RUSSIA REBALANCES ITS
ECONOMIC FOCUS:
Opportunities And Strategies
To Enter The Market
Gwyneth Tan
Centre Director
Moscow Overseas Centre
30 September 2015
CONTENTS
1.
2.
3.
4.
5.
6.
Introduction
Recent political and economic developments
Immediate opportunities
Entering the Russian marketplace
Conclusion
Q&A?
2
1. Introduction
Say “Russia”. What images come to mind?
If these are the only images you can think of, then you’re in for a long overdue update!
4
Russia today.
5
Snapshot of Russia:
Official name:
Russian Federation
Area: 17 mln km2
No. of regions: 83
Total population: 143.8 mln pax
Major cities:
Moscow (10.1 mln pax)
St Petersburg (4.7 mln pax)
Novosibirsk (1.4 mln pax)
Nizhny Novgorod (1.3 mln pax)
Yekaterinburg (1.3 mln pax)
President: Vladimir Putin
Prime Minister: Dmitry Medvedev
6
Economic indicators as at end-2014:
Interest rate: 17% → 11.5% by end Jun 2015
GDP: US$1,860.6 bln
GDP growth: 0.6%
Inflation: 7.8%
Unemployment rate: 5.2%
Total foreign direct investments: US$23.6 bln
Total exports: US$520.3 bln Top export products
70.3% - Oil, fuel & gas
11.1% - Metals
06.0% - Chemicals
04.5% - Machinery & equipment
Top export partners
14.7% - Netherlands
06.8% - China
06.7% - Germany
06.2% - Italy
Total imports: US$323.9 bln Top import products
48.1% - Machinery & equipment
14.8% - Chemicals
13.9% - Food & agricultural
products
07.1% - Metals
Top import partners
16.3% - China
12.1% - Germany
04.9% - USA
04.2% - Belarus
7
2. Recent political and
economic developments
Prior to 2014 sanctions, Russia’s foreign economic
relations were dominated by the West (mostly Europe).
After USSR collapse in 1991, Russia reached out
to Europe and the West for resources to update
its outdated Soviet economy.
Investments brought
transfer of tech &
know-know
+
In 2014, Russia’s trade relations was almost 60% dominated by
developed Western nations.
Imports of modern
equipment, products
& services
In 2013, Russia’s 10 largest investors were
Western nations who make up 84% of all foreign
investors.
C & S America & Carribbean
US$12.72 bn (2%)
Australia & New Zealand
Middle East & Africa
US$0.6 bn (0.1%)
US$19.26 bn (3%)
USA & Canada
US$23.44 bn (4%)
CIS
US$70.97 bn (12%)
Europe & UK
US$318.17 bn (54%)
China, N Asia, S Asia &
SEA
US$140.44 bn (24%)
Sources: UN COMTRADE, Federal Customs Service of Russia, Federal Statistics Service.
9
In 2014, Western sanctions and plunging global oil prices
struck a double blow to its already slowing economy.
Oil prices plunged
more than 50% in
2014.
% growth
GDP
4.5%
4.3%
2010
US$
FDI
2011
55bn
43bn
2010
3.4%
2012
50bn
1.3%
0.6%
2012
US$56
Declining growth hit barely above zero
in 2014.
2013 2014
70bn
23bn
2011
US$105
2013
Foreign direct investments fell more
than half of historical levels.
2014
Sources: World Bank Russia Economic Report No. 33, April 2015.
10
2014 sectoral sanctions cut off Russia’s access to key
Western resources for developing and growing its
economy:
Russia’s top banks:
Russia’s O&G + Defense + Dual-tech majors:
Sources: OAFC, EU Council Decisions.
11
Russia’s counter sanctions cut off a significant supply of
staple food imports which form the Russian basic diet:
• Fresh and frozen meat and smoked meat products (excluding canned
versions)
• Fresh and frozen poultry and processed poultry products (excluding
canned versions)
• Milk and dairy products
• Fresh and frozen fish and seafood
• Fresh vegetables, edible roots and tubers, fruits and nuts
12
World Bank forecasts GDP contraction of -3.8% for 2015,
easing to -0.3% for 2016.
Oil prices are predicted to hover between
US$50-70 per barrel.
US$50
US$70
World Bank expects GDP
contraction in next 2 years.
Forecast
GDP
3.8%
0.3%
2015
2016
Sources: World Bank Russia Economic Report No. 33, April 2015.
13
2014 stresses showed Russia the vulnerabilities of
overreliance on one market bloc. Russia responded with
3 cohesive strategies, most notably in its pursuit of Asia.
