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  • Recent political and economic developments
    Prior to 2014 sanctions, the West (mostly Europe) dominated Russia’s foreign economic relations. After USSR collapse in 1991, Russia reached out to Europe and the West for resources to update its outdated Soviet economy. In 2013, Russia’s 10 largest investors were Western nations who make up 84% of all foreign investors.

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    In 2014, Russia’s trade relations was almost 60% dominated by developed Western nations.

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    In 2014, Western sanctions and plunging global oil prices struck a double blow to its already slowing economy.
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    2014 sectoral sanctions cut off Russia’s access to key Western resources for developing and growing its economy. Russia’s counter sanctions cut off a significant supply of staple food imports that form the Russian basic diet:
    • Fresh and frozen meat and smoked meat products (excluding canned versions)
    • Fresh and frozen poultry and processed poultry products (excluding canned versions)
    • Milk and dairy products
    • Fresh and frozen fish and seafood
    • Fresh vegetables, edible roots and tubers, fruits and nuts

    World Bank forecasts GDP contraction of -3.8% for 2015, easing to -0.3% for 2016. Oil prices are predicted to hover between US$50-70 per barrel. 2014 stresses showed Russia the vulnerabilities of overreliance on one market bloc. Russia responded with three cohesive strategies, most notably in its pursuit of Asia.
    Russia’s 3-pronged response:

    Immediate
    RUB2.4 trillion Anti-Crisis Plan
    • 65% bank recapitalisation
    • 13.9% support of enterprises that account for 70% of GDP

    Near to mid-term
    Intensify import substitution
    • Capital intensive industries (priority given to defence and O&G sectors)
    • Manufacturing
    • Agriculture

    Longer term
    Pursue Asia and non-Western markets
    • New export markets for oil
    • New sources of capital & financing
    • New sources of technology, know-how, machinery & equipment

    Increased bargain hunting by Asian companies. Despite anti-West climate, some Western investors have set up production in-market:
    • Chinese direct investments into Russia in 2014 increased by over 250% to more than US$8 billion.
    • Thai company CPF launched a new stage of the industrial pig-breeding farm in Moscow Region at a total investment of US$27 million.
    • Western companies continue to invest and expand operations. E.g. investments by Swedish cosmetics company Oriflame (US$165mn), German automotive components company Schafller (US$35mn), American car maker Ford Sollers (US$400mn).

    Some predict that sanctions will cripple Russia for good. However, end-2014 macro indicators suggest that Russian economy is able to hold up under pressure:
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    Prudent budget management:
    • 10% cut in budget expenditure for 2015
    • Capping budget expenditure at RUB15 trn until 2017

    Reforms to improve business climate continue to progress.
    • Russia ranks 62nd on World Bank’s 2015 Ease of Doing Business index. Compare: Vietnam -78th, China -90th, Indonesia -114th, Brazil -120th, Cambodia -135th, India -142nd, Myanmar -177th, Philippines -95th

    • Russian corporate tax rates: 20% in 2015 (steadily reduced from 43% in 2001). Compare with: 25% -Myanmar, Vietnam, Indonesia, China; 34% -Brazil, India

    • Positive economic indicators that reforms are working:
    Industrial production index: >50% increase from 2002-2012
    Diversification of exports: >50% increase from 2000 to 2013
    Increase of non-O&G exports: 250% increase from 2000 to 2013

    Resource: IE Singapore
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