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Russia
ING
Economics Department
Russia
ING Economics Department
Russia: unlocking the poRussia:
tential
unlocking the potential
The Russian economy will grow by 2-4% in the coming years. Sustaining this growth rate i
future will depend largely on structural improvements. Oil and gas reserves wi
contribute towards financing badly-needed investment in infrastructure for 20 and 70 yea
respectively. However, this depends on developments in the global oil price. The size o
the population is shrinking with consequences for the labour force. It is time for action
The Russian
will
grow by 2-4%
in the
comingvalue
years. Sustaining
this growth
rate in future
Focusing
oneconomy
non–oil
industry,
high
added
production,
improving
thewill
legal environ
depend
largely
on
structural
improvements.
Oil
and
gas
reserves
will
contribute
towards
financing
ment and promoting more equal distribution of power and wealth are required to ge
for 20 and 70 years respectively. However, this depends on
thebadly-needed
economy investment
back on in
ainfrastructure
higher growth
path. The main challenge for Russia is convincin
developments in the global oil price. The size of the population is shrinking with consequences for the
domestic
and
foreign
investors
that
is
serious
about making progress on these issues. I
labour force. It is time for action.
success
in
doing
so
will
trigger
a
substantial
inflowthe
oflegal
capital,
unlock
other Russia
Focusing on non–oil industry, high added value production, improving
environment
and promoting
treasures
than
oil/gas
(mineral
deposits)
andto bring
the 5%back
economic
growth rat
more equal
distribution
of power
and wealth
are required
get the economy
on a highertarget
growth path.
within
reach.
The main
challenge for Russia is convincing domestic and foreign investors that is serious about making
progress on these issues. Its success in doing so will trigger a substantial inflow of capital, unlock other
Russian treasures than oil/gas (mineral deposits) and bring the 5% economic target growth rate within
Main
observations
reach.
The reliance of the Russian economy on energy resources (25% of GDP, 65% of exports and 40% of
government revenues) is risky due to the dependence on the global oil price, depletion of reserves and a
Mainpossible
observations
transit disruption.
•- TheMore
reliance
of the Russian
economy on energy
resources
(25% of GDP,
of exports and
40%business
of government
revenues)
progress
in competitiveness,
reduction
of corruption
and 65%
improvements
in the
climate
will help the
is risky
due
to
the
dependence
on
the
global
oil
price,
depletion
of
reserves
and
a
possible
transit
disruption.
economy to reach its potential growth rate of 5%.
•- More
in competitiveness,
reductionthe
of corruption
in the
business
climate
will help
Theprogress
authorities
in Moscow recognise
problems and
andimprovements
are working to
address
them.
Accession
tothe
theeconoWorld Trade
my to reach its potential growth rate of 5%.
Organisation last year will force changes to be implemented more rapidly.
• The authorities in Moscow recognise the problems and are working to address them. Accession to the World Trade Or- ganisation
Foreignlast
investors
needed,
but
participation
depends
year willare
force
changes
to their
be implemented
more
rapidly.on the progress made to address the
issues
mentioned
earlier.
• Foreign investors are needed, but their participation depends on the progress made to address the issues mentioned earlier.
Signs
of diversification:
of production
investment
goods
5%
2011
toyears.
10% in 10 years.
•- Signs
of diversification:
shareshare
of production
investment
goods 5%
in 2011
to in
10%
in 10
-
0
Figure 1 Comparison of Russia and Germany
10
Figure 1 Comparison of Russia and Germany
GDP pc in US$
$45.000
$5.000
Russia pc
Germany pc
$4.500
$40.000
Russia
$4.000
$35.000
Germany
$3.500
$30.000
$3.000
$25.000
$2.500
$20.000
$2.000
$15.000
$1.500
$10.000
$1.000
$5.000
$500
$0
$0
2000
40
GDP in US$ billion
2013
2017
Figure 2 Ease of doing business in 2013, World Bank
50
Ease of doing business ranking
out of 185 countries
$50.000
20
30 of doing business in 2013, World Bank
Figure 2 Ease
60
70
80
90
100
110
120
130
140
150
160
170
180
Russian economic growth figure is stuck between 2% and 4%
this year. In the seven years before the 2009 crisis, Russia
achieved annual average GDP growth of 6.8%. Double-digit
growth in private consumption and investments contributed
to this high growth rate. Since export growth overtook import
growth, the external
sector contribution was negative for years. Current account
surpluses of 10% of GDP, such as were seen
economic
growth
stuckfor
between
2% and
beforeRussian
the crisis,
are gone.