Russia’s 3-pronged response:
Immediate
Near to mid-term
RUB2.4 trillion AntiCrisis Plan
• 65% bank
recapitalisation
• 13.9% support of
enterprises which
account for 70% of
GDP
Intensify import
substitution
• Capital intensive
industries (priority
given to defence
and O&G sectors)
• Manufacturing
• Agriculture
Longer term
Pursue Asia and nonWestern markets
• New export markets for
oil
• New sources of capital &
financing
• New sources of
technology, know-how,
machinery & equipment
14
Increased bargain hunting by Asian companies. Despite
anti-West climate, some Western investors have set up
production in-market:
Chinese direct
investments into
Russia in 2014
increased by
over 250% to
more than US$8
billion.
Thai company
CPF launched a
new stage of the
industrial pigbreeding farm in
Moscow Region
at a total
investment of
US$27 million.
Western companies continue to invest
and expand operations. E.g. investments
by Swedish cosmetics company
Oriflame (US$165mn), German
automotive components company
Schafller (US$35mn), American car
maker Ford Sollers (US$400mn).
Sources: McKinsey China, , Sdelanounas.
15
Some predict that sanctions will cripple Russia for good.
However, end-2014 macro indicators suggest that
Russian economy is able to hold up under pressure:
Prudent budget management:
• 10% cut in budget expenditure for 2015
• Capping budget expenditure at RUB15 trn
until 2017
Sources: Newsweek, Bloomberg.
16
Reforms to improve business climate continue to
progress:
Russia ranks 62nd on World Bank’s 2015 Ease of Doing
Business index. Compare: Vietnam - 78th, China - 90th,
Indonesia - 114th, Brazil - 120th, Cambodia - 135th, India 142nd, Myanmar - 177th, Philippines - 95th.
Russian corporate tax rates: 20% in 2015 (steadily reduced from 43% in 2001)
Compare with:
25% - Myanmar, Vietnam, Indonesia, China
34% - Brazil, India
Positive economic indicators that reforms are working:
Industrial production index:
>50% increase from 2002-2012
Diversification of exports:
>50% increase from 2000 to 2013
Increase of non-O&G exports:
250% increase from 2000 to 2013
Sources: Newsweek, Bloomberg.
17
Positive social indicators: strong domestic support for
Putin = no civil unrest = stability for business.
• Russia’s civil society is extremely hierarchical.
• The country’s president is regarded as the
nation’s cornerstone and supreme leader.
• Western sanctions against Russia had
intensified Russia’s domestic patriotism.
• Putin’s domestic support rose to an
unprecedented 81% (see Chart).
• Rather than debate political views, foreign
investors should be assured that continuing
strong domestic support for Putin means that
civil unrest is unlikely. This increases stability
for doing business.
Sources: Frontier Strategy Group
18
Foreign investments continue despite adverse economic
and geopolitical climate = opportunities in adversity!
Sources: Frontier Strategy Group
19
Russia’s rebalancing to Asia extends to Singapore. This
shift is unprecedented. A critical window has opened for
Singapore to secure long-term traction in the market
before competition heats up.
How can Singapore
win a share?
20
Finally, how should Singapore respond?
Western sanctions on Russia are unilateral and do not
apply to Singapore or Singapore entities.
• Singapore complies only with UN resolutions.
• Singapore does not join in any sanctions:
- outside of UN mandates; or
- unilaterally imposed by one nation against
another.
Sources: Newsweek, Bloomberg.
21
3. Immediate opportunities
Russia turns towards Asia
for new trade flows.
US$110.8bn
Prior to 2014, 54% (US$318.2 bn) of
Russia’s overseas trade is with
Europe and UK.
Only US$110.8 bn is with China,
Japan and Korea.
While US$15.8 bn is with Southeast
Asia.
US$15.8 bn
There is much room to capture more
Russia-Asia trade flows from which
Singapore traders can also benefit.
23
Provision of oilfield services, equipment, machinery and
parts to Russia’s O&G producers and EPCs.
Russian oil producers:
Company
Russia (total)
Oil production
(mil tons, 2014)
Russian gas producers:
% to 2013
201.992
-0.5%
86.689
-0.2%
61.425
100%
50.942
+2.8%
26.223
+0.4%
17.808
+10.8%
526.75
+0.6%
Company
Russia (total)
Gas production
(bcm)
% to 2013
432.03
-8.1%
53.56
+1.5%
37.33
+3.9%
18.73
+2.6%
640.24
-4.2%
Russian EPCs:
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Potential food trade as Singapore is unaffected by
Russia’s import ban.
