Russia Business Forecast Report Q3 2007

Publication Date	June 2007
Publisher	Business Monitor
Product Type	Report
Pages	59
ISBN Number	1742-8882
Product Code	BMI00300

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Summary

Elections Draw Near

With the current elite set to remain dominant, the direction of future economic policy is fairly-well established, and Russia will be marked by comparative stability over the medium term. Furthermore, while the peaking of the electoral cycle poses some risks, the external economic environment will remain supportive, providing a secure backdrop to domestic business activity. Thus, while there are still market distortions arising from the state's incomplete transition from state socialism, strong investment in infrastructure modernisation demonstrates that gradual economic progress will be made over our five-year forecast horizon.

The December Duma elections and the March 2008 presidential elections dominate the political risk outlook. While the result of the former is easy to call - government-supported parties will maintain their legislative majority - there are two front-runners for the presidency, first deputy prime ministers Dimitry Medvedev and Sergei Ivanov, representing the economic liberal and conservative nationalist factions in the Kremlin, respectively. BMI would view a Medvedev presidency more positively, because he would pursue current economic policy and would most likely adopt a more co-operative approach to international relations. However, whoever wins, Russia's political risk profile is set to remain comparatively strong.

We have maintained our forecasts for oil prices this quarter, although there are risks to our projection that they will fall below US$45/bbl by 2011. Leaving aside exact forecasts, we believe that the rise in energy prices in recent years is structural, rather than cyclical, in nature. Consequently, balance of payments and fiscal dynamics will remain strong. This will result in higher government and private sector investment which is, alongside household consumption, the key economic driver. Overall, we believe that economic risks will remain extremely low, although the central bank may have to act pro-actively to mitigate the effect of strong domestic growth on inflation over the forecast period.

The domestic investment environment will become increasingly supportive to private sector business activity over the medium term. The rapid maturation of the banking sector will increase the private sector's access to capital, while strong domestic demand growth will drive development of domestically oriented sectors. Crucially, after 15 years in which Soviet-era economic and social infrastructure has been run down, the government and public sector companies plan a massive investment programme. This will create opportunities not only in projects directly funded from the treasury, but also via public-private partnerships.

Content

Executive Summary
Elections Draw Near
Chapter 1: Political Outlook
- SWOT Analysis
- New Political Rating Methodology
- BMI Political Risk Ratings
- Domestic Political Outlook
- United Russia Maintains Dominance
- As expected, parties allied to the Kremlin swept the March 11 elections Overall, the news reinforces BMI's view
- that United Russia will remain dominant in the December Duma poll, although it is likely to be a more fractious
- institution than now
- Table: Russian Cabinet & Other Key Posts
- Foreign Policy
- Foreign Policy Strategy Post Putin
- The March 2008 presidential election will set the tone for medium-term foreign policy While Russia's interests
- are fairly clear, an Ivanov presidency would be more likely to lead to a deterioration of relations with other major powers
Chapter 2: Economic Outlook
- SWOT Analysis
- Economy Ratings Revisions
- An Explanation
- BMI Economic Risk Ratings
- Introduction
- Economic Activity
- 2006 GDP Growth Confirmed at 67%
- The Federal Statistics Service (FSS) has released official Q406 and 2006 GDP figures The data provides yet
- further support for BMI's view that investment will drive economic growth over the medium term
- Table: Economic Activity
- Balance Of Payments
- Capital Inflows Remains Key Uncertainty
- Russia's balance of payments position is, and will remain, exceptionally strong over the forecast period
- Table: Balance Of Payments
- Exchange Rate Policy
- Further Strengthening Ahead
- BMI has been bullish towards the rouble since 2003 when it was above RUB3000/US$, and the currency is
- closing in on our long-held target of RUB2500/US$
- Table: Exchange Rate Policy
- Fiscal Policy
- Government Primes The Pump...Within Reason
- Russia's first three budget proposals call for a significant increase in expenditures with a plan to eliminate fiscal
- surpluses by 2010
- Table: Fiscal Policy
Chapter 3: Special Report
- A Survey of Global Housing Risk
- The US Risk
- Concerns over poor quality mortgage lending in the US precipitated global market volatility in Q107
- An Assessment of Selected Countries
- South Korea - Sub-prime Vulnerabilities Clearing
- We have considered a selection of key emerging markets to assess their vulnerability to housing credit
- risk and to highlight some major themes in the development of financial systems in general and the
- mortgage market in particular
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Legal Framework
- Labour Force
- Table: Demographic Indicators
- Table: Employment Indicators
- Foreign Investment Policy
- Table: Russia, Annual FDI Inflows
- Table: Emerging Europe, Annual FDI Inflows
- Foreign Trade Regime
- Table: Top Export Destinations, US$mn
- Table: Value Of Exports By Category, US$mn
- Tax Regime
Chapter 5: Key Sectors
- Infrastructure
- Industry Trends And Developments
- Table: Russia Infrastructure Industry Forecast
- Tourism
- Market Overview
- Table: Russia Tourism Industry Historical Data & Forecasts
- Table: Russia Travel Industry Historical Data & Forecasts