Russia’s economic outlook and business prospects

  Russia’s growth: Since 1999, Russia has experienced outstanding growth rates, constantly improving macroeconomic conditions, and a growing involvement in the global economy. The Russian economy achieved an average GDP growth rate of about 7% per year. GDP in 2007 grew by an estimated 8.1% to $1.344 trillion, making Russia one of the top ten economies in the world.  Worldwide demand for oil and natural gas continue to be the engine behind much of the growth.

  Russia’s financial strength: Russia’s financial situation continues to strengthen as is indicated by the federal external debt  shrinking from an estimated $44.7 billion in December 2006 to $37.4 billion in December 2007.Russia’s sovereign credit ratings have increased to investment grade. In 2008, the oil and gas sector in Russia accounted for about 20.5% of Russia’s overall GDP. The Russian oil boom has produced a flood of cash, increase of political power, and an expansion of the opulent elite.  Russia’s international reserves (formerly referred to as its gold and currency reserve) are the world’s third biggest – $581.5 billion as of August 28th, 2008.The Russian wealth is enormous.

Investment into Russia: Russia has recently attracted a lot of foreign investment.   According to the World Bank, foreign investors have contributed $27.8 billion to Russian ventures in 2007, up from $6.8 billion in 2003.  Russia was the fourth largest recipient of FDI in 2007 after China, India, and the U.S.  This demonstrates the undeniable attractiveness of the Russian economy to global investors.  Russia outperformed other top developing countries when measured on a per-capita basis, attracting $369USD for each of its 141 million people, more than twice Brazil’s per-capita figure and six times the comparable mark for China.

The following figure shows the 15 most attractive economies for FDI in 2007 based on the percentage of responses to an UNCTAD survey. China, the U.S., and Russia are in the 3 of the top 4 spots.


Consumer demand and purchasing power: Russians have high disposable incomes; close to 70% of Russians’ income is disposable vs. around 40% for a typical Western consumer.  They have a 13% flat income tax, subsidized housing and utilities, and about 10% savings.  That provides an enormous amount of consumer capital for investment. Between 2000 and 2007,

the average annual disposable income of the richest 10% of households grew faster than that of any other income group, reaching $34,741 in 2007.  These households possessed 31.2% of the total disposable income in 2007 (as can be seen from the graph below). Russia currently has close to 110 billionaires (measured in US dollars), placing it second only to the U.S. in terms of number of billionaires.

According to some analysts, Russia is now the fourth largest consumer of luxury goods, after USA, Japan, and China. Russia’s elite are passionate about luxury cars, vacations, international properties, branded clothing and footwear, and exotic pets and racehorses.  It is predicted that Russia will account for one-third of global luxury sales by 2017.

Many major luxury automobile manufacturers such as Land Rover, Bentley, BMW, and Mercedes have all had huge success in Russia.  For instance, Russia is likely to replace Italy to become the third largest market for Land Rover after Britain and United States in 2008. Russians are no longer content to drive just BMW or Mercedes; there is an increasing propensity towards more sophisticated brands such as Bentley and Rolls-Royce.  Out of the 10,000 cars that Bentley sold globally in 2007, about 300 of them were sold from a single outlet showroom located at Barvikha luxury village (close to Putin’s residence). This is just one example of the increased demand luxury brands are experiencing in Russia.  According to most experts, this trend is likely to continue into the foreseeable future.

Russian investment overseas: Many Russian companies such as Gazprom, Lukoil, and Rusal now have the financial muscle to not only invest in foreign firms, but to also acquire them.  These companies have invested in pipelines, refineries, production facilities, and processing plants around the globe.  Although most of these investments were previously in physical assets, corporate acquisitions are now a growing element for companies such as Evraz, a steel group that acquired Oregon Steel for $2.3 billion in 2006. Another example is a series of investments by Rusal’s owner, Oleg Deripaska, who bought large stakes in General Motors, Magna International, the Canadian Auto Parts Group, and a few construction groups including Hochtief (German) and Strabag (Austrian).

The fact that Dmitry Medvedev, Russia’s current president, is encouraging Russian businessmen to invest in foreign companies illustrates a strong national desire to purchase foreign assets and boost Russia’s standing overseas.  As a result of an improving economy, new capital resources, and a taste for international investment, Russians have made substantial purchases of U.S. financial assets.  Their holdings of U.S. financial assets in February 2008 reached $38.4 billion, a 400% increase from the year before.  Russians are now the 13th biggest international owners of U.S. securities.

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