Russia through a lens - Deloitte United States...03 Russia troug a lens Content 04 Russia in figures...

Deloitte Research Centre | Ninth issue | 4Q 2017

Russia through a lensMacroeconomic outlookKey Russian macroeconomic indicators in 4Q 2017

Page 04

Deloitte CFO Surveyof the Leading Companies in RussiaRisk modeling is the main driver of internal audit function

6

Russia and Italy: doing business togetherItaly is Russia’s 6th largest trading partner

Page 22

Snapshot of the Russian agroindustry – 2017Subsidies share in agroindustry companies’ profit is 87%

Page 23

Russia through a lens

02

03


Content

04Russia in figuresMacroeconomic outlook (GDP, inflation, trade indicators, currency rate, Central Bank key rate, commodity price dynamics, etc.)

16Research Centre market analysis"Deloitte CFO Surveyof the Leading Companies in Russia""Russia and Italy: doing business together""Snapshot of the Russian agroindustry – 2017"

29Global windTop news: China and RussiaTop news: Europe and Russia

31Contacts

30Useful stickers

28Top M&ATop-5 deals in Russia

Page 14 Page 19 Page 21

We are pleased to present the latest edition of Russia Through a Lens, the macroeconomic journal produced by the Deloitte Research Centre in Moscow.

Established in December 2015, the journal is published quarterly and falls under the Research Centre’s monitoring activities.

In Russia Through a Lens, we focus on current key trends in the Russian economy and present our research in the following fields:

• Russia in Figures – statistical analysis • Research Centre market analysis • Top M&As

If you have any questions or suggestions regarding this research, please do not hesitate to contact us at:[email protected]

Designed by the Deloitte Design Group, Moscow

mailto:cisresearchteam%40deloitte.ru?subject=

Russia through a lens | Russia in figures

04

Russia in figuresGDPGDP dynamics

Source: Rosstat, (*forecast) Ministry of Economic Development, (**forecast) Institute for Economic Forecasting of the Russian Academy of Sciences (IEF RAS)

Source: Rosstat, (*forecast) Ministry of Economic Development

The data for the period from 2011 includes changes related to the implementation of the international methodology for the evaluation of housing services, the evaluation of capital consumption taking into account its current market value, and the conformation of data

on exports and imports with the data presented in the balance of payments developed according to the methodology provided by the Sixth Edition of the Balance of Payments and International Investment Position Manual (BPM6) introduced by the International Monetary Fund.

Q4 GDP, bln RUB

The Central Bank improved the estimate of Russia's GDP growth for the fourth quarter of 2017 to 0.6 percent. The data on industrial production, which turned out to be worse than the forecast for October, "were compensated by the positive effect of rising oil prices." The Central Bank expects that the country's GDP in the first quarter of 2018 will increase by 0.6 percent, and in the second quarter – by 0.5 percent. At the same time, a significant amendment to the forecast is possible as new information becomes available. Source: "What the Trends Say", bulletin of the Department of Research and Forecasting of the Central Bank

“At the beginning of this year (2017), when I said that growth would be at least 2 percent, everyone laughed, no one believed me. In fact, the second quarter is already 2.5 percent, and the third quarter is 2.2 percent. The growth will most likely reach 2 percent, even slightly more by the end of the year.” Maxim Oreshkin, Minister of Economic Development of the Russian Federation

10,6

19

18,7

75 24,0

77

10,8

16

20,1

62

25,4

72

7,48

0

13,2

49

21,9

23

9,79

7

16,8

77

22,8

40

2006

2010

2014

2007

2011

2015

2008

2012

2016

2009

2013

2017

*

GDP, bln RUB GDP growth, % (at current prices)

GDP volume indices, %

2.1

33,2

48 60

,283

83,2

33

41,2

77 68

,164

86,0

44

38,8

07 73

,134

91,2

87

26,9

17

46,3

09 79

,200

97,2

00

2009

2013

2017

*

2006

2010

2014

2018

**

2007

2011

2015

2008

2012

2016

24.6 19.38.3

24,213.1

3.4-6.07.3

23.5 30.2

5.1

8.2 4.5 0.75.2 3.5 -0.2-7.81.38.5 4.3 -2.8

6.1 6.5

1.9


05

InflationInflation rate, %

GDP forecasts

Inflation rate forecasts

Source 2017 2018 2019 2020

International Monetary Fund 4.0% 4.0% 4.0% 4.0%

Vnesheconombank 3.4% 3.9% 3.8% 3.8%

Bloomberg poll (consensus) 3.9% 4.0% - -

Economist Intelligence Unit 2.5% 4.3% 4.8% 4.5%

Source 2017 2018 2019

Economist Intelligence Unit 1.8% 1.7% 1.8%

The Ministry of Economic Development

2.1% 2.1% 2.2%

Central Bank +1.7% to +2.2%

+1.0% to +1.5%

+1.5% to +2.0%

IEF RAS 1.8% 1.9% 2.1%

Standard & Poor's 1.8% 1.7% 1.7%

Moody’s 1.5% 1.5% -

Source 2017 2018 2019

Eurocomission 1.7% 1.6% 1.5%

World Bank 1.3% 1.4% 1.4%

International Monetary Fund 1.8% 1.6% 1.5%

JPMorgan 1.1% - -

European Bank for Reconstruction and Development

1.8% 1.7% -

Gaidar Institute, RANEPA 1.3% 1.4% 1.2%

Organisation for Economic Co-operation and Development

2.0% 2.1% -

Inflation in November 2017*: 2.5 percentInflation target** in 2017: 4.0 percent

* The inflation figure is the consumer price growth rate over the corresponding month of the previous year.** The inflation target is set for the consumer price growth rate over the corresponding month of the previous year (the Central Bank).

