Vienna Process 6 th Meeting What is new

Vienna Process 6 th Meeting What is new on the business climate in Russia Mikhail Dmitriev President of the Center for Strategic Research Vienna 27 February 2013 1

Like the rest of the world economy, Russian faces high macroeconomic uncertainty in the longer run Long-term growth scenarios by the Ministry of Economy 2 Source: MED

In 1 H 2012 Russia’s growth rates were above average for developing economies Russia OECD developing Europe Other developing 3 Source: the World Bank 3

But output recovery is uneven Manufacturing Industrial production Mining Water, gas and power generation 4 Sources: Rosstat, Gaidar Institute 4

With adjustments to crops fluctuations Russian economy was slowing down just as the rest of the world World Russia actual Стандартный Source: HSBC, World Bank Russia, crops’ adjusted С поправкой на урожай 5 5

HSBC forecast comes true: slowdown continues HSBC GDP growth forecast for 2013: 2, 5% GDP growth, yoy 6 Source: HSBC 6

• • Consumer demand –the key driver of growth Since 2004 domestic consumption contributed 80% of GDP growth By 2020 Russia may become the largest consumer market in Europe By 2025 Russia’s consumer market may reach $3 trln Equity of Russia’s consumer sector companies are discounted by 25 -50% to the peers in BRICS and Turkey Aggregate demand Statistical deviation Change of inventories External demand Domestic demand GDP growth 8

But consumer confidence is still in the negative zone CENTER FOR STRATEGIC RESEARCH Source: Rosstat

Procyclicality of growth: potential for new bubbles Jan-June 2011 Jan-June 2012 Agriculture and forestry Mining Manufacturing Jan-June 2011 Industrial services Trade Finance Jan-June 2012 Construction Transportation and telecommunications Real estate 10 Source: the World Bank 10

Labor market is overheated • Unemployment has fallen to the lowest levels for the last 20 years • Wages grow ahead of productivity Unemployment Seasonally adjusted General Source: Rosstat, the World Bank Real wages (%) Tradable sector Non-tradable sector Non-market sector 11

Problems for new investments: Labor supply declines Annual average growth projections for working age population БЛАГОДАРЮ ЗА ВНИМАНИЕ USA EU-15 Japan Russia 12 Source: The Economist, CSR 12

Two generations of baby-boomers 10 -year cohorts From to 100 and above Total Source: CSR Year

Consumption boom is heavily reliant on banking loans Share of bank loans in household consumption (%) Source: Gaidar Institute 14

Consumer confidence remains in the negative CENTER FOR STRATEGIC RESEARCH Consumer confidence index Source: Rosstat

Russia and many of its regions was successful in improvements of its business environment Russia is among 30 of the most successful among 167 countries, which were improving doing business during the last 7 years БЛАГОДАРЮ ЗА ВНИМАНИЕ Ownership registration Registration Of firms Enforcement Taxation of contracts Insolvency resolution Source: the World Bank Investor’s protection International Access to Construction trade credit permists 16 16

Regional variatioты in business climate (BEEPS survey) CENTER FOR STRATEGIC RESEARCH Source: EBRD

Historically Russia was rather successful in attracting FDI БЛАГОДАРЮ ЗА ВНИМАНИЕ Source: KPMG 19 19

FDI spread unevenly across the regions БЛАГОДАРЮ ЗА ВНИМАНИЕ Source: KPMG 20 20

Net capital outflow: 363 bln $ US in 5 years • Net outflow has been typical even for the FDI • Share of foreigners on domestic equity market has declined from 70% in 2007 to little more than 50% in 3 Q 2012 • Structure of capital outflows and inflows is asymmetrical • Inflows – loans and bonds • Outflows – equity investments • Russia has the 4 th largest and fastest growing venture market in Europe БЛАГОДАРЮ ЗА ВНИМАНИЕ Portfolio investments Net capital outflow FDI Other Source: the World Bank. 21 21

Corporate external debt is increasing Bln $ US БЛАГОДАРЮ ЗА ВНИМАНИЕ Source: the World Bank 22 22

Since 2009 Global equity markets are closely linked to FRS assets… MSCI Global (lhs) FRS assets, bln $US БЛАГОДАРЮ ЗА ВНИМАНИЕ 23 Source: Institute of Energy and Finance 23

… but Russian equity market has delinked from that of the US: the gap is now 60% БЛАГОДАРЮ ЗА ВНИМАНИЕ 24 Source: Development Center, HSE. 24

Investments stagnate CENTER FOR STRATEGIC RESEARCH Investments mom (rhs) Investments, 2008=100% Source: Development Center HSE

Long term trends: will the official goals be achieved? Capex in % of GDP Share of high-tech industries(%) Actual trend Labor Productivity Official goal Rank in «Doing Business” 26 Source: the World Bank

Thank you for attention!