Thefigure
sameisgoes
the governthis year. Infinancial
the seven
years before
the 2009
crisis,
Rusment’s4%
comfortable
position.
Surpluses
on the
govsia budget
achieved
annual
average
GDP growthThough
of 6.8%.foreign
Doubleernment
seem
to have
disappeared.
digitreserves
growth incover
privatemore
consumption
investments
exchange
than oneand
year
of imports,
contributed
to
this
high
growth
rate.
Since
export growth
Russia still is a net creditor nation.
overtook import growth, the external sector contribution
Russia’s
potential growth rate should be 5% in the long term.
was negative for years. Current account surpluses of 10%
Structural problems are mainly what are preventing the
of GDP, such as were seen before the crisis, are gone. The
economy
from
achieving
this. In Davos
last year, financial
Prime Minissame
goes
for the government’s
comfortable
positer Medvedev
made
clear
it
is
the
ambition
of
the
Russian
tion. Surpluses on the government budget seem
to have disleadership
to achieve
this
potential
growthreserves
rate as cover
soon as
appeared.
Though
foreign
exchange
more
possible.
In
the
same
speech
Mr
Medvedev
identified
than one year of imports, Russia still is a net creditorthe
nation.
cause Russia’s
of the potential growth rate should be 5% in the long
term.
Structuralasproblems
areRecognising
mainly what these
are preventing
structural
problems
domestic.
probthe
economy
from
this.to
InRussia’s
Davos last
year, Prime
lems as
top
priorities
in achieving
the roadmap
integration
in
Minister
Medvedev
clear to
it isthe
theWorld
ambition
of the
Rusthe global
system
is vital. made
Accession
Trade
Orsian leadership
to achieve
this
potentialRussian
growth companies
rate as soon
ganisation
(WTO) in August
2011
requires
as
possible.
In
the
same
speech
Mr
Medvedev
identified
to considerably increase their competitive power, both in the
cause of the structural problems as domestic. Recognising
terms of labour
these problems as top priorities in the roadmap to Russia’s
productivity and energy cost saving. This requires
integration in the global system is vital. Accession to the
investments
percentage
of GDP
to increase
from
curWorld in
Trade
Organisation
(WTO)
in August
2012the
requires
rent 20%
of GDP
to at least
Russian
companies
to 25%.
considerably increase their competiFiguretive
1 shows
advance
ofofRussia
total GDP compared
power,the
both
in terms
labourinproductivity
and energy
to Germany.
In GDP
per
capita,investments
however, no
is regcost saving.
This
requires
in advance
percentage
of GDP
istered.
to increase from the current 20% of GDP to at least 25%.
Figure 2 shows Russia’s disappointing position in the
Ease of Doing business index, where it ranks 112 out of
185 countries, close to Bangladesh. The ambition of leaders in the Kremlin is to be ranked 20th as quickly as possible. The main hurdles are getting electricity, construction permits and the
extensive paperwork for cross-border trading.
Figure 3 World Competitiveness Index 2012
Figure 3 World Competitiveness Index 2012
WCI 2012
110
Hong Kong
100
90
Netherlands
80
China
70
India
60
Turkey
Poland
Russia
50
40
0
50
100
150
200
250
300
% change WC index 2002 - 2012
According to figure 3 the World Competitive Index (WCI)
2012,Russia’s
Russia’s level
disappointing,
as as
2012,
level of
ofcompetiveness
competivenessis is
disappointing,
wellas
asits
itsprogress
progress in
WCI
highwell
in the
the period
period2002-2012.
2002-2012.The
The
WCI
highlights
the
scientific
and
technical
infrastructure
as
positive
lights the scientific and technical infrastructure as positive
factors for Russia. The score for education is unchanged
factors
for Russia. The score for education is unchanged while
while weak spots are clearly management and efficiency.
weak spots are clearly management and efficiency.
