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RUSSIAРОССИЯ
2011
ИНВЕСТОРЫ И ДЕВЕЛОПЕРЫ НЕДВИЖИМОСТИ В РОССИИ И СНГREAL ESTATE INVESTORS AND DEVELOPERS IN RUSSIA & CIS
GRI
2 Key Messages:
1. Russia will not be immune to strengthening global headwinds
Focus of vulnerability shifting to the ability to fiscally support a weakening economy No big signs of a slowdown yet, but the spill-overs will be felt in 1H2011 We see 4.1% (vs. 4.7% consensus) and 3.5% (vs. 4.4% consensus) GDP growth in 2011 and 2012 Forecasts driven by weaker investment (in 2011 and 2012) and consumption (in 2012)
2. The negative impact on the economy may be cushioned by 4 silver linings
Longer maturity structure of external debt More flexible exchange rate More robust reform momentum No overheating
Silver linings amid rising threatsIvan Tchakarov, Ph.D.
+7 (495) 258 7770 x7400
Page 3
Key vulnerability 2008
• In 2008, Russia’s descent from stability to ‘hot potato’ caught many by surprise.
• After all, CA was in surplus, standard metrics of BS vulnerabilities were strong
• Optimism among policy-makers abundant
• However, the sudden calling in of short-term external loans put the private sector in a tight spot
• Authorities had to intervene to backstop any major defaults
• Heavily managed RUB was kept in place for too long, preventing a brisk external adjustment
Page 4
Non-oil deficit remains far wider than target
Key vulnerability now
• In 2008, Russia entered the crisis with a strong stock and flow fiscal position, allowing it to pursue (correctly) aggressive countercyclical policy
• Now the medium-term fiscal framework adopted on July 7th throws prudency to the wind, putting in danger previously announced intention to balance the budget by 2015.
• Non-oil balance to remain about -10% of GDP by 2014
• Break-even oil price at a whopping USD125bbl vs. USD50bbl in 2008
• Hence, current vulnerability has shifted from the ability to meet short-term foreign obligations to fiscally support an economy faced with heightened sensitivity to external shocks20
01
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
E
2012
E
2013
E
2014
E
-14
-12
-10
-8
-6
-4
-2
0
Non-oil structural deficit (%GDP)Target for non-oil structural deficit (% GDP)
Page 5
We forecast bigger slowdown in 2012
Bear hug
Consumption fall smaller, but more protracted
• New forecasts driven by weaker investment in 2011/2012 and consumption in 2012
• Fixed investment 3.8% (vs. 6.8%) in 2011 and 4.7% (vs. 8.8%) in 2012
• Consumption 3.8% (vs. 4.1) in 2011 and 3.5% (vs. 6.0%) in 2012
• Investment growth forecast to drop sharply and immediately with a quarter lag (Q42011), remaining there for next year and with a full-year decline of 3.8%
• Consumption growth takes longer to adjust with maximum impact reached after 4 quarters.
• Hence, largest impact of the shock to be felt in H12012
Consensus forecast August
RenCap old forecast
RenCap new forecast
MinEcon Sept 2011
Gov July 2011
Real GDP2011 4.7 4.9 4.1 4.1 4.22012 4.4 4.6 3.5 3.7 3.5
Inflation, eop2011 8.4 7.3 7.1 6.5 - 7 7.52012 7.6 6.7 6.2 5 - 6 6.0
RUB/$, avg2011 28.5 28.4 29.3 28.6 28.42012 28.6 27.3 28.9 28.7 27.9
1 2 3 4 5 6 7 8 9 10-5
-4
-3
-2
-1
0
1Retail Sales yoy response Investments yoy response
start of the shock 3Q2011
largest impact of the shock 1H12
Page 6
Pre-crisis GDP level reached by end-2011
Bear hug
Output gap to close only in 2Q2013
• The downward revision to our 2011 GDP growth forecasts is too small to change our estimates that Russia will reach its pre-crisis level of output by the end of this year
• However, it will still have taken twice as long to achieve this in comparison with the 1998 sovereign crisis (14 vs. 7 quarters)
• Largest impact of the shock will be felt in the first half of 2012
• At the same time, the more sizable growth revision for 2012 means the output gap will now only close in 2Q13, i.e. three quarters later than we previously estimated
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1985
100
115
1998 crisis, 1=4Q97current crisis, 1=2Q08, RenCap forecastcurrent crisis, 1=2Q08
3Q11
1H12
95 96 97 97 98 99 00 01 02 03 04 05 06 07 08 08 09 10 11 12 135,000
7,000
9,000
11,000
-10
-5
0
5
10Actual output Potential output Output gap(rhs)
2Q13
Page 7
Micro data slowing, but still very robust
Only minor signs of a slowdown
• Disaggregated microeconomic data does not yet signal a significant slowdown yet
• In fact, data is still very robust
• However, as argued above, it will take a couple of quarters for the external shock to kick-in
• Recall that in 2008 major weaknesses appeared only in late 2008 and beginning of 2009, although the global crisis had been raging for some time already.
