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Copyright © 2014, East Office of Finnish Industries. All rights reserved.
Current Russian Business Environment
- A Finnish Perspective
Raimo Valo, CEO
Helsinki, 18.3.2015
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
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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!
Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Mikko Hietikko | [email protected] 6
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
Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Mikko Hietikko | [email protected] 7
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
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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
Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Mikko Hietikko | [email protected] 10
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
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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…
Analyst, Janne Hirvonen | [email protected] 12
Foreign Trade
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
«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
Analyst, Mikko Hietikko | [email protected] 13
Russian population
Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Mikko Hietikko | [email protected] 14
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 %)
Copyright © 2014, East Office of Finnish Industries. All rights reserved. Analyst, Janne Hirvonen | [email protected] 15
Brain Drain
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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.
Analyst, Janne Hirvonen | [email protected] 16
Government plan to save the economy from 280115
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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
Analyst, Mikko Hietikko | [email protected] 17
Scenarios
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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%
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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
Analyst, Mikko Hietikko | [email protected] 19
Optimist Outlook
Oil GDP RUB/EUR Investment 2015 80 USD/bbl 0% 70 0% 2016 90 USD/bbl 3% 70 5%
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
• 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%
Copyright © 2014, East Office of Finnish Industries. All rights reserved.
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
Analyst, Mikko Hietikko | [email protected] 21
Geopolitics