Russia Market in 2010

Russian economy: Demand and investments contract sharply

Russian economy has seen a prolonged period of growth over the past decade, however, reversal in oil prices (from $140 to $40) and foreign capital inflows ($210 bn = 14% of GDP), led to a sharp contraction in the economy since mid-2008 Weak global demand, tightening credit and rising unemployment (6 mn [+39% YoY] in August 2009*) resulted in a significant drop in consumer spending and investments Consumer spending is expected to decline 7 % in 2009 as against an increase of 11% and 14% in 2008 and 2007 respectively. While fixed capital investments contracted by 15 % in Q1 09 over Q1 08
Trend in Russian GDP Growth*
10% 7.7% 8.1% 5.6%

Real GDP Growth (Y-o-Y)

5%

0% 2006 -5% 2007 2008 Q1 09 Q2 09 Q3 09

-10% -9.8% -15%

-9.4% -10.9%

Trend in Industrial Production Y-o-Y in %

10% 6.3% 8.1% 5.6%

Industrial Production (Y-0-Y)

5% 0% 2006 -5% -10% -15% -16.5% -20% 2007 2008 Jan-Sep 09

Collapsing global and domestic demand led to a sharp fall in industrial output, which decreased by 14 % in Q1 09.
*Rosstat, September 2009, Unemployment rate is estimated at 10.4% in 2009E*

14.40%

Source: Rosstat, CBR, Ministry of Finance, Bloomberg, 2 2 Economy Ministry. Oct 20, 2009

Russian economy: Expected to take longer to recover, despite recovery in oil prices
Although oil prices have recovered significantly in 2009, International Monetary Fund expects oil prices to average $ 61/ barrel in 2009 due to continuing challenging global economic environment and no further production cuts announced by OPEC in late May meeting. This is expected to result in a moderate recovery in the Russian economy. The Russian GDP is expected to grow marginally by 1.6% in 2010. The growth rate will range between 3-5% in the medium term Domestic demand will also support growth, benefiting from availability of credit and a strong fiscal stimulus However, maintaining demand will have additional downside risks of recapitalizing banks to maintain flow of credit and additional social spending
Projected Oil Prices 2006- 2010
120 100
Oil Prices in $/ bbl

80 60 40 20 0 2006

71.1 64.3

97.0

76.5

61.5

2007

2008

2009F

2010F

Project Russian Real GDP Growth (2007-2013)

10% 8.10% 5.60% 3.50% 1.60% 4.70% 3.60%

Real GDP Growth

6% 2% -2% -6% -10%

2007 2008 2009F 2010F 2011F 2012F 2013F

-8.00%

Source: International Monetary Fund, World Economic Outlook Database, Oct 2009. IHS Global Insight Inc, country intelligence report, Oct 2009

Sector analysis
GDP growth by main sectors Total GDP growth Tradable sectors Agriculture, forestry Extraction industries Manufacturing Non-tradable sectors Electricity, gas, water production and distribution Construction Transport and communication
Source: Rosstat; World Bank staff calculations.

2008 5.6 % 1.8% 8.4 % 0.2 % 0.9 % 7.4% 1.2% 13.2% 6.9%

Q1 09 -9.8 % -14.4% -2.4 % -2.2 % -23.5 % -6.2 % -5.3 % -20.9% -7.4%

Significant decline in demand noted across all sectors, especially tradable sectors
4
4

Global Manufacturing Purchasing Manager Index (GMPMI) (Output, New orders: >50 implies growth)
GMPMI- Output GMPMI- New Orders

60 59.6 57.5 57.3 53.7 52.5 50 49.6 48.7 45.8 50.2 49.5 49.8 54.6

60 59.1

58.6 54.6 53.4

59.7 55.9

50 48.8 46.2

48.9 49.4

51.5

48.6

40 9-May Russia 9-Jun China India Jul-09 Brazil

40 9-May Russia 9-Jun China India Jul-09 Brazil

Source: JP Morgan/Reuters, Data through August 2009

Russias GMPMI shows green shoots of growth, however, still lags other emerging markets
5
5

Fiscal stimulus to support abating domestic demand

Federal Budget Expenditure by Functional Classification* Total expenditures as % of GDP* Real economy1 Defense and security 2008 as % of GDP 18.7 2.5 4.5 2009 as % of GDP 23.9 4 5.5 Change 5.2 1.5 1

General public issues

Social policies Education Health Intergovernmental transfers Other**

2
0.7 0.9 0.7 6.4 1.1

2.5
1.1 1 0.8 8.5 0.5

0.5
0.4 0.1 0.2 2.1 -0.6

Sources: Budget documents; and IMF staff calculations, Note: *Based on 2009 Supplementary Budget, **Includes the disbursement for the Housing Fund in 2008 (0.6 percent of GDP), Nominal GDP (bn of Russian rubles) 41,668 in 2008 and 40,512 in 2009e. Real economy includes expenditure on corporation, households and Real economy includes fiscal measures targeted towards Corporations, SMEs and Export industries and household Note: 1Russian government intends to support firms by providing direct financial support and easing the tax burden. Fiscal measures targeted towards households includes Labor market policies (including an increase in unemployment benefits)

Budget includes large discretionary increases in defense and security spending

6
6