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Innovations in Russia: Lessons from the Crisis and Strategic Policymaking Center for Macroeconomic Research Sberbank March, 2010 1 Has crisis affected innovations in Russia? – The short answer is “NO”: If something does not exists, nothing can affect it. Pre-crisis situation according to the HSE 2009 enterprise survey: • Only 25% of firms self estimate their technological level as equivalent to the level of their foreign competitors. • Share of firms, doing R&D, decreased from 37% in 2004 to 29% in 2008. However, R&D spendings, conditioning on doing R&D, increased. . • Share of firms, having training programs for employees decreased from 69% in 2004 to 50% in 2008. Only in 25% of firms training programs cover more than 10% of personnel. 2 Presence of foreign companies remains the major factor of innovations Some gov-t ownership, 11% Some foreign ownership, 10% No foreign ownership, 90% No gov-t ownership, 89% Share of firms, %: 0 10 20 30 40 50 0 10 20 30 40 50 60 Actively innovating Introducing new products Introducing new technology Undertaking big investment programs no government ownership some government ownership no foreign ownership some foreign ownership 3 What about startups? • Prior to the crisis a number of “development institutions” was established by the government to support innovations: – – – Rusnano (support of business and infrastructure development in nanotechnologies). Government support initially was equal to 130 bn rubles ($4.4 bn), but in 2009 it was cut in half until 2011. At the moment Rusnano invested at about 38 projects; total investments in the projects equal to 96 bn. Rubles, Rusnano investments 51,8 bn.Rubles. Russian venture company (support of venture funds and infrostructure building). Initial government support 30 bn.Rubles. At the moment 7 venture funds were supported with overall capital of 19 bn.Rubles. As of November 2009 only 18% of capital was invested. Small business in sience and technology support fund. Total budget in 20092010 is 4.8 bn. Rubles. Normally finances 800 projects per year. Results by now: • • • – • More than 2000 innovation companies More than 15 000. job 3 000 young researchers supported by the government Technology commercialization SEZ. Currently 4 SEZ exists:162 projects with overall costs of 121.5 bn. Roubles. Effect of the crisis: financing was reduced, but it has never been and has not became a binding factor. 4 Government investment Private financing Businessangels Support programs for medium and small businesses Lack of private financing of R&D Regional venture funds Venture funds with “RBC” and “Rosnano” participation Vneshekonombank Federal program «Research & development…» Federal program «Nanoindustry infrastructure development in Russia» Fundamental science research, national academies of science Idea Problem of converting an idea into commercial prototype Federal program «National technology base» «Rosnanotech» RBC Seed fund Investment Fund Fund for Support small business forms Prototype New product introduction Mass 5 production I. Development and lessons from the crisis: timing and transmission channels 2007 - Aug 2008 Sept 2008 Mar 2009 April 2009 – … • Credit boom • High capital outflow • Green shoots and stabilization of the world economy • Lack of proper risk management • Financial crisis • Commodity prices bounced back • Insufficient prudential regulation • Credit crunch • => Stabilization in Russia • High volatility • Devaluation • High level of mistrust • NPL crisis in banking sector • CBR got opportunity to cut interest rates • High oil prices Crisis transmitted to the Russian economy through the following channels: 1) sharp capital outflow 2) collapse of commodity prices 3) “sudden stop” in world credit markets. (see the next slide) Because of distrust into national currency CBR was unable to provide loose monetary policy from the very beginning. Only in Q2 2009 it began to cut interest rate. Future economic situation largely depends on developments in the world economy. 