"If we talk about the year, then we had a forecast of 2.7–3.2 percent. Now we see a range of 2.5–2.8 percent. We take it down a little, and it falls down." Maxim Oreshkin, Minister of Economic Development of the Russian Federation

Fact Central Bank (*forecast)

Ministry of Economic Development (*forecast)

2006

2010

2014

2018

*

2007

2011

2015

2019

*

2008

2012

2016

2009

2013

2017

*

5.6

11.9

6.1

12.9

8.8

6.5

2.8

9.08.8

11.4

4.0

13.3

6.6

4.05.4

4.0

12.2

3.55.8

4.0


06

Trade structurePeriod: January – October 2017

• Foreign trade turnover: USD 471.1 billion (+25.0 percent YoY)

• Trade balance: surplus of USD 102.9 billion (+USD 22.3 billion YoY)

• Exports: USD 287.0 billion (+25.5 percent YoY)

• Imports: USD 184.1 billion (+24.3 percent YoY)

Share of energy products in total exports to non-CIS/CIS countries (January 2006 – October 2017)

Source: Federal Customs Service

Percentage in exports to non-CIS countries

Percentage in exports to CIS countries

2006

2010

2014

2007

2011

2015

2008

2012

2016

2009

2013

2017

68.072.7

66.469.6

74.5

64.870.3 70.8 73.472.4 73.0

62.053.0

35.5

55.3

39.542.347.0

33.0

44.0 43.640.9

54.2

32.6

Imports from the CIS countries (January – October 2017)

Percentage of imports from the CIS countries

In monetary terms YoY

In physical terms YoY

Categories (in physical terms YoY)

Energy products 4.6% 47.8% 8.3%

Metal products 16.8% 54.3% 39.5%

33.8% Pipes

41.5% Flat rolled products of iron or non-alloy steel

Chemical products 13.5% 17.3% 15.5%

7.9% Inorganic chemistry

-14.4% Organic chemistry

13.1% Plastics

Machinery and auto

21.7% 21.0% n/a

240.0% Railway equipment

11.2% Mechanical equipment

-12.9% Optical instruments and apparatus

47.6% Ground transportation

50.7% Passenger cars

25.5% Trucks

Food and raw materials for production

22.6% n/a 1.5%

28.1% Fish

43.4% Milk

-2.9% Cheese and curds

-0.7% Butter

-22.9% Citrus

10.3% Poultry meat

Textiles and footwear 7.2% 15.2% 23.3%


07

Imports from non-CIS countries (January – October 2017)

Percentage of imports from non-CIS countries




Textiles and footwear

6.1% 25.6% 16.8%

Metal products

5.8% 31.7% 42.4%

12.4% Flat iron non-alloy steel

82.4% Pipes

Chemical products

18.5% 19.3% 3.9%

11.3% Organic materials

15.3% Rubber

4.2% Plastics

5.7% Pharmaceuticals

6.0% Paint

Machinery and auto

51.2% 27.3% n/a



24.4% Electrical equipment

22.4% Optical instruments and apparatus

-6.7% Passenger cars

50.9% Trucks


11.4% 15.5% 8.3%

72.7% Butter

9.4% Cheese and curds

9.8% Meat

7.6% Citrus

14.5% Fish


08

Exports to the CIS countries (January – October 2017)

Percentage of exports to the CIS countries




Energy products

33.0% 26.2% 1.5%

-8.9% Raw oil

37.2% Oil products

71.7% Coal

-16.5% Electrical energy

2.2% Natural gas

Metal products 12.5% 31.2% 11.9%

12.0% Ferrous metals

67.4% Ferroalloys

20.0% Flat iron non-alloy steel

25.3% Semi-finished products of iron or non-alloy steel

Chemical products 15.3% 20.5% 8.0%

-20.5% Products of inorganic chemistry

-5.3% Pharmaceuticals

13.9% Products of organic chemistry

43.1% Fertilizers

15.6% Plastics

Machinery and auto

16.4% 31.6% n/a



33.2% Trucks



10.1% 15.3% 8.7%

37.7% Pork

9.2% Fish

-15.3% Milk

-5.6% Cheese and curds

11.0% Sunflower oil

Timber, pulp and paper products

4.4% 21.8% 7.6%

1.8% Plywood

2.9% Lumber

13.5% Cellulose


09

Exports to non-CIS countries (January – October 2017)

Percentage of exports to non-CIS countries




Energy products 64.8% 30.1% 3.5%

1.3% Crude oil

2.8% Diesel fuel

11.2% Coal

7.3% Natural gas

-27.0% Motor gasoline

Metal products 10.0% 26.6% -3.6%

-15.7% Cast iron

10.4% Copper and copper alloys

-8.3% Aluminium

-5.8% Ferroalloys

-4.9% Semi-finished products of iron or non-alloy steel

Chemical products

5.5% 10.9% 2.9%

16.8% Products of inorganic chemistry

24.9% Plastics

3.9% Rubber

-7.3% Organic chemistry

-5.3% Nitrogen fertilizer

Machinery and auto 5.6% 12.8% n/a

-21.0% Electrical equipment



28.6% Optical instruments and apparatus

-42.0% Trucks


4.9% 20.5% 19.1%

Timber, pulp and paper products

3.2% n/a 6.4%

13.4% Lumber

-1.0% Cellulose

-4.5% Rough wood

-0.4% Plywood


10

EUR-RUB USD-RUB

RUB vs. EUR and USD, January 2015 – December 2017

Currency rate

USD-RUB forecasts (average per year)

EUR-RUB forecasts (average per year)

