it a key opportunity for Starbucks,” said a company spokesperson. Market research group Euromonitor, has found that increased investment and higher quality produce in the industry has seen the Russian coffee market rise from €1.5b in 2004 to €1.64b in 2005.
Aerospace: Vneshtorgbank took a 5.02 percent stake in Airbus makers EADS (European Aeronautic Space & Defence Company) while British Aeropspace announced it was selling its stake in the company, thought to be worth $2.5 billion. Vneshtorgbank's approach is well timed as EADS is emerging from a crisis prompted by delays to the Airbus A380 superjumbo. EADS will also be will positioned for the anticipated upgrade of the Aeroflot fleet. EADS holds a 10% stake in Russian plane-builder Irkut and also buys titanium from Russian suppliers. EADS shares were as low as 35 percent below their April 3 high of 35.02 euros ($44.89) but have pulled back some 5% since then. EADS owns 100% of civil aircraft manufacturer Airbus. Other shareholders of EADS include Germany's DaimlerChrysler with a 22.5% stake, the French government with 7.5%, French Lagardere Group with 15%, and Spanish state holding company SEPI with 5.48%. The remainder of the shares belong to EADS' management, investment funds, and are traded on European stock exchanges.
Automotive: The sales of Russia's Kamaz Group rose 28.7% on the year to 36.257 billion rubles in January-August. Kamaz Group sold 26,582 trucks, 35.4% up on the year, and 32,618 engines, 32.2% up on the year. Kamaz Group comprises Russia?s largest heavy truck manufacturer Kamaz, truck and bus maker Neftekamsk Auto Plant, trailer producer Avtopritsep-Kamaz, Avtosila dealership, Kamaz Metallurgy, a producer of castings for auto parts, and the Tuimazy Concrete Transport Truck Plant.
FDI x 3: According to Deputy Economics Minister Kirill Androsov, foreign investment in Russia's economy in January-June almost tripled year-on-year to hit $26 billion in the first six months of 2006. In January-June of 2005, direct foreign investment in the Russian economy stood was approximately $9.3 billion.
-Russia?s retail sales up 11.3% on year in January-June
-Russia?s oil output up 2.4% on year in January-June47.
-Russians? real disposable incomes up 11.1% on year in Jan-Jun
- Gazprom CEO Alexei Millar's speech to the 2006 Gazprom AGM.
Useful LInks:
Federal State Statistics Service
Russian Stock Exchange (RTS)
Institute for Economies in Transition
Fin-Am (Investment company offering on-line trading platform)
Related Articles
Revving Up Russia’s Automotive Industry, By Yevgenia Kvitko, Special to Russia Profile, 4th July 2006.
Russian companies should still target London, Reuters, 23rd June 2006.
Severstal plans $4.5 bln capex in Russia to 2016, Reuters, 21st June 2006.
Yelena Shuvalova, Form & Content, Foreign Invenstment in Russia, Vedomosti, (June 21st 2006)
Neil Buckley and Arkady Ostrovsky Back in business - how Putin's allies are turning Russia into a corporate state, Financial Times, (June 19th 2006)
Nina Kulikova, Russian Economy: A Turning Point, RIA Novosti (January 26, 2006)
Mikhail Khmelev, The Land of Fearless Optimists, Izvestia (January 25, 2006)
Yevgenia Ivanova, Salaries Continue to Rise, but No Longer in Dollars, St. Petersburg Times (January 24, 2006)
Dmitry Babich, Getting Rich Quick, Russia Profile (January 23, 2006)
Dietwald Claus, Putting Gas and Oil Revenues to Good Use in Russia, Johnson's Russia List (January 20, 2006)
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