6 I. Development and lessons of crisis: main indicators Commodity markets Stock markets $ price index, max = 100 100 Jan 08 = 100 100 80 60 80 60 Oil Copper 40 40 Aluminium Nickel MICEX 20 Steel 20 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Foreign currency exchange 12 0 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Capital inflows 54.3 $ bln a month 16 14 S&P500 Gold 13.8 Population buying FX Population selling FX $ bln. 40.7 21.5 11.6 4.5 -7.2 -19.3 -23.7 10 -33.4 -35.1 8 6 4 -130.5 2 Jan 07 I Oct 08 Aug 09 II III 2007 IV I II III 2008 IV I II III 2009 7 IV I. Development and lessons of crisis: lessons Russia was among the countries most severely hit by the crisis Lessons Russia has to learn Macroeconomic policy Banking sector regulation In 1999-2008 Russian policy aimed at sustaining growth through ER management, but it missed to stabilize inflation expectations. Massive capital outflows at the beginning of the crisis provoked run from the national currency. As a result Government and Central Bank were unable to weaken policy to the extend sufficient for support of the economy. Due to lack of restructuring banking sector remained weak and segmented before the crisis. In addition Russia experienced classic credit boom. As crisis unfolded this resulted in high NPL level and poor banks’ balances. To avoid future crises reforms in financial sector are necessary, including prudential regulation in accordance with G20 recommendations, and banking sector consolidation. 8 REAL ECONOMY: Recovery started, but not stable yet GDP Industry Source: Rosstat, CMR calculations Q1 2002 =100 180 Jan 07 =100, seasonally adjusted Source: Rosstat, CMR calculations 130 120 160 110 140 100 120 Industrial production Fixed capital investment Construction Transport turnover 90 GDP, real NSA 100 GDP, real SA 80 2005 2006 2007 2008 2009 GDP components 55 10 Government expenditures 50 0 45 -10 40 -20 QI QII QIII QIV -30 Source: Haver Analytics, IET 30 3rd and 4th quarters of 2009 see increasing positive input into GDP from export and inventories cycle. Mar10 -15 GDP growth % YoY 35 Jan 10 Inventories adjustment Nov 09 -10 Sep 09 -10.8 Jul 09 -9.4 May 09 Capital investment Mar 09 -7.7 20 Jan 09 -5 60 Net export Nov 08 -3.8 IET Industrial Sentiment Sep 08 0 PMI Household consumption Jul 08 Source: Rosstat, CMR calculations May 08 5 Indices Mar 08 2003 2004 Jan 08 2002 80 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 07 07 07 07 08 08 08 08 09 09 09 09 10 9 -40 REAL ECONOMY: Regional perspective Industrial production in Nov 09 – Jan 10, monthly average 130 Source: Rosstat, CMR calculations • Large group of regions reached precrisis level of output already Sakhalin Amurksaya 120 Kalmykiya V 110 Magadan Bashkortostan Kursk Sakha Stavropol Murmansk Moscow oblast N.Novgorod 100 Karach-Cherkessia Kaliningrad Lipetsk Mordovia Tula Tatarstan Yamal 90 Ulyanovsk Vologda Kemerovo Omsk Sverdlovsk Perm Astrakhan Belgorod Buryat Komi Khakassia HM AO Tyumen Udmurt Rep Tambov Tomsk Novosibirsk Leningrad oblast Penza Kostroma Kaluga Ростов Yaroslavl Novgorod Kirov Khabarovsk. Moscow city Ryazan Ivanovo Chelyabinsk Vladimir Chechnya 80 L Tver Orel 60 60 70 index, average monthly industrial production in H1 2008 = 100 Kurgan Bryansk 80 L-recession • Orel, Samara, Tver, Bryansk, Kurgan, Chuvashia, Ivanovo, Vladimir seasonally adjusted, Samara Chuvashia 70 V-recovery • N.Novgorod, Kursk, Moscow oblast, Tula, Kaliningrad, Lipetsk Arkhangelsk 90 100 110 120 Industrial production index in H1 2009, monthly average 130 10 DRIVERS OF GROWTH: Oil and gas markets Oil prices Natural gas Source: Reuters URALS $/barrel 140 500 120 USD/th. m3 400 100 300 80 Gazprom contracts EU spot market (TTF) 200 60 100 40 Jan 10 Oct 09 China imports Supply and demand on oil market Source: Energy Information Group estimates mln. barrel a day Jul 09 Apr 10 Apr 09 Jan 10 Jan 09 Oct 09 Oct 08 Jul 09 Jul 08 Apr 09 Apr 08 Jan 09 Jan 08 Oct 08 Oct 07 Jul 08 Jul 07 Apr 08 Apr 07 0 Jan 07 20 Jan 08 Source: Bloomberg 500 Oil Iron ore Copper Aluminium 400 86 300 200 World supply world demand 100 High demand from China and discipline in OPEK permitted quick recovery in energy and raw materials demand. Natural gas sector, where market goes through structural changes, is an exception. Jan 10 Oct 09 Jul 09 Apr 09 Jan 09 Oct 08 Jul 08 Apr 08 Jan 08 % from average monthly imports in 2007, in real terms Oct 07 Jan 10 Oct 09 Jul 09 Apr 09 Jan 09 Oct 08 Jul 08 Apr 08 Jan 08 Oct 07 Jul 07 Apr 07 Jan 07 0 Apr 07 82 Jan 07 84 Jul 07 88 Source: Bloomberg, IMF 600 11 DRIVERS OF GROWTH : Metal markets Nickel Price, USD/ton Steel (mediterranean) Price, USD/ton LME stocks, th. ton 100 Mar 10 Jan 10 Nov 09 Sep 09 Jul 09 May 09 Mar 09 Jan 09 Nov 08 Sep 08 Jul 08 May 08 0 Mar 08 0 30 600 20 400 10 200 0 0 Feb 10 3000 800 Oct 09 200 40 Aug 09 300 1000 Jun 09 6000 50 Apr 09 400 1200 Feb 09 500 Price, USD/ton 60 Dec 08 9000 Oct 08 600 Aug 08 LME stocks, th. ton Dec 09 Copper Jan 08 0 Jan 08 Mar 10 Jan 10 Nov 09 Sep 09 Jul 09 May 09 Mar 09 Jan 09 0 Nov 08 Sep 08 Jul 08 May 08 Mar 08 Jan 08 0 5000 Mar 10 500 Source: Bloomberg 10000 Jan 10 1000 15000 Sep09 1000 20000 Jul 09 2000 1500 25000 May 09 2000 Mar 09 3000 30000 Jan 09 2500 35000 Nov 08 4000 Price, USD/ton 180 160 140 120 100 80 60 40 20 0 Sep 08 3000 Jul 08 3500 May 08 