Russia – What is changing? Erik Berglof Chief Economist European Bank for Reconstruction and...
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Transcript of Russia – What is changing? Erik Berglof Chief Economist European Bank for Reconstruction and...
Russia – What is changing?Russia – What is changing?
Erik BerglofChief Economist
European Bank for Reconstruction and DevelopmentThe Portoroz Business Forum
November 16, 2006
Russia is changingRussia is changing
Economy growing, fueled by consumption Middle class emerging Foreign direct investment expanding rapidly Russian private business changing dramatically Sound macro management, but little reform of state
sector and increasing interference Now shifting from savings to spending mode Facing increasing capacity constraints
Russia’s Difficult TransitionRussia’s Difficult Transition
Deeper and more drawn-out transition recession than CEE
1998 financial crisis marked a turning point
Remarkable and unexpected growth spurt post-1998
Line shows all transition countries
Russia is growingRussia is growing- dollar GDP quadrupled since 2000; to surpass $2 trln in 2010- dollar GDP quadrupled since 2000; to surpass $2 trln in 2010
314
392
405
271
196
260
345
432
589
764
2,09
1
1,79
4
1,50
3
1,22
8
954
307
0
500
1,000
1,500
2,000
2,500
95 96 97 98 99 00 01 02 03 04 05 06F 07F 08F 09F 10F
$ bn
Source: Russian authorities, DB Research estimates
Real wages rising and consumption Real wages rising and consumption booming…booming…
– Real wage increases drive consumption
– Further wage hikes to be expected…
– …as public sector wages planned to double in 2005-8
Growth in retail trade and real average wage growth, YoY, 3mma
4%
6%
8%
10%
12%
14%
16%
18%
Jan-
03
Apr-0
3
Jul-0
3
Oct-0
3
Jan-
04
Apr-0
4
Jul-0
4
Oct-0
4
Jan-
05
Apr-0
5
Jul-0
5
Oct-0
5
Jan-
06
Apr-0
6
Jul-0
6
Retail trade, YoY, 3mma Real average wage, YoY, 3 mma
Source: Rosstat
……consumer credit exploding…consumer credit exploding…
– Growth in consumer credit nearly 100% year-on-year…
– …with ratio of retail consumer loans to GDP approaching 6%
– Deposits also up, but not growing as fast
Consumer credit growth, YoY, 2003-5
0%
20%
40%
60%
80%
100%
120%
140%
Dec
-02
Mar
-03
Jun-
03
Sep-
03
Dec
-03
Mar
-04
Jun-
04
Sep-
04
Dec
-04
Mar
-05
Jun-
05
Sep-
05
Dec
-05
Mar
-06
%
Consumer credit growth, YoY Retail deposits growth, YoY
Source: CBR
……falling unemployment despite falling unemployment despite restructuring…restructuring…
– Surging services sector and turnaround in manufacturing employment
– Fall in unemployment also feeds consumption
Unemployment rate, %
0
2
4
6
8
10
Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06
%
Unemployment rate Officially registered unemployed, % of labour force
Source: Rosstat
……small business growth creating jobssmall business growth creating jobs
01,0002,0003,0004,0005,0006,0007,0008,0009,000
1998 1999 2000 2001 2002 2003 2004 9mo2005-10%
-5%
0%
5%
10%
15%
20%
Employment in small businesses, thousands (lhs)
Employment growth in small businesses cumulative relative to the base year (1998),%, (rhs)
Small business employment (employment and employment growth post-1998)
Inflation still a concern…Inflation still a concern…
0%
10%
20%
30%
40%
50%
60%
70%
2000 2001 2002 2003 2004 2005 2006 2007
CPI, YoY, % PPI, YoY, %
……but short-term dynamics under controlbut short-term dynamics under control
(in % to December 2005)
100
102
104
106
108
110
Consumer prices
Producers prices for manufactured goods
Prices on sold agricultural productsGeneral cargo rates
excluding pipelines
Consolidated price index
for construction products
January-May 2006.