Source: Central Bank of Russia


-6%-7%

Q4

201

6

Q4

201

7

De

c 20

16

De

c 20

17

58.558.9

63.062.1

Euro US dollar

1-Ja

n-20

15

1-M

ay-2

015

1-Se

p-20

15

1-Ja

n-20

16

1-Ja

n-20

17

1-M

ay-2

016

1-M

ay-2

017

1-Se

p-20

16

1-Se

p-20

17

1-Fe

b-20

15

1-Ju

n-20

15

1-O

ct-2

015

1-Fe

b-20

16

1-Fe

b-20

17

1-Ju

n-20

16

1-Ju

n-20

17

1-O

ct-2

016

1-O

ct-2

017

1-D

ec-2

016

1-D

ec-2

017

1-M

ar-2

015

1-Ju

l-201

5

1-N

ov-2

015

1-M

ar-2

016

1-M

ar-2

017

1-Ju

l-201

6

1-Ju

l-201

7

1-N

ov-2

016

1-N

ov-2

017

1-A

pr-2

015

1-Au

g-20

15

1-D

ec-2

015

1-A

pr-2

016

1-A

pr-2

017

1-Au

g-20

16

1-Au

g-20

17

1-Ja

n-20

18

100

90

80

70

60

50

40

Average 2015EUR 68.0USD 61.3



Source 2018 2019 2020

Ministry of Economic Development RUB 64.7 RUB 66.9 RUB 68.0

Gaidar Institute RUB 59.4 RUB 58.8 -

IEF RAS RUB 60.2 RUB 62.2 RUB 64.2

Economist Intelligence Unit RUB 62.3 RUB 61.4 RUB 62.2

Source 2018 2019 2020

IEF RAS RUB 68.4 RUB 68.6 RUB 70.7

Economist Intelligence Unit RUB 73.1 RUB 70.9 RUB 74.3

+6%+1%

Q4

201

6

Q4

201

7

De

c 20

16

De

c 20

17

68.869.5

68.0

65.5


11

Central Bank of Russia key rate, %

Forecast of the key rate to the end of the period,%

Central Bank key rate, Stock Market indexes and credit ratings


5.50

9.50

14.00

10.509.00

7.00

10.50

12.50

10.008.50

7.50

17.00

11.509.75

8.258.00

15.00

11.00

9.25 7.75

1-Ja

n-20

14

1-Se

p-20

14

1-M

ay-2

015

1-Ja

n-20

16

1-Se

p-20

16

1-M

ay-2

017

1-M

ar-2

014

1-N

ov-2

014

1-Ju

l-201

5

1-M

ar-2

016

1-N

ov-2

016

1-Ju

l-201

7

1-N

ov-2

017

1-Ja

n-20

18

1-M

ay-2

014

1-Ja

n-20

15

1-Se

p-20

15

1-M

ay-2

016

1-Ja

n-20

17

1-Se

p-20

17

1-Ju

l-201

4

1-M

ar-2

015

1-N

ov-2

015

1-Ju

l-201

6

1-M

ar-2

017

"This step – 50 basis points – was chosen because our view of the prospects for 2018 has changed. Agreements to limit oil production have been extended, uncertainty over oil prices has decreased." Elvira Nabiullina, Governor of the Bank of Russia,

Stock Market indexes: January 2014 – December 2017

Source: Moscow Exchange

MICEX Index, RUB RTS Index, USD

1-Ja

n-21

04

1-Se

p-20

14

1-M

ay-2

015

1-Ja

n-20

16

1-Se

p-20

16

1-M

ay-2

017

1-M

ar-2

014

1-N

ov-2

014

1-Ju

l-201

5

1-M

ar-2

016

1-N

ov-2

016

1-Ju

l-201

7

1-N

ov-2

017

1-D

ec-2

017

1-M

ay-2

014

1-Ja

n-20

15

1-Se

p-20

15

1-M

ay-2

016

1-Ja

n-20

17

1-Se

p-20

17

1-Ju

l-201

4

1-M

ar-2

015

1-N

ov-2

015

1-Ju

l-201

6

1-M

ar-2

017

2300210019001700150013001100900700500

Russia's credit ratings

Agency Rating Outlook Date

S&P BB+ Positive 15 Sep 2017

Moody's Ba1 Stable 17 Feb 2017

Fitch BBB- Positive 24 Sep 2017

On 20 December 2017, the State Duma of the Russian Federation adopted in the third reading a law that defines international rating agencies as the sole providers of services for assigning and maintaining the credit ratings of the Russian Federation, constituent entities of the Russian Federation and municipalities in accordance with the legislation on public procurement.

On 15 December 2017, the Central Bank reduced the key rate by 0.5 percentage points to 7.75 percent per annum.

Source 2018 2019 2020

IEF RAS 7.5 7.0 6.5

Economist Intelligence Unit 8.0 8.0 7.8

"There are some guidelines. The key rate of 6.5 percent – the yield at this level may occur during the next year (2018)." Alexander Morozov, Director of the Department of Research and Forecasting of the Central Bank of Russia,


12

Commodity price dynamics (nickel, gold, aluminium)

Nickel forecast

Source 2018 2019

Goldman Sachs Group USD 11,000 -

Morgan Stanley USD 10,858 -

World Bank USD 10,559 USD 11,039

International Monetary Fund USD 9,360 USD 9,557

Gold and aluminium

Nickel

Source: Finam Holdings

Maximum for the period

14-year minimum

Jan-

2015

May

-201

5

Sep-

2015

Jan-

2016

Nov

-201

7

May

-201

6

May

-201

7

Sep-

2016

Sep-

2017

Feb

-201

5

Jun-

2015

Oct

-201

5

Feb-

2016

Feb-

2017

Jun-

2016

Jun-

2017

Oct

-201

6

Oct

-201

7

Dec

-201

6

Dec

-201

7

Mar

-201

5

Jul-2

015

Nov

-201

5

Mar

-201

6

Mar

-201

7

Jul-2

016

Jul-2

017

Nov

-201

6

Nov

-201

7

Apr

-201

5

Aug-

2015

Dec

-201

5

Apr

-201

6

Apr

-201

7

Aug-

2016

Aug-

2017

15,1

65

12,6

00

10,3

30

8,61

0

9,96

5

8,46

5

8,95

0

10,5

15

10,5

20

14,0

95

12,0

15

10,0

45

8,53

0 10,9

60

9,31

5

9,37

5

10,4

25

11,8

50

10,0

55 12,6

45

12,3

95

11,0

40

8,85

5

8,49

5

10,0

20

10,6

35

10,2

20

11,1

70

11,3

8513,9

50

10,0

60

8,82

0

9,42

5

9,45

5

9,77

0 11,7

95

Nickel, LME, USD/t


Aluminium, LME, USD/t Gold, COMEX, USD/oz.t.

