Focus on: Russia
Grant Thornton International Business Report 2013
Focus on: Russia

Introduction
Russia is an emerging economy of more than 143m
people. In 2012, its GDP was approximately ...
Focus on: Russia

Economy

Economy
expanded by

Like other emerging giants and fellow BRICs, Brazil and India, the
Russian...
4.9%

Focus on: Russia
12.0%

6.3%
4.5%
4.3%

53.9%

Growth and trade forecasts

4.0
3.5
3.0

16.0%

15.0%

6.3%

1.5

4.5...
80

Focus on: Russia
70
60
50
40
30
20
10

80

0

Business growth prospects
-10

70

-20

Russian business optimism droppe...
Focus on: Russia

Growth constraints
Stifling bureaucracy is the key constraint stopping Russian businesses
from growing. ...
Focus on: Russia

Finding growth
The IBR 2013 results suggest three areas on which Russia could focus
to boost growth:
Pro...
IBR 2013 methodology
The Grant Thornton International Business Report (IBR) is the leading mid-market business survey in t...
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Focus on Russia (IBR 2013)

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Drawing on data sources such as the Grant Thornton IBR, the EIU and the IMF, this report considers the outlook for the economy, including the growth expectations of 400 businesses interviewed in Russia, and more than 12,500 globally.

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Focus on Russia (IBR 2013)

  1. 1. Focus on: Russia Grant Thornton International Business Report 2013
  2. 2. Focus on: Russia Introduction 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 Tishakov Grant Thornton Russia Partner T +7 495 258 9990 E sergey.tishakov@ru.gt.com   W www.gtrus.com US$2trn gross domestic product 143 million inhabitants Focus on: Russia 2
  3. 3. Focus on: Russia Economy Economy expanded by Like other emerging giants and fellow BRICs, Brazil and India, the Russian economy has slowed sharply. 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 12.0% unrest in the Middle East means the price 6.1% of oil is expected to remain well above US$100/barrel. Oil and gas dominate 6.0% exports, accounting for around 70% of 5.9% the total. 64.9% 5.1% 3.4% Export markets in 2012 12.0% Netherlands Ukraine Germany China Italy 53.9% Others 6.1% 16.0% 6.0% 15.0% 64.9% 53.9% 5.9% 5.1% 6.3% 16.0% 15.0% 6.3% 4.5% 4.3% 4.5% 4.3% Key indicators • 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 4.0 • retail sales were up by 3.8% in January-July boosted by rising disposable incomes • inflation continues to fall, dropping 12.0% to 6.1% in September the slowest in 6.1% 12.0% 13 months 6.0% • the current-account surplus6.1% shrank to US$1.1bn in Q3, down from US$5.8bn5.9% 6.0% 64.9% in the Q2 and the lowest since 1998. 5.1% 4.0 Import sources 3.5 5.1% 3.0 3.0 2.5 16.0% 2.5 China Germany Ukraine Belarus Japan Other 16.0% 2.0 53.9% 5.9% 64.9% 3.5 53.9% 1.5 15.0% 15.0% 1.0 6.3% 0.5 6.3% 4.5% 4.3% 2.0 1.5 1.0 0.5 0.0 4.5% 0.0 4.3% Source: Observatory of Economic Complexity -0.5 4.0 -1.0 4.0 -1.5 3.5 2.5 -1.0 3.5 3.0 -0.5 2013 3.0 -1.5 2014 2015 2016 2013 2017 2014 2018 Focus on: Russia 3 20
  4. 4. 4.9% Focus on: Russia 12.0% 6.3% 4.5% 4.3% 53.9% Growth and trade forecasts 4.0 3.5 3.0 16.0% 15.0% 6.3% 1.5 4.5% 4.3% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.0 0.0 -0.5 2.5 -1.0 -1.5 2013 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. 6.0% 15.0% 5.9% Growth is expected to slow to 1.8% in 2013 with global trade still tepid 64.9% 53.9% 5.1% 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. 1.0 0.5 0.0 forecast growth in 2013 -0.5 -1.0 -1.5 2015 1.8% 2014 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. 5.9% 6.0% 5.1% Economic outlook 16.0% 6.1% 6.1% 12.0% 2014 2015 Source: Economist Intelligence Unit (2013) 2016 2017 2018 Current-account balance (% GDP) Real GDP growth (%) 2016 3.3% 2013 forecast growth in 2014 2017 2018 Focus on: Russia 4
  5. 5. 80 Focus on: Russia 70 60 50 40 30 20 10 80 0 Business growth prospects -10 70 -20 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. 60 Investment plans have been more volatile, perhaps reflecting an aversion to planning 50 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 40 12 months, rising to 47% in Q2 and 66% in Q3 – a record high since 2008. However, 30 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 20 in 2007 and 2008. 10 0 -10 -20 Net percentage of businesses expecting to increase profits (next 12 months) 43% expect 80 70 60 revenues 50 to rise 40 30 10 2009 2010 2011 2012 2013 80 35% planning 70 60 50 investment activity 40 20 0 10 -10 2007 2008 2009 2010 80 Source: Grant Thornton IBR 2013 70 2008 30 20 -20 2007 Net percentage of businesses expecting to increase investment in plant & machinery (next 12 months) 2011 2012 2013 0 Russia BRIC 2007 2008 2009 2010 2011 2012 2013 Russia BRIC Source: Grant Thornton IBR 2013 60 50 40 30 Focus on: Russia 5
  6. 6. Focus on: Russia Growth constraints 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. 2007 2008 2009 2010 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%. 2009 2010 2011 59 2007 2008 2009 2010 2011 2012 2013 44 38 18 25 32 40 29 42 35 55 38 Russia BRIC 62 42 Source: Grant Thornton IBR 2013 2011 bureaucracy 2012 2013 constraining business 2008 Percentage of businesses citing regulations and red tape as a constraint on growth Percentage of businesses citing a lack of skilled workers as a constraint on growth (2013 average) growth 2012 2013 plans 50 a lack of talent is a challenge 40 30 Russia BRIC Global Source: Grant Thornton IBR 2013 Focus on: Russia 6
  7. 7. Focus on: Russia Finding growth The IBR 2013 results suggest three areas on which Russia could focus to boost growth: Productivity Innovation 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 demand Private 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. Net percentage of businesses expecting to increase R&D activity (2013 average; next 12 months) Russia BRIC Global 9 36 21 Net percentage of businesses expecting to raise salaries (2013 average; next 12 months) 46 68 67 Percentage of businesses citing infrastructure as a growth constraint (2013 average) Transport 39 26 14 ICT 35 26 16 Focus on: Russia 7
  8. 8. IBR 2013 methodology The 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 King Grant Thornton International Ltd Global research manager T +44 (0)207 391 9537 E dominic.king@gti.gt.com Nadia Pototskaya Grant Thornton Russia Head of marketing T +7 495 258 9990 E nadia.pototskaya@ru.gt.com © 2013 Grant Thornton International Ltd. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a seperate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. www.gti.org
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