January-May 2005
108.5
109.7
105.9
107.3103.6
104.8
108.6
108.8103.8
104.5
Remarkable macro managementRemarkable macro management
Huge current account surpluses
Large budget surpluses 2004-2006
Built substantial reserves – Stabilisation Fund over $70 bn in November 2006...
...but mode is changing Fiscal balance (% of GDP)
Current account balance (% of GDP)
From “savings mode” to “spending mode”From “savings mode” to “spending mode”
In 2007 budget outlays are set to increase by around shift 4% of GDP
More than 50% capital spending into the key sectors of the economy
The “winners” include electricity, IT-sector, transportation and housing
Uneven Progress on Transition Uneven Progress on Transition
Advanced far on first-stage reforms: trade and price liberalisation, and privatization
More modest progress on more complex institutional reforms
Two upgrades in 2006: banking and non-bank financial sector
Russia 2006 (EBRD Indicators)
Highest score
Lowest score
Hitting capacity constraintsHitting capacity constraints
High energy prices associated with strong growth…
…but capacity constraints are now imposing limits
-5
0
5
10
15
20
In p
er ce
nt (a
nnua
l weig
hted
avg.
)
0
10
20
30
40
50
60
70
US$ p
er b
arre
l (ann
ual a
vera
ge)
Russia (left axis) Oil price - Brent (right axis)
Investment critical to sustain growthInvestment critical to sustain growth
– Higher investment needed to sustain growth in consumption…
– …with latest figures showing improvement
Investment vs industrial production growth , YoY, %
0%
4%
8%
12%
16%
Jan-
03
Apr-0
3
Jul-0
3
Oct
-03
Jan-
04
Apr-0
4
Jul-0
4
Oct
-04
Jan-
05
Apr-0
5
Jul-0
5
Oct
-05
Jan-
06
Apr-0
6
Jul-0
6
%
Industrial production growth, YoY, 3mma Investment growth, YoY, 3 mma
Source: Rosstat
Huge investments needsHuge investments needs
New extraction and refining capacity in resource industries, particularly in oil and gas
Machinery and equipment in manufacturing industry old – average more than 20 years
Extreme underinvestment in hard infrastructure: power, transportation, municipal infrastructure (water etc.)...
...not to speak of education and health care
Corporate Sector TransformingCorporate Sector Transforming
Consolidation of ownership and control Better governance standards and
transparency More professional management Restructuring... ...and investing
Productivity growing under pressureProductivity growing under pressure
– Productivity improving in sectors competing with imports (consumer goods…)
– …pressured by stronger rouble and trade liberalization
– labour-shedding, but..– …growth in services
sector compensates
Productivity growth vs real wages growth by sector, 2005
Productiopn and distribution of electricity, gas
and water Vehicles production
Equipment production
Metals
Chemical production
Light industry
Food industry
Extraction of fuel raw materials
Total industry
0
4
8
12
0 4 8 12
Productivity growth, %
Real
avera
ge w
age g
rowth,
%
45o
Source: MEDT
Internationalization of industryInternationalization of industry
Increasing productivity at least partially offset rouble appreciation
Increasing exports, but still dominated by resource-based industries
Outward direct investment increasing, with resource industries leading, but facing constraints
Listings on foreign exchanges booming...