Jan-

2015

May

-201

5

Sep-

2015

Jan-

2016

Nov

-201

7

May

-201

6

May

-201

7

Sep-

2016

Sep-

2017

Feb-

2015

Jun-

2015

Oct

-201

5

Feb-

2016

Feb-

2017

Jun-

2016

Jun-

2017

Oct

-201

6

Oct

-201

7

Dec

-201

6

Dec

-201

7

Mar

-201

5

Jul-2

015

Nov

-201

5

Mar

-201

6

Mar

-201

7

Jul-2

016

Jul-2

017

Nov

-201

6

Nov

-201

7

Apr

-201

5

Aug-

2015

Dec

-201

5

Apr

-201

6

Apr

-201

7

Aug-

2016

Aug-

2017


Minimum for the period Maximum for the period

Minimum for the period

1,86

4

1,74

0

1,57

2

1,51

5 1,82

1

1,55

7 1,93

1

1,67

3 2,10

6

1,81

5

1,69

1

1,48

1

1,57

2 1,92

1

1,62

6

1,92

3

1,73

7 2,16

1

1,68

8

2,28

0

1,78

5

1,62

0

1,44

9

1,52

1 1,96

1

1,64

0

1,91

8

1,73

1 2,04

6

1,92

0

1,60

5

1,50

1 1,67

2

1,91

8

1,61

5 2,12

8

1,28

4

1,19

2

1,11

4

1,12

2

1,21

1

1,21

7

1,27

1

1,31

9

1,28

3

1,21

4

1,17

4

1,14

2

1,24

5

1,24

5

1,32

3

1,24

1

1,27

7

1,27

0

1,15

2

1,30

5

1,18

7

1,09

5

1,07

1

1,23

3

1,25

2

1,35

7

1,27

6

1,17

7

1,27

8

1,18

2

1,14

2

1,06

1 1,29

5

1,26

5

1,31

3

1,32

5


13

Source 2018 2019

Goldman Sachs Group USD 1,200 USD 1,375



Citigroup USD 1,350 -

Commerce Bank USD 1,400 -

Source 2018 2019

Goldman Sachs Group USD 2,072 USD 2,200



International Monetary Fund USD 1,913 USD 1,940

Merrill Lynch USD 2,380 -

Gold forecast Aluminium forecast

"Aluminium and nickel were the best performers on the London Metal Exchange during 2017. However, according to Moody’s, aluminium prices could soften in 2018. Current aluminium prices have some level of support due to low metal inventories, but further upward price moves will be limited, with a possibility for some softening in 2018. Should capacity rationalization in China occur and hold, the prices would find stronger support and could increase volatility in the near term amid the uncertainty of a spring ramp-up."Source: Metal Bulletin Group


14


15

Natural gas forecast

Crude oil forecast

Source 2018 2019 2020

US Energy Information Administration USD 59.7 USD 61.4 -

World Bank USD 56.0 USD 59.0 USD 60.0

Central Bank of the Russian Federation (Urals) USD 44.0 USD 42.0 USD 42.0

Ministry of Economic Development (Urals) USD 43.8 USD 41.6 USD 42.4

Standard & Poor's USD 55.0 USD 55.0 USD 55.0

International Monetary Fund USD 48.6 USD 50.3 USD 51.8

Economic Intelligence Unit USD 59.0 USD 57.5 USD 54.5

Goldman Sachs USD 62.0 - -

IEF RAS USD 59.0 USD 61.0 USD 63.0

JPMorgan USD 58.0 - -

Commodity price dynamics (oil, gas)

Source 2018 2019

World Bank USD 3.1 USD 3.2

Economic Intelligence Unit USD 3.4 USD 3.9

Goldman Sachs USD 3.0 -

Brent oil, natural gas


Brent crude oil, ICE, USD/bbl Natural gas, NYMEX, USD/mmbtu

Jan-

2015

May

-201

5

Sep-

2015

Jan-

2016

Nov

-201

7

May

-201

6

May

-201

7

Sep-

2016

Sep-

2017

Feb-

2015

Jun-

2015

Oct

-201

5

Feb-

2016

Feb-

2017

Jun-

2016

Jun-

2017

Oct

-201

6

Oct

-201

7

Dec

-201

6

Dec

-201

7

Mar

-201

5

Jul-2

015

Nov

-201

5

Mar

-201

6

Mar

-201

7

Jul-2

016

Jul-2

017

Nov

-201

6

Nov

-201

7

Apr

-201

5

Aug-

2015

Dec

-201

5

Apr

-201

6

Apr

-201

7

Aug-

2016

Aug-

2017

53

65

48

36

55

50 5150

57

62 63

50

37

56

50 4949

61

57

67

55 52

45 40

54

43

5352

6367

53

38

47 52

47

53

2.7

2.6

2.5

2.2

3.2

2.3

3.1

2.9 3.

0

2.7

2.8

2.3

1.7

2.83.

0 3.0

3.0

2.9

3.7

3.0

2.7

2.7

2.3

2.0

3.2

2.8 2.83.

3

3.1

2.7

2.7

2.4

2.1

3.3

2.9 3.

0





The world’s major oil producers have extended production cuts by another nine months to the end of 2018, in a bid to tackle a global glut of crude and keep prices buoyant. The curbs, originally started in January

2017 after an agreement between the members of OPEC, the oil cartel, and other major producers including Russia, have lifted a barrel of Brent crude from $40 to $50 in 2016 to more than $65 now.

"Khalid al-Falih, the Saudi energy minister, stated that the extension of the current cuts – which expire at the end of March 2018 – was necessary because “more work needed to be done."Source: The Guardian

Russia through a lens | Research Centre market analysis

16

Research Centre market analysisDeloitte CFO Survey of the Leading Companies in Russia

Optimism about financial prospects is here to stay:

• 53 percent of the respondents believe that their company’s financial prospects are likely to change for the better.