Russia still has a legacy of impressive fundamental science,
Figure 1 shows the advance of Russia in total GDP compared
engineering schools and infrastructure for pilot scale producto Germany. In GDP per capita, however, no advance is
tion preserved
in many
industries. To keep
its front running
The challenges
Figure
4 Russian
competitiveness
in detail
registered.
position in scientific and technological infrastructure and education, investment is needed. Foreign companies could play
The main challenge that the government faces is to make
WCI Russia compared with 59 countries
Theinchallenges
an important role to improve efficiency and productivity.
progress
reducing the hurdles to doing
The main challenge that the government faces is to make
Transparency International ranked Russia 133 out of 182
business in Russia:
Ranking
2012 Index, on par
% chg
progress in reducing the hurdles to doing
countries in 2012 in its Corruption
Perceptions
business in Russia:
with Iran and Honduras. There is an obvious need for swift 2002-2012
• • Improve
thebusiness
businessclimate
climate(measured
(measured
in the
Improve the
in the
World
action
to improve
this profile. 23
Scientific
infrastructure
-1.3%
World
Bank’s
Ease
of
Doing
Business
index)
Bank’s Ease of Doing Business index)
Apart from investments in the Winter Olympic Games in
Technology
infrastructure
34
38.9%
• • Improve
competitiveness(as(as
measured
Improve competitiveness
measured
by by
thethe
index of
2014 and Football World Cup in 2018, substantial investEducation
38
-1.4%
index
of international
business
school IMD)
international
business school
IMD)
Basic infrastructure
42
34.5%
Reduce corruption
index)
• • Reduce
corruption(Transparency
(Transparency
index)
•
Invest
in
improving
the
infrastructure
Figure
4
Russian
competitiveness
in
detail
• Invest in improving the infrastructure
Attitude and efficiency
51
16.4%
Privatisation
WCI
Russia compared with 5953countries
• • Privatisation
Productivity
-8.8%
Compensate for
working
age
popula
Ranking
% chg
• • Compensate
foraadecline
declineininthe
the
working
age
popuManagement practice
57
18.0%
tion by 0.8% in 2012-2017, compared with 0.2% growth
2012
2002-2012
lation
by 0.8% in 2012-2017, compared with 0.2%
Overall
WCI
48
53.0%
in 2003-2008. Moreover, the participation rate is already
growth in 2003-2008. Moreover,
Source:
IMD
fairly high (more than 74% in Q2 2012). Employment is
Scientific infrastructure
23
-1.3%
the
participation
ratebyis0.5%
already
fairly
(more
expected
to contract
a year
on high
average
overthan
the
Technology
infrastructure
34
38.9%
74%
in Q2
2012). Employment is expected to connext five
years.
Education
38
-1.4%
tract by 0.5% a year on
average
overRussia’s
the next
five years. position in the Ease of
Figure
2 shows
disappointing
Doing business index, where it ranks 112 out of 185 countries, close to Bangladesh. The ambition of leaders in the
Kremlin
to be ranked 20th as quickly as possible. The
Russia
Aprilis2013
main hurdles are getting electricity, construction permits 2
and the extensive paperwork for cross-border trading.
According to figure 3 the World Competitive Index (WCI)
Russia April 2013 2
Basic infrastructure
Attitude and efficiency
Productivity
Management practice
Overall WCI
Source: IMD
42
51
53
57
48
34.5%
16.4%
-8.8%
18.0%
53.0%
Government initiatives to deal with the challenges
• Priority sectors have been identified to regain technological leadership. These include the pharmaceutical
industry, high tech chemistry, composite and non-metallic
materials, aircraft manufacturing, information and communication technologies and nanotechnology.
• The government has invested in institutions capable of
commercialising applied research.
• Several Western firms have been attracted to participate
in the Skolkovo project, Russia’s version of US high-tech
centre Silicon Valley.
• Large-scale privatisations have been announced, such as
shipping company Sovcomflot and Russian bank VTB.
Diversification: signs of improvement
The overall picture shows the share of investment goods
production increasing in future. Not only will its share in
GDP rise, but also its share in total global production. The
same goes for several production sectors in intermediate
goods. This trend should be reflected in the export package
with an increasing share of higher added value products.
For thevalue
time being
however,
andbeing
gas still
dominate
added
products.