Staple food item
Beef (fresh, chilled and frozen)
Pork (fresh, chilled and frozen)
Poultry
Fish and seafood
Milk and dairy products
Vegetables
Fruits and nuts
Annual shortage (tonnes)
59,050
450,790
338,730
457,190
428,790
914,730
1,599,570
25
Decentralisation of Moscow City and SEZ development in
Russia Far East presents opportunities for Singapore
SEZ and urban developer-investors:
Russia Far East
Moscow City
Sources: Ministry for Development of Russia Far East, Moscow City Government.
26
Opportunities for Singapore SEZ developer-investors and
urban solutions companies in Moscow City and Russia
Far East:
Decentralisation of Moscow City
Congestion caused by urban migration from regions for higher
salaries and work opportunities with foreigners.
Overburdened city infrastructure causing traffic jams and
overcrowding on city trains.
2014 ambitious plan by Moscow City Government to decentralise
city centre by creating interchange hubs outside of city centre
that offer new spaces for work, leisure and business.
2.16km2 (or 2,159,501m2) within existing Moscow City boundaries
for development into 192 new hubs, to be connected to the
outskirts by 61km of new subway lines and 200km of new railway
lines
New 1,480km2 of adjacent territory for development into new
business, industrial, residential and entertainment districts, “New
Moscow”. Will increase Moscow City’s total geographical area by
59% from 2,511km2 to 3,991km2.
Sources: Ministry for Development of Russia Far East, Moscow City Government.
27
Russia has laid out ambitious plans for RFE development through the creation of
rebranded SEZs as "Advanced Development Territories" (ADTs)
1.
Komsomolsk
Logistic
Manufacturing
Technological
Agro-Industrial
Svobodny
2.
Belogorsk
3.
Khabarovsk
4.
Leninsk
5.
Zarubino
6.
Lazo
7.
Ussuriysk
8.
Mikhailovka
9.
Nakhodka
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1
Belogorsk
Komsomolsk
2
3
Khabarovsk
4
6
Yuzhno-Sakhalinsk
8
7
Ussuriysk
10. Nadezhdinskoe
11. Svobodny
5
9
Vladivostok
10
Nahodka
Possible locations of some ADTs
12. Nagorny
Source: RFE Ministry
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4. Entering the Russian
marketplace
Strong relationships are paramount – very
necessary to spend time to build relationships and
nurture trust with Russian business partners.
Why?
1
2
3
4
Market is still
dominated by large
and complex
Russian and
Western entities
who share hardforged business
relationships.
Recent economic
strain compels
Russia to seek
new business
partners –
window of
opportunity
opens for
Singapore.
Despite steady
improvements,
business
environment is still
complex – strong
local partners can
help navigate the
rules and market
practice.
Loyalty is longterm in the
Russian business
perception – good
partners are
regarded as
friends for life.
30
Offer differentiated products, invest in ground due
diligence, hire capable Russian interlocutors, invest in
payment protection.
1
2
3
4
Prepare to compete
against European
and American
standards and
quality with more
competitive pricing.
Invest in physical
due diligence to
overcome low
transparency.
Hire able
interlocutors, not just
interpreters.
Ensure payment
protections are
in place.
It is common that the
same English words
mean different things
to a Russian and an
English speaker.
Financial
sanctions have
caused Russian
businesses to
suffer payment
delays.
There is no reliable
Bizfile equivalent in
Russia.
Russians are still
used to Western
quality standards.
Desktop research
does not give
accurate picture.
An interlocutor
experienced in the
norms of the sector
can help prevent costly
misunderstanding.
Be ready to
negotiate
amicably while
preparing for
longer payment
terms.
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5. Conclusion
In a nutshell:
1
2
3
Russia and businesses
will adjust to the new
environment.
Singapore’s
competition in
Russia was formerly
from Western
players.
The window period for
Singapore will not last.
Russia’s large resource
base and highly
specialised talent pool
will provide stable
foundation for future FDI
and export growth.
Russia will pay heed to
maintain diverse
economic ties with the
world, instead of focusing
only on its neighbouring
European markets.
Going forward, Russia
will pay heed to
maintain diverse
economic ties with the
world, not just with the
West.
There will be additional
competition soon from
China and North Asia
rivals.
Russia’s pivot to Asia does not
mean Western investors have
left the market place.
By end of 1Q2015, Asian
bargain hunters have begun to
fill the vacuum.
Over time, the Russian
marketplace is likely to become
more, not less diverse, and
more competitive, offering
Russian customers a wider
choice of price points and
quality levels.
.
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6. Q&A?
Thank You
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