Russia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources (oil, gas, and metals)
- Floating exchange rate of the ruble since November 2014
- Political stability
- Trained workforce
- Low public debt, comfortable foreign exchange reserves and current account surplus
- Ongoing purge of the banking sector with reduction in the number of institutions
- Maintained regional and energy power
- Dependence on the price of hydrocarbons
- Declining demography, except in major cities
- Absence of commercial agreements beyond its immediate neighbors
- Dependence on foreign capital goods and technology
- Weak infrastructure aggravated by lack of investment
- Regional disparities despite redistribution
- American and European sanctions
- Mediocre business climate
Confirmation of Modest Recovery
Modest recovery has been taking place since the end of 2016 in connection with the positive influence of the rise in oil prices on confidence and domestic demand. Household consumption will again be the main contributor to growth in 2018. Households will maintain confidence, benefiting from higher incomes, the revival of credit and moderation of inflation based on food prices and the stabilization of the ruble. For the same reasons, the investment should remain well oriented. The rise of the ruble, which accompanied that of oil prices, makes the importing of capital goods cheaper. However, shortcomings in the business environment and the weight of sanctions on external financing will hinder growth in some sectors. If inflation remains below the 4% target, the central bank could continue to lower its key rate (8.5% in November 2017). Nevertheless, higher wage growth than productivity and high inflationary expectations will encourage caution. In addition, while bank profitability, which fell to zero in 2015, is on the rise, private banks (slightly less than half of the assets, but the largest number of institutions) are lagging behind. Moreover, the increase in oil revenues should allow a slight relaxing of the fiscal policy at the social programme level, even if public consumption is still expected to stagnate. Finally, the contribution of trade to growth may no longer be negative if the catch-up effect in imports of consumer goods and equipment recedes. The manufacturing sector (agri-food, chemistry/pharmaceuticals, automotive) should benefit from the proper orientation of domestic demand.
In the absence of progress in resolving the Ukrainian conflict, Western sanctions targeting leading figures and the energy, defense and finance sectors through restrictions on travel, trade, investment, and financing should continue. This will maintain the lack of investment, hampering the development of offshore fields and innovation, likely to offset the maturation of many fields and increase the growth potential estimated at 1.5%.
Low Budget and Current Account Deficits
The public deficit is expected to fall to 1.5% in 2018, and to 7% of the GDP excluding hydrocarbon revenues. The 2017-2019 triennial budget provides for a 1% annual decrease in the non-oil deficit. Dividends paid by public companies will reach half of their profits, excise duties on tobacco and alcohol will increase, as will taxation on extractive businesses. Expenditure control will be more difficult given the indexing of pensions and wages to inflation, as well as the desire to maintain transfer payments and subsidies. In 2019, a new fiscal rule will come into effect. It stipulates that primary expenditures (in other words excluding interest) cannot exceed the sum of oil revenues calculated on the basis of USD 40 per barrel and non-oil revenues. Surplus oil revenues will go into the Reserve Fund, which has been heavily depleted between 2015 and 2017, keeping public debt at a low level. Combined with those of the National Provident Fund, assets account for just over 5% of the GDP.
The current account surplus could remain above 2% of the GDP in 2018. It is based on the considerable trade surplus linked to hydrocarbon exports (60% of total exports) which largely offsets the deficit in services and revenues (oil and gas engineering expenses, Russian stays abroad, foreign corporate dividends, transfers of foreign workers). The increase in hydrocarbon sales does not translate into an increase in the surplus, as the domestic economic upturn is reflected in an increase in imports. Despite the efforts made since the application of sanctions, the substitution of domestic products for imports has had little success, except in the agri-food sector. The financial account is negative, as the Russian private sector makes financial and real estate investments abroad, while new foreign investment in Russia is low. However, funds are coming back to Russia in the form of foreign loans, often by those who have put money in there. For this reason, private external debt (35% of the GDP) must be put in perspective, especially since reserves represent more than 16 months of imports.
Political Stability but Deficient Business Environment
The crisis in Ukraine, sanctions and aggressive international activism have strengthened the popularity of Vladimir Putin, who can, in addition, claim economic recovery. Vladimir Putin, who has been in power for seventeen years, is expected to win the March 2018 presidential election in the face of weakened opposition, boosted by controlled media and the Internet, and whose main figure, Alexei Navalny, is under fire for various legal proceedings and cannot run. Ksenia Sobchak, a media personality and daughter of a former mayor of St. Petersburg, could capitalize on her novelty. The issue of the election will lie more in participation. Reforms are likely to occur after the election, which would improve a poor business environment marked by state interventionism, the random execution of contracts, favoritism, relative respect for property rights and administrative delays.