• So no time to be complacent right now
Q1 2011/Q1 2010, % Q2 2011/Q2 2010, % 1H2011/1H2010, %
Passengers Cars production 98.0 46.5 66.6
Trucks production 76.7 43.6 55.9
Car sales 76.5 43.3 55.5
Trucks sales, weight less that 6 tons 50.0 31.9 39.0
Trucks sales, weight 6 to 16 tons 107.9 90.2 97.0
Trucks sales, weight above 16 tons 90.1 103.4 97.8
No of Buildings Completed -1.2 95.7 48.4
Buildings Completed: Area Volume 1.9 74.8 43.7
Wood products production 10.9 10.0 10.4
Rough wood production 9.5 3.9 7.3
Glass production 50.6 36.3 42.7
Refractory bricks production 50.4 41.0 45.5
Refractory cement production 48.9 2.6 21.5
Ceramic tiles production 9.6 20.7 15.4
Construction lime production 107.5 15.4 21.2
Freight carried 6.2 6.1 6.1
Steel production 10.2 1.2 5.5
Steel pipes production 23.2 22.9 23.1
Portland Cement, Aluminous Cement, Slag Cement & Similar Hydraulic Cements
20.2 10.0 13.4
Building Blocks and Stones: Made of Concrete
27.8 34.6 32.1
Building Blocks: Made of Aerated Concrete
46.5 27.3 33.8
Prefabricated Ferroconcrete Buildings 17.5 14.0 15.5
Page 8
Foreign reserves smaller in absolute…
The silver linings-less ST debt
Foreign reserve coverage of external debt has also declined…
0100200300400500600
Jul-08 Jun-11
…and relative terms
…although ST debt coverage has increased significantly
05
10152025303540
Jul-08 Jun-11
020406080
100120
Jul-08 Jun-11
0
200
400
600
800Jul-08 Jun-11
Page 9
External debt has recovered to pre-crisis levels…
The silver linings-less ST debt
External bank dent is still lagging…
…while private debt is yet to catch up
…while corporate borrowing has reached pre-crisis levels
Dec-
05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
Jun-
08
Dec-
08
Jun-
09
Dec-
09
Jun-
10
Dec-
10
0100200300400500600
Total External debt
Short term Long term
Dec-
05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
Jun-
08
Dec-
08
Jun-
09
Dec-
09
Jun-
10
Dec-
10
0
100
200
300
400
Total Private sector
Short term Long term
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-100
50
100
150
Private sector: Banks
Short term Long term
Dec-
05
Jun-
06
Dec-
06
Jun-
07
Dec-
07
Jun-
08
Dec-
08
Jun-
09
Dec-
09
Jun-
10
Dec-
10
050
100150200250
Private sector: Other
Short term Long term
Page 10
Share of ST debt has declined (23% to 12%)…
The silver linings-less ST debt
Banks have been particularly active…
…mainly as a result of private sector deleveraging (30% to 15%)
…but other sectors have also moved in that direction
3871
8 -..
.38
777
-...
3886
9 -..
.38
961
-...
3905
2 -..
.39
142
-...
3923
4 -..
.39
326
-...
3941
7 -..
.39
508
-...
3960
0 -..
.39
692
-...
3978
3 -..
.39
873
-...
3996
5 -..
.40
057
-...
4014
8 -..
.40
238
-...
4033
0 -..
.40
422
-...
4051
3 -..