For theoiltime
however,
oil Rusand
sia’sstill
export
package.
The importance of improvement in the
gas
dominate
Russia’s
agricultural
sector
and
the linkedoffood
and food logistic
secexport
package.
The
importance
improvement
in the agritor is underestimated.
Improvements
crops
and logistical
cultural
sector and the linked
food andin
food
logistic
sector is
processes can help
to mitigate fluctuations
food prices
underestimated.
Improvements
in crops andinlogistical
procand reduce
thetoinflation
esses
can help
mitigaterate.
fluctuations in food prices and reduce the inflation rate.
Figure 5 Growth by sector and contribution to GDP
Figure 5 Growth by sector and contribution to GDP
Shares in GDP
2012
Agriculture, forestry & fisheries
2014
are
ds,
0
g
rma-
2012-2016
4%
1.8%
28%
4.1%
9%
1.8%
16%
5.6%
Consumer goods non durables
3%
-0.42%
Consumer goods durables
1%
-1.3%
Intermediate goods
7%
6.6%
Investment goods
5%
10.8%
3%
2.36%
5%
5.5%
63%
3.9%
Industrial production
Extraction
Manufacturing
par
ft
Avg . Ann % change
Utilities
Construction
Services
100.0%
Increasing share production investment goods
Production of investment goods represents only 5% of GDP
in 2012. This will increase by almost 11% per year in the
period 2012-2016 – a growth rate two times higher than GDP
growth in the same period. If the main improvements in the
business climate, competitiveness and the transparency index are implemented, the share of investment goods in total
GDP could be 10% in 10 years’ time. The main contributors
to higher growth rates are generated by the production of
motor vehicles and parts, other means of transport, computers and office equipment, special purpose machinery and
general purpose machinery.
Competitiveness of the production package is an important
factor in forecasting the success of the switch in the production on the international market. The overall cost level is of
high importance for its success. The next figure from a study
published by KPMG shows the overall cost differentials by
sector. Three of the BRIC countries – India, China and Russia
– record a major cost advantage in labour-intensive sectors
of industry compared to the US, Germany and the Netherlands. Although Russia’s overall cost level is higher than that
of India and China, the cost differential with the Netherlands,
Germany and the US is still substantial. Labour costs are
part of the cost comparison.
Since Russian wages are relatively low, overall labour costs
are still comparatively low. However, due to real wage
increases averaged 15% over 2000-2008 then falling to
5.5% in 2010-2012 while productivity increased on average
with 5% since 2003 relative unit labour costs in Russia are
increasing. The pace of this increase seems to flatten out this
year and next. The relative unit labour cost index indicates
Figure 6 Total cost comparison 2011, US =100
Figure 6 Total cost comparison 2011, US =100
120
100
80
60
40
20
0
VS
NL
Germany
Support…
Prof int…
Software…
Video…
Bio techn…
Medical…
Pharmace…
Plastics
Metal…
Agrifood
Telecom…
Aerospace
Chemicals
Electronics
Green…
Automotive
Precision…
ce,
ducng
edulay
ments are needed to improve the country’s basic infrastructure: roads, railways, harbours and urban structures.
Over the next 50 years substantial amounts are required to
replace ageing infrastructure.
Source: Oxford Economics
Source: Oxford Economics
Source: KPMG guide to international business location costs, 2012
Source: KPMG guide to international business location costs, 2012
Increasing share production investment goods
Production of investment goods represents only 5% of GDP in
Russia
April
3 by almost 11% per year in the period
2012. This
will2013
increase
2012-2016 – a growth rate two times higher than GDP growth
in the same period. If the main improvements in the business
Since Russian wages are relatively low, overall labour costs
are still comparatively low. However, due to real wage increases averaged 15% over 2000-2008 then falling to 5.5% in
2010-2012 while productivity increased on average with 5%
Source
Russi
a key
open
petitio
ple, a
impro
ready
These
issues
servic
was u
avera
from
due in
demi
short
able t
the se
would
secto
40% v
Fore
ener
Russi
creases averaged 15% over 2000-2008 then falling to 5.5% in
2010-2012 while productivity increased on average with 5%
since 2003 relative unit labour costs in Russia are increasing.
