focus on: russia (ibr 2013)
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Focus on: RussiaGrant Thornton International Business Report 2013
143 million inhabitants
US$2trngross domestic product
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
Focus on: Russia 2
Introduction
Focus on: Russia
Russia is an emerging economy of more than 143m people. In 2012, its GDP was approximately US$2trn, making it the eighth largest economy in the world.
Drawing on data sources such as the Economist Intelligence Unit (EIU), the International Monetary Fund (IMF) and the Grant Thornton International Business Report (IBR), this short report considers the outlook for the economy, including the expectations of 400 businesses interviewed in Russia, and more than 12,500 globally, over the past 12 months.
Sergey TishakovGrant Thornton RussiaPartnerT +7 495 258 9990E [email protected] W www.gtrus.com
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
Economyexpanded by
3.4%in 2012
Focus on: Russia 3
Like other emerging giants and fellow BRICs, Brazil and India, the Russian economy has slowed sharply.
Focus on: Russia
Growth of 3.4% in 2012 was the second slowest rate of expansion in the Putin-era with 2013 performance forecast to be even more sluggish. The budget and growth prospects in general remain heavily dependent on international commodity prices which are under threat from the
shale gas revolution, although continuing unrest in the Middle East means the price of oil is expected to remain well above US$100/barrel. Oil and gas dominate exports, accounting for around 70% of the total.
• the economy grew by 1.2% in Q2 compared with the same period 12 months previously, down from 1.8% in Q1
• however, the economy actually contracted by 0.3% on a
quarterly basis• investment and construction activity in
the first six seven months of the year were down 0.7% and 0.3% respectively on the same period in 2012
• retail sales were up by 3.8% in January-July boosted by rising disposable incomes
• inflation continues to fall, dropping to 6.1% in September the slowest in 13 months
• the current-account surplus shrank to US$1.1bn in Q3, down from US$5.8bn in the Q2 and the lowest since 1998.
Key indicators
EconomyExport markets
NetherlandsUkraineGermanyChinaItalyOthers
ChinaGermanyUkraineBelarusJapanOther
Source: Observatory of Economic Complexity
Import sources
12
.0%
6.1
%6.0
%
5.9
%
5.1
%6
4.9
%
16
.0%
15
.0%
6.3
%
4.5
%
4.3
%
53
.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013
2014
2015
2016
2017
2018
forecast growth1.8%
in 2013
forecast growth3.3%
in 2014
Focus on: Russia 4
Focus on: Russia
Growth is expected to slow to 1.8% in 2013 with global trade still tepid and concerns over the end of monetary easing in the United States increasing capital flight from emerging markets. The economy is expected to pick up pace in 2014, with expansion of 3.3% forecast, accelerating to 3.8% in 2015.
The improvement is set to be led by a growth in exports from just 1.9% growth in 2013 to 6.0% in 2014 and 5.2% in 2015. Despite this, the current account balance is expected to slip into deficit by 2016 and continue to worsen thereafter as import growth accelerates.
Exports account for more than 30% of GDP so the any deterioration in international commodity prices presents a major downside risk to this forecast. However continuing unrest in the Middle East should keep oil and gas prices elevated and the government budget close to balance.
Privatisation, together with efforts to reform the business operating environment and pensions look unlikely to make much headway over the short to medium-term. The expansion of the Eurasian Customs Union – which currently includes Belarus, Kazakhstan and Russia – looks set to be dealt a major blow with popular pressure growing in Ukraine to reject Russian overtures and instead look west to the European Union for closer economic ties.
Economic outlook
Growth and trade forecasts
Source: Economist Intelligence Unit (2013)
Real GDP growth (%)
Current-account balance (% GDP)
12.0%
6.1%
6.0%
5.9%
5.1%64.9%
16.0%
15.0%
6.3%
4.5%
4.3%
53.9%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013 2014 2015 2016 2017 2018
expectrevenues
to riseplanning35%investmentactivity
Focus on: Russia 5
Business growth prospects
Focus on: Russia
Net percentage of businesses expecting to increase profits (next 12 months)
RussiaBRIC
Source: Grant Thornton IBR 2013
-20
-10
0
10
20
30
40
50
60
70
80
-20
-10
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
Net percentage of businesses expecting to increase investment in plant & machinery (next 12 months)
RussiaBRIC
Source: Grant Thornton IBR 2013
Russian business optimism dropped to net 19% in Q3, down from 28% in Q2 and 53% at the start of the year as confidence in the economic outlook has waned. This is well below the global and BRIC averages (both 32%). However Russian business growth expectations have remained fairly steady. Net 53% expect revenues to climb over the next 12 months, below the BRIC average (67%) but above the global result (47%). Similarly 45% expect profitability to increase, above both the BRIC (41%) and global (38%) averages. These figures are well down on pre-crisis figures. Before the financial crisis struck in 2008, 80% of Russian businesses expected to see revenues rise and a further 68% expected to raise profits.
Investment plans have been more volatile, perhaps reflecting an aversion to planning for long-term growth with the economic outlook so uncertain. In Q1, net 11% of business leaders planned to increase investment in plant and machinery over the next 12 months, rising to 47% in Q2 and 66% in Q3 – a record high since 2008. However, business leaders seem reticent to take on extra staff. Just net 25% expect to hire workers in the coming year. This is level with the global average but just half the rate recorded in 2007 and 2008.