5000 LME stocks, th. tons Mar 08 LME stocks, th. tons Nov 09 Aluminium 12 DRIVERS OF GROWTH : Stock markets Stock indices Stocks in oil and gas sector Source: Bloomberg, Reuters Jan 08 = 100 100 Jan 08 = 100 100 80 80 60 60 40 40 MICEX MICEX 20 20 S&P500 0 Jan 08 Apr 08 Jul 08 Oil&Gas Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 0 Jan 08 Jan Apr 10 10 Stocks in manufacturing sector Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Jan 08 = 100 80 80 60 60 40 40 MICEX 20 Manufacturing Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Apr 10 Jan 08 = 100 100 0 Jan 08 Jan 10 Stocks in financial sector 100 20 Oct 09 Oct 09 Jan 10 Apr 10 0 Jan 08 MICEX Financials Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Excess liquidity on global financial markets leads to a rally on world and Russian stock markets. Energy out-, while manufacturing under-performs. Oct 09 Jan 10 Apr 10 13 DRIVERS OF GROWTH: Bond markets Corporate bonds market Eurobonds Source: CBonds 250 New issues Market volume 150 80 60 4 3 Mar 10 Jan 10 Nov 09 0 Sep 09 0 Jul 09 0 May 09 1 Mar 09 20 Jan 09 50 Nov 08 2 Sep 08 40 Jul 08 100 Mar 10 Jan 10 Nov 09 Sep 09 Jul 09 May 09 Mar 09 Jan 09 Nov 08 Sep 08 Jul 08 May 08 Mar 08 Jan 08 0 6 5 New issues (rs) Sovereign Corporate Jan 08 bln. rubles 500 Russian companies’ IPO in 2009-10 Loan rates and bond yield 25 bln. USD 100 200 1500 1000 Source: CBonds May 08 2000 120 Mar 08 2500 • Not a single IPO in 2009 Source: Cbonds, CBR 20 • SPO in 2009 attracted $1,15 bln. 15 • VTB equity offering bought out by the gov-t 10 • Jan 2010: RUSAL IPO gets $2,2 bln. • Many IPO are planned for 2010 Effective bond yield Loan average rate 5 Mar 10 Jan 10 Nov 09 Sep 09 Jul 09 May 09 Mar 09 Jan 09 Nov 08 Sep 08 Jul 08 May 08 Mar 08 Jan 08 0 (SUEK, Protek, MetalloInvest, Russkoe more, Rusagro, Kuzbass fuel company, EMAlians, Uralchem) Corporate bond market boom and IPO perspectives enhance financial situation for large Russian companies. Medium and small businesses are in a more difficult situation 14 CHALLENGES AND RISKS: Financial sector Credit to real sector Payments overdue % from total payments 7.3 nominal index, Jan 08 =100 Source: CBR 8 150 Individuals 140 6 Businesses 6.2 130 4 120 Businesses 110 2 Individuals 100 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 08 08 08 08 08 08 09 09 09 09 09 09 10 10 Credit and deposit rates 0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 08 08 08 08 08 08 09 09 09 09 09 09 10 10 Reserves and bad loans Lending rate Deposit rate (w/o demand deposits) % from total loans 10 18 16 12.7 14 8 6 12 8.4 10 8 6 Jan 08 Reserves Problematic and hopeless loans Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 4 2 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 08 08 08 08 08 08 09 09 09 09 09 09 10 10 15 Survey data: credit availability and usage or credit Companies’ loan Size ofsize, enterprises, loan rejections rejections and loanand arrearsarrears Sources of companies’ financing Sources of enerprises' financing Рисунок 3 Цухло Eurobonds 100 Syndicated loans 90 Bonds 80 70 Foreign banks' loans % Others 60 50 40 Budget financing 30 Shareholders' capital 20 Leasing 10 Domestic banks' loans 0 <100 Retained earnings 101-250 251-500 501-1000 1001-2000 2001-5000 >5000 Number of employees 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Companies, whose loan applications were approved Companies without loan arrears • According to HSE survey: prior to crises competitive firms financed most of their investments from retained earnings. Leverage was larger in non-competitive firms. • Sberbank survey: only 10 % apply for credit because of needs to finance investment projects • Sberbank survey: because of crisis 63-93% of firma cut down their investment plans. 16 Effect of the crisis on different industries: Food industry Oil, coal and nuclear products Chemicals Machinery & equipment Source: Center for Macroeconomic analysis and Short-Term forecasting 17 Some lessons from the crisis: • Natural resource dependence was positive factor which speeded up initial stage of recovery. • Noncompetitiveness of cyclical sectors slows recovery down. Crisis have shown that technological modernization is important not only for long-term development but also for more balanced growth. 18 Current policies in innovation sphere • Rusnano and RVC are getting more active in creating innovations ecosystem • Techno park in Skolkovo • President committee on modernization of economy • The fact that budget switched from 6% surplus o 6.5% deficit has not affected government desire to create innovation-driven economy Limiting factors: • entrepreneurships and management skills • IPR and general business climate 19