The pace of this increase seems to flatten out this year and
next. The relative unit labour cost index indicates (figure 7)
how
Russian unit labour costs in US dollars are developing compared to world unit labour costs. It is the combination of unit
labour costs in local currency adjusted for currency developments. If the index is above 100 it indicates Russia is less
competitive against the world index.
Russia’s strategic priorities of economic diversification and
modernising the economy reinforces the need for FDI as key
instrument. Outside the extraction industries FDI inflows seem
to be low. In general, the FDI stock per capita in Russia is well
ahead of other BRIC countries. Per capita, Russian FDI stock
was USD 2,960 in 2010. This is seven times the number for
China and Brazil and 18 times more than India.
Figure 8 Foreign direct investment in Russia by
sector
Figure 7
7 Relative
Figure
RelativeRussian
Russianunit
unitlabour
labourcosts
costs
140
Rel unit…
130
Foreign
investment
and flow
indusFigure
8 Foreign
directstock
investment
inby
Russia
by
try
sector
in % investment
of total
2009Foreign
stock and flow by 2011
industry
2011
in % of total
2011 2009-2011
120
Mining
andand
quarrying
Mining
quarrying
Manufacturing
Manufacturing
Construction
Construction
Wholesale,
retail,
motor
Wholesale,
retail,
motor
vehicles
vehicles
Financial
intermediation
Financial
intermediation
estate,
renting,
RealReal
estate,
renting,
business activities
business activities
Other
110
100
90
80
2008 2009 2010 2011 2012 2013 2014 2015 2016
14.5
32.1
7.4
8.7
13.5
15.5
8.3
14.5 19.9 19.9
32.128.3 28.3
5.5
7.4
5.5
15.3
8.7 5.2 15.3
13.518.5 5.2
15.5 7.3 18.5
8.3
7.3
Other
Source: Rosstat
Source: Oxford Economics
Russia April 2013
(figure 7) how Russian unit labour costs in US dollars are
developing compared to world unit labour costs. It is the
combination of unit labour costs in local currency adjusted
for currency developments. If the index is above 100 it indicates Russia is less competitive against the world index.
Russia’s accession to the WTO on 22 August 2012, generates
a key advantage: its commitment to open, transparent and
non-discriminatory trade, rising competition and more efficient resource allocation. It is, in principle, a unique chance
to spur structural changes needed to improve Russia’s
efficiency and competitiveness. Russia already made some
changes in the pre-accession period. These do not seem to
have added to GDP growth so far. Key issues for Russia are
the reduction in export and import tariffs, services sector
and industrial/agricultural subsidies. Russia was using these
instruments for protectionist reasons. The average import
tariff will finally fall from 10% to 7.8%, with one third already
effective, a quarter due in three years and the rest over
longer periods. Academic studies flag potential gains of 3%
to 11% of GDP in the short to long term, with up to 85% of the
gains fully attributable to a sharp cut in barriers to foreign
direct investment in the services sector. Higher foreign
direct investment (FDI) would be the best outcome of WTO
entry as only in a few sectors does labour productivity exceed Russia’s average of 40% vs the US level.
Foreign direct investment less focused on energy
Russia’s strategic priorities of economic diversification and
modernising the economy reinforces the need for FDI as
key instrument. Outside the extraction industries FDI inflows
seem to be low. In general, the FDI stock per capita in Russia
is well ahead of other BRIC countries. Per capita, Russian FDI
stock was USD 2,960 in 2010. This is seven times the number
for China and Brazil and 18 times more than India.
Russia April 2013 4
Despite the often mentioned concentration of FDI inflow in
natural resources extraction, the most important destination
of inward FDI in terms of stock and flows is manufacturing,
with 32% and 28% of total. This suggests inward foreign direct investment in manufacturing is for the domestic market
and export markets. FDI in natural resources is comparable
to the FDI stock and flows in financial intermediation and
real estate, renting and business activities. In 2012, 24.4% of
FDI inflow came from the Netherlands, followed by 21.3%
from Luxembourg, 13.8% from Cyprus, 9.3% from Ireland
and 5.7% from Germany. All information according to the
UNCTAD database on foreign direct investment.