.0%20%40%60%80%
100%
Total External Debt
Total Long term Total Short term
3871
8 -1
033m
/yyy
y38
777
-103
3m/y
yyy
3886
9 -1
033m
/yyy
y38
961
-103
3m/y
yyy
3905
2 -1
033m
/yyy
y39
142
-103
3m/y
yyy
3923
4 -1
033m
/yyy
y39
326
-103
3m/y
yyy
3941
7 -1
033m
/yyy
y39
508
-103
3m/y
yyy
3960
0 -1
033m
/yyy
y39
692
-103
3m/y
yyy
3978
3 -1
033m
/yyy
y39
873
-103
3m/y
yyy
3996
5 -1
033m
/yyy
y40
057
-103
3m/y
yyy
4014
8 -1
033m
/yyy
y40
238
-103
3m/y
yyy
4033
0 -1
033m
/yyy
y40
422
-103
3m/y
yyy
4051
3 -1
033m
/yyy
y0%
50%
100%
Total Private sector
Private Long term Private Short term
3871
8 -1
033m
/yyy
y38
777
-103
3m/y
yyy
3886
9 -1
033m
/yyy
y38
961
-103
3m/y
yyy
3905
2 -1
033m
/yyy
y39
142
-103
3m/y
yyy
3923
4 -1
033m
/yyy
y39
326
-103
3m/y
yyy
3941
7 -1
033m
/yyy
y39
508
-103
3m/y
yyy
3960
0 -1
033m
/yyy
y39
692
-103
3m/y
yyy
3978
3 -1
033m
/yyy
y39
873
-103
3m/y
yyy
3996
5 -1
033m
/yyy
y40
057
-103
3m/y
yyy
4014
8 -1
033m
/yyy
y40
238
-103
3m/y
yyy
4033
0 -1
033m
/yyy
y40
422
-103
3m/y
yyy
4051
3 -1
033m
/yyy
y0%
50%
100%
Private sector: Banks
Long term Short term
3871
8 -1
033m
/yyy
y38
777
-103
3m/y
yyy
3886
9 -1
033m
/yyy
y38
961
-103
3m/y
yyy
3905
2 -1
033m
/yyy
y39
142
-103
3m/y
yyy
3923
4 -1
033m
/yyy
y39
326
-103
3m/y
yyy
3941
7 -1
033m
/yyy
y39
508
-103
3m/y
yyy
3960
0 -1
033m
/yyy
y39
692
-103
3m/y
yyy
3978
3 -1
033m
/yyy
y39
873
-103
3m/y
yyy
3996
5 -1
033m
/yyy
y40
057
-103
3m/y
yyy
4014
8 -1
033m
/yyy
y40
238
-103
3m/y
yyy
4033
0 -1
033m
/yyy
y40
422
-103
3m/y
yyy
4051
3 -1
033m
/yyy
y0%
50%
100%
Private sector: Other
Long term Short term
Page 11
More flexible RUB should not fuel inflation
The silver linings-more flexible RUB
Fall in GDP growth 40% less with a Flexible RUB (1% decline in US growth relative to baseline)
• RUB volatility has spiked recently and RUB has been the EM currency that saw the largest swings in the latest episode of mkt volatility
• CBR intervened, but only in a measured fashion. This is commendable as one key lesson from the 2008 crisis was that keeping the currency heavily managed contributed to the acute fall in real GDP in 2009
• New monetary policy paradigm adopted by the CBR since the 2008 crisis will serve as an important buffer in the case of a deterioration in US and global growth prospects.
• If the RUB is allowed to act as a shock absorber, it could limit the decline in GDP by almost 40% (1.50% vs. 0.89% decline in GDP)
• Inflation should not suffer with a weaker RUB as the external shock is by nature deflationary
1 2 3 4 5 6-3.0-2.5-2.0-1.5-1.0-0.50.00.5
Response of GDP growth with flexible roubleResponse of GDP growth with fixed rouble
Jan-
01
Jul-0
2
Jan-
04
Jul-0
5
Jan-
07
Jul-0
8
Jan-
10
Jul-1
15
10
15
20
25
30
2022242628303234363840
CPI inflation YoY USDRUB (rhs)
2008 crisis saw massively weaker RUB and falling inflation
Page 12
The silver linings-not overheating
Fall in GDP growth 40% less with a Flexible RUB (1% decline in US growth relative to baseline)
• The economy was broadly running at potential until 2005/2006
• As oil price accelerated significantly and capital flows became abundant, the economy started growing above potential
• This lead to a significant overheating around late 2007/early 2008 when the negative output gap was 7% of potential GDP
• Right now the economy exhibits a positive output gap of about 1%
• Hence, external shocks will have less of a potential to lead to a major slowdown/recession
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 135,000
7,000
9,000
11,000
-10
-5
0
5
10
Actual output Potential output Output gap(rhs)
Not overheating now
Very overheating in 2008
Page 13
Twin surpluses heading south
The silver linings-reform drive
-10
-5
0
5
10
15
20
Fiscal balance (% GDP)
Current account (% GDP)
• Twin surpluses were the name of the game pre-crisis… Federal surpluses were running at 7% of GDP while the current account surplus did not decline even during the crisis
• …but the crisis is now turning the table on the current account… The current account is shrinking due to increasing import bill and broadly constant oil extraction, which constitutes large part of exports.
