Current Russian Business Environment - A Finnish Perspective · Competition 5 Problems to solve...

Copyright © 2014, East Office of Finnish Industries. All rights reserved.

Current Russian Business Environment

- A Finnish Perspective

Raimo Valo, CEO

Helsinki, 18.3.2015

[email protected] 1

Copyright © 2014, East Office of Finnish Industries. All rights reserved 2

EAST OFFICE OF FINNISH INDUSTRIES OY

• Founded in 2008 to strengthen our shareholders’ business in Russia

• 24 leading shareholders

• Represents around 80% of all investments made in Russia by Finnish companies

• Finnish Ministry of Foreign Affairs as a partner (Public Private Partnership)

• Offices in Helsinki and Moscow (and soon in SaintPetersburg)

Minister of Education Andrei Fursenko, Konecranes’ CEO Pekka Lundmark, UPM Vice President Hans Sohlsröm and Admiral Juhani Kaskeala at East Office board meeting, Moscow, 2010

Fortum CEO Tapio Kuula, YIT Vice President Kari Kauniskangas, Ambassador Matti Anttonen and Rosnano’s CEO Anatoly Chubais in Moscow, 2010

Copyright © 2014, East Office of Finnish Industries. All rights reserved

Russian Strategy of Shareholders

• Lower sales in 2014 – Market share unchanged

• Domestic competition on the rise

• Expectations down

• Interest in Investing more to Russia – 2012 five invested more, 2013 only two – 2014 nobody

1 2 3 4 5

1. Sales 1H2014 vs 2013

2. Market Share 12 mos

3. Domestic (1) vs. foreign (5) competition?

4. Sales expectations 2H2014-1H2015

5. Sales vs other markets

6. Investments in Russia

3,2

3,3

2,6

3,6

3,7

3,1

(1 = poor/less, 5 = better/more)

4,0 3,3

3,4

2013 2014

2,9

3,0

2,9

2,7

2,8

2,1

Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Mikko Hietikko | [email protected] 4

The Trend started long before Maidan…

-15

-10

-5

0

5

10

151

Q0

8

1Q

09

1Q

10

1Q

11

1Q

12

1Q

13

1Q

14

GDP, %

Source: Rosstat


• Dependency on Raw

Material exports

• Demografy issues

• Bureaucracy, Corruption , Political risks, True Competition

5

Problems to solve

Analyst, Mikko Hietikko| [email protected]

-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

China Russia USA

Patent applications by country of origin, 1995-2009

IMPORTANT: Problems in the Banking and Finance Sector!


Price of Oil …production in Russia

0,00

20,00

40,00

60,00

80,00

100,00

120,00

0

2000

4000

6000

8000

10000

12000

Production 1970-1995 Production 2000-2014 Price, real 1970-1995 Price, real 2000-2014


Higher production costs for oil

-10%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012 2013

Crude production growth Growth in E&P expenditure


• Sanctions do work, but not quite as planned… • Russian sanctions, purpose and reality

– Rising costs of agriproducts and inflation • EU&US: Lack of finance from abroad

– Change in foreing debt last year. 732 mrd USD -> 599 Mrd. (around 450 mrd in foreign currency)

– Currency reserves now 380 mrd USD and Trade Balance is positive

• S&P and Moody’s downgrades Russia to Junk > effects?

• New Sanctions?

Analyst, Janne Hirvonen | [email protected] 8

Sanctions and Business Environment

Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Janne Hirvonen | [email protected] 9

RUB and Oil

35

40

45

50

55

60

65

70

75

80

8540

50

60

70

80

90

100

110

120

huhtikuu 14huhtikuu 14toukokuu 14kesäkuu 14heinäkuu 14 elokuu 14 syyskuu 14 lokakuu 14marraskuu 14joulukuu 14tammikuu 15

Brent USD/bbl RUB/EUR


0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

Foreign Debt Repayment Schedule USD mln

Source: CBR 1.10.2014


• Foodstuff 2014 15,7 % • Devaluation, Import ban and restrictions • High interest rates

Analyst, Mikko Hietikko | [email protected] 11

Inflation

3456789101112131415161718

3

5

7

9

11

13

15

17CPI

East Office CPI forecast

Consensus Forecast (Jan-2015)

CBR Key rate

Sources: CBR, Consensus Economics, East Office


• 1-11 2014 down 5,2 %, Trade Balance 57 bn USD surplus

• 40% Devaluation effects in 2015? – Import prices -40 – -50 % higher? – Export more competitive, production in Russia

lucrative?

