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One foot in crisis, one foot out: Russia’s economy in the coming months

After two years of recession following the oil price collapse in late 2014, the Russian economy is showing signs of life – it just depends on where you look. On one hand, industrial output has been recovering and is set to rise notably this year, with export-oriented Firms, in particular, seeing growth. On the other hand, consumer demand will lag behind the rest of this recovery, offering clear opportunities only later in the year. Meanwhile, firms need to start preparing for rising business costs – particularly in the form of higher taxes – as we move into 2018. Ultimately, stronger growth for your business compared to 2016 remains possible this year, but will require an increased focus on strategy and execution in this slowly recovering market.

Industry is driving the recovery

Consumer demand in Russia

Despite the overall economy remaining in contraction in 2016, Russian businesses have been growing, with industrial production rising by 1.3% YOY. Among Russian businesses, the past two years have revealed a clear divergence in industrial output: several major industries selling to international markets have seen rising investment and production, while those firms selling more to the weak domestic market have struggled. As an example, energy & mining firms saw their production increase by 2.7% YOY in 2016 – stronger than overall industrial production – while manufacturing firms, which are primarily focused on selling to Russians, saw a pick-up of only 0.5%. Investment levels of the past two years and this burgeoning production growth indicate that these trends are set to continue well into 2018, particularly in light of prolonged weak consumer demand within Russia. B2B MNCs need to increasingly focus on those thriving industries – agriculture, energy & mining, wood, chemicals, and metallurgy – which will continue to perform far stronger than the rest of the economy this year.

Export sectors in Russia

Consumer demand remains in crisis

B2C MNCs will likely need to continue to focus on promotions and more basic products in their portfolios in the coming months, until a much clearer recovery in consumer spending is observed, likely by late H2 2017. Russian consumers still feel they are in an economic crisis; saving remains a high priority, incomes are weak, and accumulated price growth is elevated. A central bank survey in February noted that consumer expectations remain at the level of January 2015, the start of the economic crisis. A continued decline in retail sales in Q1 and a further decline in real disposable incomes in February (-4.1% YOY), despite notably slowing inflation, do not bode well for the rest of H1. Eventually, real disposable incomes will gradually recover and inflation will further moderate, allowing for recognizable improvements in consumer demand later in the year.

Russian crisis - poll

In light of the weak outlook, B2C MNCs should gather timely, on-the-ground feedback about improving consumer trends from their local partners in order to capture rising opportunities later this year. Likewise, firms should work closely with their local partners to identify regions within Russia where demand is more likely to be stronger given local industrial production improvements.

Prepare for rising business costs

As described in our report “Russia 2020”, Moscow’s long-term priority is political and macroeconomic stability. This policy entails driving growth of government revenues through tax hikes to make up for the weak energy revenues. Following the 2018 presidential elections, the government is likely to implement an increase in the VAT rate (possibly from 18% to 22%), matched with a compensating decline in employer-funded social contributions (from 30% to 22%). Firms should likewise monitor other tax increases, in particular, a corporate or personal income tax hike. High real interest rates will also remain for the year, as the government seeks to ensure low price growth, contributing to high borrowing costs for firms which may require financial assistance or delayed payment terms from MNCs.

Firms will see growth opportunities in 2017, but winning will require strong execution. MNCs should not only develop clear customer segmentation strategies, but also work closely with their local teams to get ahead of the competition by understanding the developing customer trends over the year as well as government tax policy. Eventually, Russia will pull its other foot out of the crisis, and the best prepared firms will benefit the most as the economy fully recovers

FSG clients can access our Russia Q1 QMR report for a deeper analysis of the country’s economic outlook for the next several months, and its implications for MNC strategies.

Not a client? You can purchase Adapt to Win in Slowing Russia or the 2017 EMEA Outlook from our online store.

The post One foot in crisis, one foot out: Russia’s economy in the coming months appeared first on Emerging Markets Insights.

This post first appeared on Emerging Markets Insights: A Blog By Frontier S, please read the originial post: here

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One foot in crisis, one foot out: Russia’s economy in the coming months


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