-20
-10
0
10
20
30
40
50
60
70
80
-20
-10
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
43%
-20
-10
0
10
20
30
40
50
60
70
80
-20
-10
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
-20
-10
0
10
20
30
40
50
60
70
80
-20
-10
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
constrainingbureaucracy
businessgrowthplans
talent is aa lack of
challenge
Focus on: Russia 6
Focus on: Russia
Growth constraints
Percentage of businesses citing a lack of skilled workers as a constraint on growth (2013 average)
RussiaBRIC
50
40
30
Source: Grant Thornton IBR 2013
Stifling bureaucracy is the key constraint stopping Russian businesses from growing. Over the course of 2013, 62% have cited regulations and red tape as a constraint on their expansion plans. This marks the fifth straight year bureaucracy has risen as a constraint since falling to just 25% in 2009 at the height of the financial crisis and is the highest level recorded since this question was first asked in 2007.
A lack of skilled workers is affecting 50% of Russian businesses. This is a challenge that business leaders in emerging markets tend to have to deal with more than peers in mature markets but the Russia result is fully 10 and 20 percentage points above the BRIC and global averages respectively. A shortage of orders is cited by two in five businesses, down from one in two during the financial crisis and slightly below the BRIC average.
A shortage of finance is also a concern. Over the past 12 months, 45% of Russian businesses have cited financial constraints on their ability to grow their operations – the third straight year this has risen. This compares to a BRIC average of 32% and a global average of just 21%.
55
38
62
42
Percentage of businesses citing regulations and red tape as a constraint on growth
59
44
Source: Grant Thornton IBR 2013
RussiaBRIC
2007
2008
2009
2010
2011
2012
2013
38
18
25
32
40
29
42
35
Global
46 68 67
36 219
26 1635
26 1439
Focus on: Russia 7
Focus on: Russia
Net percentage of businesses expecting to increase R&D activity (2013 average; next 12 months)
The IBR 2013 results suggest three areas on which Russia could focus to boost growth:
ProductivityInnovation is important because it increases long-term business growth prospects by boosting the quality, productivity and efficiency inputs. The issue is brought into sharper focus as Russia’s population not only ages but also shrinks – there are expected to be 13% fewer people in Russia in 2030 compared with 2006.
However, on average over the past 12 months, just 9% of Russian businesses have indicated an expectation to increase R&D activity, the fourth lowest of the 45 economies surveyed. And this is not a one-off occurrence. Since this question was first asked in 2010, this figure has barely moved. By contrast 36% of BRIC businesses and 21% globally expect to increase investment in R&D in year ahead. The reform of the Russian Academy of Science was thought by some to be a step in the right direction but just 27% of businesses expect it to have a positive effect on R&D.
Consumer demandPrivate consumption is expected to contribute incrementally less to GDP over the medium term, falling from 3.5% in 2012 to 1.9% in 2018. The recent deceleration in inflation has boosted real incomes, which grew by 4.4% in July 2013 compared with the same period a year earlier.
However, on average over the past 12 months just 46% of Russian business leaders expected to raise salaries, well below the BRIC (68%) and global (67%) averages. Moreover with inflation still running at 6% and forecast to remain above 5% in the medium-term, just 10% expect to offer real increases, again below the BRIC (17%) and global (15%) results. This points to a squeeze on disposable incomes and therefore on consumption.
Infrastructure Better connectivity allows business to access inputs more quickly and speeds up the provision of goods and services to consumers. Good quality infrastructure improves the efficiency of operations so investing in better roads, rail and broadband raises growth potential.
However, Russian businesses are far from satisfied with the transport and information communications technology (ICT) available to them. Over the past 12 months, 39% have cited poor transport infrastructure as a constraint on growth. Only businesses in India (47%) are less satisfied. A further 35% cite the poor quality of ICT infrastructure. Only businesses in India, Botswana, the Philippines and Vietnam are less satisfied.
Finding growth
Transport
Net percentage of businesses expecting to raise salaries (2013 average; next 12 months)
Percentage of businesses citing infrastructure as a growth constraint (2013 average)
RussiaBRICGlobal
ICT
© 2013 Grant Thornton International Ltd.
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www.gti.org
IBR 2013 methodologyThe Grant Thornton International Business Report (IBR) is the leading mid-market business survey in the world, interviewing approximately 3,300 senior executives every quarter in listed and privately-held businesses all over the world. Launched in 1992 in nine European countries, the report now surveys more than 12,500 businesses leaders in 45 economies on an annual basis, providing insights on the economic and commercial issues affecting companies globally.
The data in this report are drawn from interviews with chief executive officers, managing directors, chairmen and other senior decision-makers from all industry sectors in businesses with 100-499 employees. Q3 data is drawn from 3,300 interviews globally (100 in Russia, 375 in the BRICs) conducted in September 2013. 2013 data is drawn from over 12,500 interviews (400 in Russia, 1,500 in the BRICs) conducted between November 2012 and September 2013.
To find out more about IBR, please visit: www.internationalbusinessreport.com.
Dominic KingGrant Thornton International LtdGlobal research managerT +44 (0)207 391 9537E [email protected]
Nadia Pototskaya Grant Thornton RussiaHead of marketing T +7 495 258 9990E [email protected]