Russia Business Forecast Report Q3 2009

Publication Date	June 2009
Publisher	Business Monitor
Product Type	Report
Pages	60
ISBN Number	1744-8824
Product Code	BMI03947

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Summary

In the latest Russia Business Forecast Report we outline the key effects of the macroeconomic crisis in 2009 as well as our outlook for the long-run recovery process. Our core view is that Russia will face a sharp economic contraction in 2009, with only limited growth likely in 2010. While a marked recovery is expected in 2011, we stress that trend growth is likely to settle several percentage points lower, reflecting a similar trend globally. While the risks of a systemic banking sector crisis in Russia have been sharply mitigated through the second and third quarters of 2009 on the back of the global market rally and resulting compression in borrowing spreads, we do caution that these risks will remain on the cards in 2010. We remain concerned about the global outlook and the potential long-term effects of quantitative easing in the United States. While we expect the trough of the current recession to be hit in 2009 in both Russia and the US, we do not discount the potential for a protracted recovery process to last into 2011 or a subsequent fall back into negative growth at that time.

We expect the Russian government's popularity to fall further as unemployment rises on the back of the deepening recession in H109. As a result, we caution that a cabinet shuffle cannot be discounted in the short term while risks to policy continuity are likely to elevate. That said, we maintain our core view that the lack of a significant opposition in Russia will mean that the predominant power structure led by President Dmitry Medvedev and Prime Minister Vladimir Putin is likely to remain unchanged in Moscow, at least for 2009.

Russia is in the midst of a very deep macroeconomic crisis and in 2009 we expect the economy to contract by 7.1% in real terms, with risks weighted to the downside. H109 is likely to see a double- digit economic decline as the real sector impact of the Q308 financial crisis plays out further.

This will be a domestic demand driven recession, but contextualised within a wider global capital shortage. As Russia continues to experience net capital outflows, domestic credit conditions will remain highly constricted through to at least 2010, ensuring a prolonged contraction in gross fixed capital formation and private consumption.

Corruption remains an endemic problem in Russia, with President Medvedev himself admitting that his policy drive to cut graft had thus far met with no success. In comments made on May 12, the president stated that the government was only at the very beginning of efforts to structurally alter the system of corruption which pervades the economy. We hold to our view that malfeasance will remain the biggest impediment to improving Russia's business environment over the long term and stress that significant improvements should not be expected in the short term.

Content

Executive Summary
- Macroeconomic Crisis: How Will It Play Out?
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Policy Divisions Set To Rise
- We expect the Russian government's popularity to fall further as unemployment rises on the back of the deepening recession in H109
- Foreign Policy
- Georgia, Missile Shield To Hamper Thawing Of US Ties
- Efforts to improve Russia-US relations in 2009 will be hampered by long-standing disagreements over a planned
- US strategic missile defence shield, Russia's military presence in Georgia and diplomatic tensions over NATO expansion
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Domestic Demand To Collapse Further
- Russia is in the midst of a very deep macroeconomic crisis and we now expect the economy in 2009 to contract by
- 7.1% in real terms, with risks weighted to the downside
- Balance Of Payments
- Current Account To Remain Near 0% of GDP
- A marked improvement in the Russian financial account in Q109 bodes well for the stability of the balance of payments through the mid-point of the year
- Exchange Rate Policy
- Short-Term Gain, Medium-Term Pain
- We remain bearish the Russian rouble over the medium term and hold to our view that a downside break through
- RUB41.00/basket is likely
- Banking Sector
- Systemic Crisis Risks: The Second Wave
- The marked slowdown in capital flight from Russia in H109 has helped to stabilize the interbank market and slow the pace of deposit withdrawals from the domestic banking system
Chapter 3: 10-Year Forecast
- The Russian Economy To 2018
- Trend Growth To Settle Much Lower
- Over our 10-year forecast horizon, Russian trend growth is expected to slow markedly to an average annual 4.3% between 2014 and 2018
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Outlook
- Operational Risk
Chapter 6: Key Sectors
- Textiles & Clothing
- Executive Summary
- BMI sees textiles as the most vulnerable to low cost import competition
- Freight Transport
- Executive Summary
- In the long term, demand for road haulage will be boosted by the expansion of the motor vehicle fleet, and the sophisticated door-to-door logistics requirements of an increasingly consumer-oriented society
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Politic al Over view
- Table: ECONOMIC ACTIVITY
- Table: BALA NCE OF PAYMENTS
- Table: Long -Term Macroeconomic Forec asts
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Europe , FDI Annu al Inf lows
- Table: BMI TRADE RATINGS
- Table: Top Export Destin ations
- Table: Texti les And Clothing Production And Intern ation al Trade , 2006-2013
- Table: Forec ast Of Freight Carried 2006-2013
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL & REGIONAL REAL GDP GROWTH
- Table: EMERGING MARKETS
- Table: COMMODITIES