• The highest levels of optimism (79 percent) are observed in companies with annual revenue of RUB 10 to 100 billion.

• Meanwhile, foreign companies are the most pessimistic (33 percent).

Positive expectations about capital expenditures (CAPEX) has grown by 23 percentage points from spring 2016:

• 60 percent of the respondents expect their company’s operating revenue to increase in 2017, and 13 percent anticipate a decrease.

• 60 percent expect an increase in their real income.

Companies try to maintain both their headcount and payroll levels:

• Almost every third company (29 percent) plans to increase the number of staff.

• Most companies (58 percent) plan to increase average payroll.

Almost half of the companies surveyed (49 percent) plan to raise prices by 5 percent on average, while 44 percent expect prices to remain at the current levels.

Uncertainty has increased for the first time since 2015 by 0.18 points.

Risk appetite has decreased by 0.14 points.

Ruble-based financing that has been gaining ground since 2015 was cited as the number one risk management strategy in 2017 (49 percent) as less respondents voted for retaining the foreign currency clause in contracts.

Risk factors that had the most negative impact on business in Russia in 2017:

• Stagnation in the Russian economy

• Increasing production costs abroad

• Rising barriers to entry into new markets

• Lower consumer interest in new products

• Lower transparency

• Social risks: impact of business process automation (staff cuts)

• Risks of implementing innovative projects

• Competition from innovative products

Priority business strategy to recover the market position in Russia in 2017:

• Business development through organic growth

• Ongoing cost control

• Digitalization of business functions

Almost half of the companies (42 percent) plan to expand their business into other localities:

• Priority markets include Asia and Latin America.

Financial climate in 2017

Uncertainties, risks and development strategies in 2017

Key findings


17

The long-term impact of the global crisis gradually fades away: In 1H2017, currency risks were not identified within the top 5 barriers.

Business drivers in Russia in 2H2017:

• Innovative products

• Digitalization

• Expansion into new markets

• Financial position

• Liquidity

Barriers for business development in Russia in 2H2017:

• Production costs

• Innovations

• Focus on core operations

• Production abroad

• Currency risks

Roughly four out of every five companies (78 percent) have an internal audit function.

Overall, CFOs believe that internal audit function demonstrates average performance.

More than a third of the companies that implemented structural innovations (38 percent) grew in value.

More than half of the companies surveyed (60 percent) plan to spend up to 1 percent of their annual revenue on R&D.

According to 51 percent of the respondents, most innovations come from dedicated divisions inside their companies.

Financing is seen as the key barrier for implementing innovations in companies.

The key drivers for implementing innovations are the market and competition.

Business drivers and barriers

Innovations


18

Internal Audit Function

Internal audit profile

Internal audit performance*

Possible effect from technology**

• Overall, the performance of internal audit functions is rated average. This is generally due to positive perception of internal auditors’ professional competence. At the same time, low efficiency in terms of use of technology is perceived as the barrier to higher rating. Yet, companies expect that the implementation of risk modeling and predictive analytics capabilities will deliver maximum improvement to the performance of their internal audit functions.

There is no internal audit function in the company

There is a professional who performs functions of an internal auditor but these are not his/her key functions

There is a dedicated internal audit function (division, department)

There is a professional who performs functions of an internal auditor

24%

7%

47%

22%

At the end of our 2017 survey, we asked CFOs to tell us about their company’s internal audit function.

• Roughly four out of every five companies (78 percent) have an internal audit function.

• 29 percent of the companies with an annual revenue of RUB 2 billion or less have a dedicated internal audit unit.

• One in two CFOs (54 percent) states that internal auditors’ recommendations are not always implemented by other functions.

Sergey KudryashovDirector Risk Advisory Operational Risk and Internal Audit Leader

Other functions implement recommendations of internal auditors at all times

Other functions implement recommendations of internal auditors but not at all times

Other functions do not implement recommendations of internal auditors 3%

54%

43%

Risk modeling

Predictive analytics

Big data

Visualization

New talent management models

Cognitive technology

0.50

0.46

0.40

0.36

0.31

0.24

* (-1 to 1, where -1 stands for low performance and +1 stands for very high performance)

** (0 to 1)

Overall performance

Professionalism

Efficiency

Use of technology

-0.05

0.37

-0.17

-0.34-1 +1

"The internal audit function is turning from a financial and operational control tool into an important element of corporate governance. For that reason, management of Russia’s leading companies is increasingly interested in developing this line of business in line with the world’s best standards."Sergey Kudryashov

RUB 100 billion or more

RUB 10 to 100 billion

RUB 2 to 10 billion

Less than RUB 2 billion 29%

50%

57%

60%

7%

0%

14%

0%

29%

33%

14%

20%

36%

17%

14%

20%


19

Internal audit in 3 year’s time

Internal audit: areas for improvement

• One in every two respondents (54 percent) says that Internal auditors will perform a control and auditing function in three year’s time.

• Speaking about key areas for improvement, the majority of the companies indicate risk modeling and business process resilience (60 percent and 54 percent, respectively).

There will be no internal audit function

Internal auditors will perform a control and auditing function

The internal audit function will be actively providing guarantees, leveraging external expertise

The internal audit function will be leveraging external expertise

9%

34%

54%

3%

Risk modeling

Business process resilience

Use of innovations

Specialized IT skills

Data analytics

Operational management excellence

General advisory excellence

Business continuity

Knowledge of industry

Knowledge of finance

Efficient prevention of financial abuses

Knowledge of laws and tracking of developments

Awareness of data confidentiality issues

60%

54%

46%

46%

40%

40%

40%

34%

34%

26%

20%

14%

14%


20

Relevant topics suggested by CFOs

USD to RUB

Oil price

Bank of Russia’s key interest rate

EUR to RUB

Gold price

Inflation

53%

31%

16%

33%

44%

22%

4%

38%

58%

49%

40%

11%

31%

64%

4%

53%

44%

2%

60 RUB

8.0 %

57 USD

70 RUB

4.1 %

1,313 USD

Increase

No change

Decrease

Increase

No change

Decrease

Increase

No change

Decrease

Anticipated market dynamics

In September 2017, we asked our respondents about their expectations regarding changes in prices/rates of currencies and goods in a year’s time (by fall of 2018).