• Structural changes possible? – A long and rocky road…


Foreign Trade


«Federal subjects of Russia by population dencity 31.01.2010» участника собственная работа. Original uploader was Алексей Глушков at ru.wikipedia - Russia - blank map (2009-01).svg. Под лицензией Общественное достояние с сайта Викисклада - https://commons.wikimedia.org/wiki/File:Federal_subjects_of_Russia_by_population_dencity_31.01.2010.svg#mediaviewer/File:Federal_subjects_of_Russia_by_population_dencity_31.01.2010.svg


Russian population


China and Russia

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Exports to China Imports from China

Structure of Trade

Others

Machinery andtransportation

Metals

Clothing

Wood & Wood products

Chemicals, plastic &rubber

Food and foodstuff

Mineral products

Source: FTS

88,8

75,9 74,9

53,9

33,2 32,8 27,9 27,7 25,2 24,5

18,7

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

Import

Export

$ bn $ bn

Biggest trading partners Mrd $, 2013, Ei IVY-maat

2014 export to China +4,9 %, Import from China 8,2 %. China represents 11 % of Russian Trade. (EU 48 %)


• Structural change of economy, stability (leading companies), labour market balance, inflation and softening the effect of inflation

• Support to companies which replace imports. Defence and hightech. • Small and Medium sized companies get support. Taxes and Bureacracy.

Regional Taxes etc. • Compensation to pensioners and families with children. RUB20.000 one

off. Inflation fix on pensions and index on 2014 level. • Support to banks and a Trash bank to be established. 250bn RUB to

capitalize banks (3.3 bn EUR). • Finance to Real Sector. More than RUB 500 bn (EUR 6.6bn). VEB 300 bn

RUB. 230 bn RUB state guarantees. Special Gov. Committee to decide. • Defence Industry support. Compensation of devaluation losses. • Budget costs cut by 10%, excluding defence industry, agriculture and debt

service. 5% cuts per year for 3 years. • Cuts in central government, Special fringe packages will be deleted.


Government plan to save the economy from 280115


• In any case economic difficulties will continue past 2015 – Current GDP forecasts for 2015 from -1% to -8% – Inflation in Feb past 16% y/y – Private consumption and investment down in 2015 5-10%

• Scenarios

– 3 Economic scenarios • Oil price: 60/Base, 80/Optimist, 40/Pessimist • Conflict in Ukraine freezes

– Geopolitics • Base assumption: conflict in Ukraine freezes • Positive case: de-escalation and reforms in Russia


Scenarios


• Slowly recovering oil prevents collapse of economy and government budgets

• Devaluated currency helps to balance budgets and to make domestic production more competitive – Still reserve fund exhausted in two years - government stakes on

rising oil – Devaluation starts to reverse: connection with oil, fear premium

from ruble fades away with Ukraine conflict freezing • Economy returns to low growth, driven by state enterprises and

import substitution. No immediate pressure for structural reform. • Import substitution the main economic policy Analyst, Mikko Hietikko | [email protected] 18

Base scenario

Oil GDP RUB/EUR Investment 2015 60 USD/bbl -4 % 70 -10% 2016 70 USD/bbl 0% 65 0%


• Situation in Ukraine freezes, keeping Russia out of capital markets, but no further destabilizing effect

• Quickly rebounding oil price provides windfall cash to fund investments after foreign debts paid off

• Income likely used to fund investments in import substitution • Budget restraints loosened: consumption can and will grow.

– Elections coming in 2018 • "Imported growth“ can continue: Income from fuels continues to be

transferred into domestic demand and support for inefficient structures


Optimist Outlook

Oil GDP RUB/EUR Investment 2015 80 USD/bbl 0% 70 0% 2016 90 USD/bbl 3% 70 5%


• Low oil price keeps the economy strained with currency, economic decline continues past 2015

• Few growth opportunities when budgets and credit drained • Sharp decline may force reforms in the economy

– Positive effect over longer term • In longer run, if structural reforms are passed, economy may reach

a growth path of 5% – Market structures: improving efficiency; property rights;

deregulation; culture change in government organs – Access to capital markets essential in large scale reformation of the

economy in absence of petrodollars Analyst, Mikko Hietikko | [email protected] 20

Pessimist Outlook

Oil GDP RUB/EUR Investments 2015 40 USD/bbl -8% 80 -15% 2016 40 USD/bbl -2% 80 -5%


1. When frozen conflict in Ukraine, no improvement in economy – Likely when price of oil recovering – Economy muddling through as in last 5 years

2. Geopolitical de-escalation – Possible when resources to keep conflict running drained: return to

international co-operation as an exit – Lifting sanctions – access to capital markets – More likely accompanied with economic reform

3. Further military expansion

– Another potential if unlikely consequence of economic stagnation – Low oil price keeps budgets strained and prevents social transfers and

subsidies to economy -> Social unrest, requires diversion – Lightest consequence an embargo from most of the world


Geopolitics

Current Russian Business Environment - A Finnish Perspective · Competition 5 Problems to solve...

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