4
Upgrading the export package will follow change in
the production pattern
The upgrade of the production package is reflected in an
increasing share of investment goods. These capital goods
are needed to produce higher added value products for domestic consumers and export products. As a consequence,
it is not surprising to see fuel still dominating exports till
2017.
Figure 9 Export of goods (2007-2017) in USD bn
Figure 10 Exports of goods (2007-2017) in USD bn
Figure 8 Expenditure by category 2012-16 (volume
US$ bn
CAGR
in 2012
2012-16
The destination of the export flow of oil and gas is highly
focused on the Netherlands as the main hub for Russian gas
to other continents. China is second with its high demand for
Russian coal.
Rapidly developing local market
Russia’s large population of 143 million puts it high on the
list of largest countries in the world. In contrast with countries such as Turkey, the population is expected to shrink.
However, since per capita income continues to increase, the
size of the domestic market will continue to grow. Spending
power will continue to grow.
Food and non-alcoholic beverages
Alcoholic beveraged and tobacco
Clothing and footwear
Housing
Household goods and services
Health goods and medical services
Transport
Communication
Leisure and recreation
Education
Hotels and catering
Misc. Goods and services
Total
293
67
82
82
45
37
127
51
50
11
42
60
947
Sources: National statistics, OECD, Euromonitor and ING
Figure 9 Import of goods (2007-2017) in USD bn
Number of persons in mln
Income bracket
US$ 5,000
US$15,000
2013
53.5 33.3
2020
59.1
52.3
Source: Euromonitor
Growth in prosperity in the country and the shift towards
middle-aged consumers increases private consumption and
causes a shift in the consumption pattern. There is a huge
and fast-growing demand for housing, transport, health
goods, medical services, alcoholic beverages and tobacco.
The category of products with a lower growth rate is clothing
and footwear.
Domestic sales of food products and textiles are highly
dependent on imports. Industrial machinery and transport
equipment are investment goods reflecting the increasing
effort to build a competitive Russian industrial base.
The origin of imported products depends largely on China
(electrical equipment), Germany(machinery, transport
equipment) and Ukraine (ores and metals).
Russia April 2013 5
Figure 10 Import of goods (2011-2017) in USD bn
8.8
7.6
7.2
8.6
9.1
10.6
10.7
10.4
9.6
10.7
10.1
9.8
9.1
Role of foreign companies
Foreign companies are invited to participate in the transition
of the Russian economy towards less dependence on energy
resources. This can be done in different ways:
• Foreign direct investment (an equity participation or equity loan) in a Russia company.
• Many foreign companies test the water by establishing a
joint venture first.
• Foreign companies can participate in privatisation deals,
rather than establish a new presence. This is often more
suitable for large corporates.
• Foreign companies are stimulated to offer their technical
and managerial knowledge to Russian companies by selling technical assistance.
• Sell products, such as machinery and transport equipment, that help upgrade the production package.
• The challenge for the Russian authorities is to convince
domestic and foreign investors that investing in Russia is
safe. Accession to the WTO last year is a clear step in that
direction, but more will still have to be done, considering
the scores and ranking of Russia’s competitive position
and in the Ease of Doing business index as well as the
transparency index score.
• The areas of interest to foreign companies are:
- Stock of scientific and technological findings that could
be used in Western production.
- Improved logistical infrastructure, especially in the
food chain.
- Better productivity in production and logistical processes.
- Improve crops in agriculture by offering technical assistance
- Technical assistance to improve energy saving.
- Participation in the 2018 Football World Cup event.
Russia April 2013 6
Role of Russian companies
• The scientific and technological know-how of Russian
institutes and companies represents a substantial value
included in pilot products and innovations. In combination
with Western companies it could be investigated whether
these innovations can be commercialised.
• Russian companies follow the same initiative taken by
many large corporates from emerging markets to ensure
access to developed markets via acquisitions.
• A new privatisation wave could spur acquisitions by Russian companies.
• Areas of interest are:
- Energy resources
- Transport and logistical services
- Manufacturing of machines and transport equipment
- Manufacturing of Computers
- Professional services (scientific and technical)
- Food and food logistical services
Sources
Business Monitor International, several publications
Oxford Economics, global industry database
IMD, World Competitiveness Index 2012
ING FM Research, WTO- A chance to play in premierleague, 26 October 2012
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