Personal experience with innovations

Virtual reality

Use of smart home technology

Experience in the cryptocurrency market

Trends:

• One out of five CFOs (20 percent) has experience in using virtual reality (VR) technologies.

• More than one out of ten respondents (13 percent) is aware of IoT smart home technologies.

• 4 percent have experience in buying cryptocurrencies (bitcoins).

20%

42%

38%

13%

65%

22%4%

54%

42%

I have some experience

I do not have experience but I would be interested in trying it

I do not have experience and I am not interested in trying it

Bitcoin to USD

5,585USD

38%

44%

18%


21


22

Russia and Italy: doing business togetherKey findings

The forecast of GDP growth in Russia for 2017 is 2.1 percent (baseline scenario), for 2018–2020 annual growth is expected at 2.1–2.3%.

In 2017, GDP of Italy is expected to increase by 1.5 percent in real terms. In 2018, GDP is estimated to increase by 1.4 percent driven by growth in domestic demand.

Share of Italy in Russian exports is 4.19 percent, making it Russia’s 6th largest trading partner.

Share of Russia in Italian exports is 3.86 percent. This makes Russia Italy’s 13th largest trading partner.

2.1 % 3.86 %1.5 % 4.19 %

Top 3 Russian exports to Italy

• Mineral fuels, petroleum and distillates, bituminous substances, mineral waxes

• Ferrous metals

• Precious metals, precious stones, bijouterie, coins, pearls

Top 3 Italian exports to Russia

• Nuclear reactors, boilers, equipment and mechanical devices

• Pharmaceutical products

• Electrical machinery and equipment; sound-recording and sound-reproducing apparatus

Top 3 Russian companies in Italy

• Lukoil

• Russian Railways

• Gazprom

Top 3 Italian company in Russia

• DKC

• Parmalat

• Ariston


23

Snapshot of the Russian agroindustry – 2017Key findings

Profit before tax (crop production and animal farming in 2016)

Subsidies share in companies’ profit

in 2014–2016

Product profitability in the key agricultural segments in 2016

Wheat price forecast by IEF RAS for 2018

with a barrel of oil at USD 50

Share of agricultural producers’ operational profit

in the structure of Russian wheat export prices

in 2016

Total subsidies issued

in 2013–2016

Efficiency of government support to the agroindustry, according to respondents (on a scale of -1 to +1)

The strongest driver of competitiveness

Top three strategies for agribusinesses in 2017

Top three technologies implemented by agribusinesses

183 USD/tonne

251 RUB billion

87 %

20 %

825 RUB billion

-0.08

11%32 %

Food as a share of total household spending

in 2017

Growth in corn exports (in monetary terms,

2016 vs 2015)

Companies with a positive view

of the situation in the industry

Cost reduction

Direct supply chain

Higher production

output

Accumulation of genetic

data

Expansion into new markets

Precision farming

78 %

1 12 23 3

38 % 43 %

More stable legislative and regulatory policies


24

Grain exports: highlights and main logistic channels

Logistic companies: ZAO RusAgroTrans is the largest railway carrier for grain commodities. In 2016, it had a negative margin (-2 percent).

In 2015 the margin was positive (6.6 percent).

Railway transportation costs depend on the route. According to estimates by RusAgroTrans, grain commodity transportation rates for the route “Kavkazskaya Station (the Krasnodar Region) – Novorossiysk”, including costs related to port documentation and transshipment services, were RUB 2,640 per tonne (USD 46 per tonne at a USD/RUB exchange rate of RUB 57 in 2015); RUB 2,845 per tonne (USD 44 per tonne at a USD/RUB exchange rate of RUB 65) in 2016; RUB 2,444 per tonne (USD 43 per tonne at a USD/RUB exchange rate of RUB 57). Given the expert estimates of port-related costs of USD 21 per tonne for 2016, railway carrier services were at about USD 23 per tonne.

Transportation by road can be competitive against railway transportation for distances of up to 600-800 km.

Agricultural producers: The margin of grain production varies greatly across producers, depending on soil quality, climate, environment and the technological maturity/size of a producer. According to SPARK-Interfax data, margins of certain large grain producers from export-oriented regions varied from 15 percent to 50 percent in 2015–16, with an average margin of 35 percent in 2015 and 30 percent in 2016.

Main logistic channels:

The Krasnodar, Stavropol, Rostov and Volgograd Regions

minor ports in the Azov and Black Sea Basin

(offshore transshipment in the Kerch Strait may also occur)

Turkey, Egypt and other countries

in the Middle East and North Africa

The Krasnodar, Stavropol, Rostov and Volgograd Regions and areas in the Central Black Earth Region

deep-water ports in the Azov and Black

Sea Basin

grai

n el

evat

ors almost

all countries with sea access

Transportation by road

Agribusinesses/traders (reselling may also occur)

Transportation by railway

Ports

Freight

Buyers


25

Ports: Deep-water ports for the transshipment of grain exports: Novorossiysk (PAO Novorossiyskiy Kombinat Khleboproduktov, with a transshipment volume of 3.5 million tonnes in 2016); AO KSK, with a transshipment volume of 3.3 million tonnes, AO Novorossiysk Grain Terminal, with a transshipment volume of 3.2 million tonnes; Taman (ООО Taman Zernovoy Terminalniy Kompleks, with a transshipment volume of 2.7 million tonnes; Tuapse (AO Tuapse Zernovoy Terminal, with a transshipment volume of 1.8 million tonnes).

