Russia Business Forecast Report Q4 2007

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 dominates 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, as he would pursue current economic policy and would most likely adopt a more cooperative 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 via public-private partnerships.