FDI: new records, from low levelsFDI: new records, from low levels
– FDI expected to more than double to more than $30 bn this year
– Further growth expected with continued macro stability
– Now twice those of Brazil and five times those of India; but less than half of China’s
FDI forecast
0
5
10
15
20
25
30
35
40
45
50
2004 2005 2006F 2007F 2008F
$ bn
Source: CBR, Deutsche UFG Research
More FDI flows to banking and More FDI flows to banking and manufacturing - and the regionsmanufacturing - and the regions
FDI, regional breakdown, 2005
Other14%
Sakhalin Oblast28%
Omsk Oblast24%
St. Petersburg & Leningrad Oblast
4%
Tyumenn Oblast6%
Moscow region8%
Moscow16%
Source: Rosstat
FDI by sector, 2005
Extraction of raw materials, fuel
30%
Manufacturing46%
Real Estate7%
Trade & Services6%
Financial services5%
Other6%
Source: Rosstat
Russia: Financial sector developmentRussia: Financial sector development
Banking sector expanding rapidly (>40 %) in all products and most regions; products in roubles
Securities markets also expanding: greater liquidity, longer maturities in bond markets, London IPOs
Banking sector reform weak in application of minimum capital requirements and transparency
July 2006 capital account convertibility – supports bond market liquidity, and result in net inflow, but…
…banking sector more vulnerable to outflows; underlines need for consistent macro management
Falling cost of capital… Falling cost of capital… …attracts large companies to capital markets…attracts large companies to capital markets
Source: Bloomberg, Deutsche UFG Research estimates
Equity (IPOs)
Eurobonds($bn)
Rb bonds (Rb bn) $bn
2004 7.6 144 0.88
2005 14 261 5.1
2006F 18.4
Debt (gross)
Source: Deutsche UFG Research estimates
20 350
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2001 2002 2003 2004 2005 2006 2007
Implied equity risk premium Russia 2030 Eurobond YTM
8%
5%
Cost of capital since 2001 Capital market financing
M&A
$bn
23.1
39.4
44.6
Russia’s De-DollarisationRussia’s De-Dollarisation
Growth in bank loans to the non-financial private sector
0
10
20
30
40
50
60
70
per
cent
total deposits in RUB in foreign exchange
Growth in bank deposits
-30
-20
-10
0
10
20
30
40
50
60
per
cent
total deposits in RUB in foreign exchange
Russia: key challengesRussia: key challenges
Consolidation of industrial groups will need to be checked by credible enforcement of competition policy.
Return to private sector initiative and reduce state interference in the economy to restore business confidence
Contain inflationary pressures by limiting fiscal relaxation in the 2007 budget, while transitioning to an inflation targeting regime
Investment FundInvestment Fund
– Vehicle for financing private-public partnerships– Allocations to Investment Fund
2006FY: ~$3 bn 2007FY: ~$6-7 bn
– Government commission already approved 7 projects Total investment consideration $23 bn Majority of the approved projects have to do with
transport infrastructure Private-to-public financing ratio is 3:1 to 4:1
Power giant UES investment programPower giant UES investment program
1.4 2.1 2.9 3.7 21.118.618.315.46.90
5
10
15
20
25
02 03 04 05 06F 07F 08F 09F 10F
Cape
x fo
r Rus
sian
powe
r gen
erat
ion,
$ b
n
Source: UES
Failure to reform state sectorFailure to reform state sector
State sector still largely unreformed; civil service reform failed
Number of Russian bureaucrats doubled in the 1990s…
…with the bulk of the increase taking place in the regions
Number of employees in state administration, in thousands
0
200
400
600
800
1,000
1,200
1,400
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
'000
Source: Rosstat
Emerging economic model: Emerging economic model: Strong state interference and nationalism...Strong state interference and nationalism...
Resource sector understandable...– Difficult choices – Russian choices– Time pressures (energy sector)
...but spreading to other strategic sectors– Uncertainty undermines investment climate
Industrial policy increasingly vertical... ...”National champions” and ”priority projects”
...but earlier reforms are paying off......but earlier reforms are paying off...
Deregulation for small businesses Strengthened banking regulation Pockets of rejuvenation in state administration New generation of managers...
……progress towards WTO accessionprogress towards WTO accession
Trade in goods: main impact through stricter standards on certain trade instruments, e.g. anti-dumping; less uncertainty about market access conditions for Russian export
Services sectors: greater foreign competition through direct investment may raise productivity
Enforcement of domestic law now potentially subject of international dispute settlement
Russia is changingRussia is changing
Phase 1 (1991-1999):
Drawn out transition recession
Phase 2 (2000-2005):
Strong macro management and rapid growth, driven by private consumption
Phase 3 (2006-):
Investment (and public consumption + transfers)– Huge needs throughout economy– Substantial resources + foreign direct investment– Severe implementation constraints (need private sector)– Reform of state critical for Russia’s economic model