Transshipment rates offered by these ports have only slight differences, staying currently in a range of USD 15–20 per tonne. Specifically, Novorossiyskiy Kombinat Khleboproduktov charges USD 17 per tonne; the grain terminal KSK charges USD 20 per tonne and USD 15 per tonne for larger volumes.

Margins earned by grain transshipment providers can be obtained by analysing financial statements. This analysis shows that margins can vary significantly, from 20 percent to 80 percent. Therefore, an average margin for deep-water ports is about 74 percent and it is 35 percent for shallow-water ports. It should be noted that these are somewhat rough estimates because these ports act as export channels for a wide variety of shipments other than grain.

Traders: Margins earned by the largest grain exporters vary significantly (-2.0–6.2 percent), with an average margin of about 1.5–2.0 percent. In addition, large traders generally work directly with smaller resellers such as Trade House RIF, rather than with agricultural producers. As a result, trader margins that are estimated based on financial statements of the incumbents may be underestimated due to the fact that such estimates do not include a full picture of grain resales.

There are few pure exporters among companies because many of them are diversified businesses engaged in the production and processing of oilseeds; exports of vegetable oils; the production and processing of grain, etc., with oilseed production continuing as a core business for certain companies such as Artis-Agro, Russian Oils and Sodurzhestvo Trade House.

Freight services: Freight rates for grain shipments can vary depending on (i) the vessel type (e.g. shipments via the Azov Sea and the Black Sea can be carried by vessels with a deadweight of 5,000–7,000 tonnes and 43,000–60,000 tonnes, respectively) and (ii) demand, with an average freight rate of USD 10–15 per tonne for vessels with higher carrying capacity and USD 20 per tonne for vessels with lower carrying capacity.

The Volgograd, Saratov, Samara and Orenburg Regions

inland harbours

on the Volga River or

Caspian ports

IranThe Stavropol Region gr

ain

elev

ator

s Azerbaijan The Central Federal District, primarily the Central Black Earth Region

Baltic ports

grai

n el

evat

ors mainly Central

Africa and Latin America, primarily

Nigeria and Mexico

Other logistic channels:


26

Below is an analysis of income distribution in grain export channels in 2016:

Exports via the Black Sea: Grain is shipped from the Krasnodar or Stavropol Regions by railroad or trucks to deep-water ports in the Black Sea.

Exports via the Azov Sea: Grain is primarily transported by truck from the Rostov Region to shallow-water ports, with about half of the shipments being further transshipped offshore to Handysize and Panamax vessels in the Kerch Strait.

1 2Customer price structure for exports in 2016

FOB Novorossiysk + Freight

FOB Rostov + Freight




Ports

Freight

Traders

Buyers

Profit

Costs

163 USD/tonne

55% 24% 0% 0% 5% 3% 0% 2% 11% 0%

48% 20% 13% 0% 2% 7% 0% 2% 8% 0%

182 USD/tonne


27

Sunflower oil exports: highlights and main logistic channels

Profit

Costs




Ports

Freight

Processing

Buyers

Main logistic channels: Other logistic channels:

Agribusinesses{sunflower seeds}

Oil extraction plants (OEP) + transshipment terminals working in cooperation

with oil extraction plants

Turkey, Egypt, Iran, China

or other countries with sea access

Agricultural producers: Cost efficiency of sunflower farming varies from farmer to farmer, depending on the climate and environment, soil quality and technological maturity. According to estimates by the Russian Ministry of Agriculture, the average cost efficiency in Russia was 56 percent in 2016. As a result, with the existing shortage in feedstock and alternative options to supply sunflower seed for processing or export, the distribution of margins across the sunflower oil export supply chain has shifted more to agricultural producers.

Processing providers: Margins earned by processing providers vary significantly by oil extraction plant, depending on the local market characteristics, which primarily includes competition for feedstock among processing providers and feedstock prices. This segment is characterised by processing capacities significantly exceeding the feedstock supply. According to experts, the industry had an average EBITDA margin of 8 percent in 2015–16. Based on our estimates, the average margin for processing services is about 7 percent.

Customer price structure for exports

Agribusinesses{sunflower seeds}

Sunflower oil

OEP The CIS countries or China

oil transshipment terminal

Turkey, Egypt, Iran, China

or other countries with sea access

Bulk transportation of sunflower oil is dominating export shipments. It accounted for about 70 percent

(1.23 million tonnes) in 2016. Unlike with grain exports, sunflower oil exports are distinctly characterised by the absence of clearly defined traders in the export channel. Shipments are generally handled by large processing providers or their trade houses without engaging with wholesale intermediaries. There are only a few instances when exports are channeled via companies that are not engaged in oil processing (e.g. International Grain Company). Another important aspect is that almost all major processing providers engaged in exports have their own export terminals and/or have an interest in the share capital of specialist companies. In addition, many players (e.g. Aston, Yug Rusi and Efko) have their own trucks or vessels to transport oil and also run their own large facilities that cultivate oil-bearing crops.

Mikhail KsenofontovInstitute for National Economic Forecasting of the Russian Academy of Sciences (IEF RAS)

37% 47% 9% 7%

770 USD/tonne


28

Top 5 M&As*

Target company Industry Bidder company Seller company Deal value (USD, mln)

Additional information

MegaFon OAO (19% stake)

TMT Gazprombank OAO Telia Company AB 1,046 The transaction is in line with Telia’s strategy to focus on Nordic and Baltic Regions.

PIK Group (24.59% stake)

RE Sergey Gordeev (private investor)

Minority shareholders

826 In July 2017, Sergei Gordeev, the president of PIK Group, purchased stakes from his business partners in the company, Alexander Mamut and Mikail Shishkhanov. Following his consolidation of 50.02% in PIK, Gordeev was required to make a mandatory share buyback offer to minority shareholders. As a result, the latter sold him about 162.4 million shares (corresponding to 24.6% of the group's equity capital).