• …and even more so on the fiscal balance. The prudent fiscal policy to save a significant portion of the oil windfall during the upswing cushioned the effect of the 10% turnaround in the fiscal position.
Page 14
The silver linings-reform drive• Financing these deficits will be a key challenge... Deficits on the public and external side, exacerbated by
rising health and pension obligations, will require a changed approach to attract foreign investment.
• …in particular in light of allegedly unfavorable business environment. The transparency International rating of corruption in Russia fell last year from 2.2 to 2.1 on a scale of 0.0 (highly corrupt) to 10.0 (very clean), pacing Russia 154th out of 178 countries between Papua New Guinea and Tajikistan.
• Russia needs to improve business climate in order to attract foreign investment and we think Kremlin may be starting to realize this... In our mind, the crisis has visibly brought a new frame of mind that is more open and welcoming to foreigners.
• …and some tentative signs are already visible:
o Privatization;
o Reduction in the strategic enterprises list open to foreign investment;
o WTO membership;
o 2018 World Cup;
o Accessibility to domestic bond (OFZ) market;
• These reforms are under-appreciated and under-priced… The less-favorable external drop and the need to invest heavily in the decrepit infrastructure is inviting a fresh look into Russian growth prospects.
• …but they will be implemented only in an evolutionary manner. We think that there is more serious underlying momentum to the current reform agenda.
Page 15
How corrupt is Russia?
The silver linings-reform drive
• TI well-known perception corruption index asks international businessmen for their assessment of corruption whether or not they have done business there
• Hence, results are vulnerable to distortions based on press portrayals of a country
• The best data to assess corruption comes from surveys that ask businessmen and citizens whether they or their acquaintances have recently been asked to pay bribes
• When scaled by GDP, Russia’s corruption is exactly as common as one would expect given its level of economic development
Page 16
How (un)democratic is Russia?
The silver linings-reform drive
• According to Polity IV database, btw 1992 and 2007, Russia ranged btw 3 and 6, averaging 4.5 (Saudi Arabia was rated -10, and USA +10)
• In general, higher income means high democracy, except for oil-rich countries and Singapore
• Countries around Russia’s level exhibit a broad range of political regimes-from highly authoritarian Libya to the consolidated democracy of Poland
• Again, Russia seems to be exactly where one would expect given its income level
Page 17
Does Russia’s demographics befit a country at war?
The silver linings-reform drive
• Among 28 post-communist countries for which WB publishes data, Russia had only the 14th largest fall in population btw 1989 and 2007
• If one were to exclude influx if immigrants, the fall worsens to 6.6, but still puts Russia outside the worst 10 countries.
Page 18
RUB could be the biggest casualty
Appendix I- How important is oil?GDP growth may fall by 70bpts over four quarters if
oil prices drop by $15/bbl
• Using statistical methods, we estimate that variations in oil prices account for a third of the variation in Russia’s GDP
• What is the responseof Russia’s GDP growth to a one-standard-deviation decline in the Brent oil price (equal to $15/bbl)?
• Our model indicates that economic activity in Russia responds negatively and the impact of the shock is maximized after three quarters, when the shock shaves close to 1.2% off growth. The average impact over four quarters is about 70 bpts.
• The RUB could suffer as well, with the $/RUB declining by 1.2 two quarters after the shock.
• The impact on the fiscal and current account is much more modest
1 2 3 4-1.4-1.2
-1-0.8-0.6-0.4-0.2
0GDP growth
1 2 3 4 5 6-0.20.00.20.40.60.81.01.21.4
$/RUB rate
RUSSIAРОССИЯ
2011
ИНВЕСТОРЫ И ДЕВЕЛОПЕРЫ НЕДВИЖИМОСТИ В РОССИИ И СНГREAL ESTATE INVESTORS AND DEVELOPERS IN RUSSIA & CIS
GRI
