The new Russian government, under President Dmitry Medvedev, will remain committed to massive infras...
The new Russian government, under President Dmitry Medvedev, will remain committed to massive infrastructure spending, which will underpin continuing strong growth of the economy, according to the chief analyst at RZB Group, one of the largest foreign banks operating in the region.
Peter Brezinschek, head of Raiffeisen Research (part of the RZB Group), believes Medvedev will honour many of the commitments made by his predecessor, Vladimir Putin, as he seeks to rebuild the depleted infrastructure of the 1990s.
The government is committed to spending $400bn by 2015 on 304 projects, while $300bn will be spent on the railway system of Russia by 2030, meaning the outlook for steel manufacturers such as Evraz is very good.
It is nearly a decade since the so-called Russian crisis of 1998, when the then-government defaulted on its debt, triggering a global sell-off in markets. So weak was the economy at the time that GDP per capita had halved from its 1991 level in relation to the 15 major EU nations.
From 2000, the CIS (Commonwealth of Independent States) managed what Brezinschek describes as a "remarkable rebound", boosted by rising energy prices, but also from an increase in competitiveness caused by the strong real depreciation that occurred during the Russian crisis.
During the seven years up to and including 2007, the CIS states even outpaced the fast-growing emerging countries of Central and South Eastern Europe.
He believes that this 'boom' in the CIS economies will continue over the next decade or so running up to 2020, albeit that inflation will remain relatively high and GDP growth will moderate from the very strong levels of recent years.
RZB estimates that real GDP growth for Russia, the Ukraine and Belarus will drop to 4% between 2010 and 2015, and to around 3% from 2016 to 2020, from its current level of around 6% for the period 2006 to 2010. There will also be a gradual decline in growth in Kazakhstan, from its current level of over 10% to 7.5% by 2020.
Brezinschek said: "There is one drop of bitterness though: the general economic framework will keep inflation from falling much below the 10% threshold."
Impact of demographic and resource development
Russia is faced with a demographic 'crisis' that will see its population fall from 144 million to 139 million, with a life expectancy of 65, according to United Nations projections.
Brezinschek said: "Demographic development appears to be a key limiting factor of overall economic growth in a medium- to long-term perspective. Therefore, there is a need for policies to counter the population decline, improve the institutional environment and increase spending on education."
Foreign direct investment (FDI), both internally and externally, will provide a major catalyst to the growth of the CIS economies, he believes. Foreign investors started to return in a meaningful way to Russia and Kazakhstan in 2003, which then spread to Ukraine in 2005 after the so-called 'Orange Revolution'. Interestingly, the largest contribution to FDI comes from Cyprus, while in 2006, outward FDI by Russia amounted to EUR130bn.
Brezinschek said: "Russia clearly pursued a strategy of gaining a foothold in high-tech companies abroad, as evidenced most recently by the acquired share in pan-European aerospace and defence company EADS."
In 2006, the oil and gas sectors accounted for 20% of Russia's economy, with natural resources accounting for another 8%, but Brezinschek believes the government will look to decrease this reliance in favour of high value-added industries.
That said, Russia is currently the world's largest gas supplier and has the world's eighth-largest global oil reserves, while Kazakhstan has 3% of the world's oil reserves spread over 200 fields. The Ukraine is also suspected of having large offshore oil and gas deposits in the Black Sea.
Brezinschek added: "According to official data, the share of high value-added sectors in the domestic economy is only 10% now. The Russian government's long-term plan is to increase this share to at least 16-18% by 2020.
"In the coming years, we will see a shift from manufacturing industry, which has been growing for the past 15 years, driven by the natural resources sector, towards the service sector. The restructuring should also boost construction as infrastructure development will keep demand high over the next 10 to 20 years."
By 2020, Brezinschek also believes there will be massive consolidation in the overall number of banks by 30-40%. At the end of 2007, there were 1,100 banks, and he thinks this will drop to between 600 and 700.
He concluded: "Strong economic growth will be maintained, but demographic challenges loom and the markets show high potential for foreign investors."
- Lawrence Gosling.
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