Zoloto Kamchatki, JSC

E&R PJSC Vysochaishy Renova group of companies

500 The transaction will enhance Vysochaishy's position of a key gold miner in Russia.

En+ Group plc (6.9% stake)

E&R Polina Deripaska (private investor)

Oleg Deripaska (private investor)

500 The transfer of shares by Mr. Deripaska to Mrs. Deripaska is subject to a call option whereby Mr. Deripaska may, directly or indirectly, repurchase the shares at a later date.

MMC Norilsk Nickel OJSC (Bystrinsky GOK project) (37% stake)

E&R Vladimir Potanin (private investor), Grigory Berezkin (private investor)

MMC Norilsk Nickel OJSC

275 Norilsk Nickel, together with the foundation established by Vladimir Potanin and Gregory Berezkin, launched Bystrinsky GOK in the Trans-Baikal Region, the construction of which is estimated at USD 1.5 billion. This is the second largest copper production company created in Russia since the early 1990s.

(Russian companies)

*Open information about deal value

Source: Merger Market


29

Source: InvestinRussia.com

Global windTop news: China and Russia

Top news: Europe and Russia

19 December 2017China will invest USD 5 billion in steelmaking capacityThe Ministry for the Development of the Far East announced plans to create a cluster for deep steel processing in Primorye. The project will be implemented in three stages and involves the construction of 10 million tons of steelmaking capacity. Yao Xiaodong, Chairman of the Board of Directors of the company Deban Guangdong, estimated the total investment in the cluster construction at USD 5 billion.

8 December 2017Russian-Chinese Center for High Technologies in Skolkovo Technopark The Chinese company Tus-Holdings will invest USD 50 million in order to create a Russian-Chinese high-tech center in the Skolkovo technopark.

20 December 2017Production of agricultural machinery in KubanGerman concern CLAAS will invest EUR 6.6 million in the coming years in the development of its plant in the Krasnodar Territory, which will expand the localization of agricultural machinery production.

6 December 2017Agro-industrial and cattle-breeding complexes in PrimoryeThe Mikhailovsky zone of priority development will be supplemented by two new investors, who will invest over RUB 15.2 billion in production and create more than 600 jobs. The new investors are: the company Primorskaya Milk, created with the contribution of New Zealand capital, and the company TH Rus Primorsky, a subsidiary of one of the largest agricultural holdings in Vietnam.

28 November 2017Construction of a pulp and paper millChina Paper plans to invest approximately USD 1.5 billion in the construction of a pulp and paper mill in the Khabarovsk Territory.

12 November 2017Alibaba will spend USD 30 million to store data in RussiaAlibaba will invest USD 30 million in the development of an IT infrastructure in Russia and the creation of a data center. New capacities are needed to improve the service on the online sites of the companies AliExpress and Tmall in compliance with Russian law.

17 October 2017The government permitted China Gold to purchase up to 70 percent of the Klyuchevskoye gold depositIn September 2016, FAS Russia agreed on China Gold’s acquisition of 70 percent of the Klyuchevsky gold deposit. The production capacity is expected to be 2.64 million ounces a year; investments will amount to USD 500 million.

9 October 2017Haier will invest USD 50 million in production in Naberezhnye ChelnyThe first stage is a factory of washing machines. The volume of investments will be USD 50 million, and the estimated production capacity is 500,000 washing machines a year.

30 November 2017Fortum expands its presence on the renewable energy market Finnish Fortum expands its presence on the renewable energy market in Russia through the purchase of three 35 MW power plants from Hevel – Renova JV Victor Vekselberg and Rusnano. Previously, the company's green portfolio consisted of only wind power generation. The cost of the transaction, according to analysts, may reach RUB 5.5-7 billion.

23 November 2017Boeing will open a plant in the Sverdlovsk RegionUral Boeing Manufacturing Company (UBM, a joint venture of VSMPO-Avisma and Boeing) will be engaged in roughing and finishing the machining of titanium forgings. These are parts of the fuselage, wings, pylons and chassis for all models of Boeing aircrafts. Investments in the project will amount to RUB 5.5 billion.

November 2017FAS approved the purchase of JOGMEC’s 49 percent in INK-KrasnoyarskWithin the framework of the Eastern Economic Forum, INC and JOGMEC signed a framework agreement that consolidated the basic conditions for cooperation between the parties on a new joint project. The parties expect that the total investment in the project for the period up to 2021 inclusively will be at least USD 100 million.


30

Useful stickers

Useful stickers regarding innovations in Russia

LARGEST INITIAL PUBLIC EQUITY OFFERING BY A RUSSIAN COMPANY SINCE 2012 The IPO of En+ is the first major primary equity raising by a Russian company in Britain since Western sanctions were imposed on Russia

RUSSIA MOVED UP TO 35TH PLACE (FIVE PLACES HIGHER) IN THE DOING BUSINESS 2018 REPORT RELEASED BY THE WORLD BANK

BLOOMBERG: “THE PESSIMIST'S GUIDE TO 2018”Bloomberg describes various "pessimistic" world development scenarios for the next 10 years

THE 2018 FORTUNE CRYSTAL BALL Fifty-nine business forecasts for 2018 from Fortune magazine

Open Innovations Forum 2017Digital Economy, Top Speakers, Challenges Of Global Transformation

The largest ICO in 2017 (in Russian)

https://www.bloomberg.com/graphics/pessimists-guide-to-2018/

https://www.reuters.com/article/us-en-ipo-pricing/russias-en-prices-ipo-at-14-per-gdr-valued-at-8-billion-idUSKBN1D30N0

http://fortune.com/2017/11/20/predictions-2018-future-business/

http://www.doingbusiness.org/reports/global-reports/doing-business-2018

https://www.multivu.com/players/uk/8210651-open-innovations-2017-record-breaking/

https://rb.ru/list/ico-goda/

Contacts

Joe [email protected]

Lora ZemlyanskayaResearch Centre [email protected]

Dmitriy KasatkinSenior Research [email protected]

Mikhail GordeevSenior Research [email protected]

Vladimir SokolovSenior Research [email protected]

Yulia AfanasyevaIntern [email protected]

Victoria PigalkinaIntern [email protected]

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