Russia

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March 2017

Russia outperforms most of emerging Europe on per capita income, creditworthiness, and business climate. But growth lags most of the region. Lower oil prices and Russia’s geo-political dispute with Ukraine and the ensuing sanctions levied by western countries have heavily impacted the economy. However, the possibility of improved relations with the US raises the probability of lower sanctions and a more sanguine outlook.

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Economic outlook

Russia’s economy has struggled over the last three years. Falling oil revenues, sanctions from western countries in response to the occupation of Crimea, Russia’s self-imposed ban on food imports, a sharp currency depreciation and large outflows of foreign capital have caused economic hardship.  But the outlook is looking better. The Russian economy is forecast to expand for the first time since 2014 driven in part by the mild recovery in global oil prices.

Russia will need to diversify the economy away from the energy sector while simultaneously investing in its people and improving the access to and quality of services. But fiscal consolidation and limited fiscal space will make implanting policies that encourage diversification and long-term productivity growth difficult.

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Russia’s per capita income has fallen sharply since 2014 as the country has slipped to middle income status after reaching high income status a few years ago. There are also chronic levels of inequality with 110 people out of a population of 140m, controlling 35% of household wealth.

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Business climate

The poor economic performance and outlook have weighed heavily on Russia’s credit ratings. Standard and Poor’s and Moody’s downgraded Russia to junk status, while the OECD revised down its country credit grade to 4. Fitch maintains its investment grade rating, but this could deteriorate to junk status.

 

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Russia’s business climate comes in at 40 out of 190 economies on the World Bank’s ease of doing business gauge — which measures regulation and red tape relevant to a domestic small to mid-sized firm. Getting credit, protecting investors and trading across boarders are very difficult in Russia. The state plays a large role in the economy. Private enterprises are technically allowed to compete with state corporations on the same terms and conditions, but things can be very different in practice.

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Political power in Russia is highly centralised in the president and presidential administration within the Kremlin. The executive’s power is further enhanced by the relative absence of countervailing political influences and parties. Russia scores in the bottom quartile in most areas of governance. Corruption, the lack of political stability and ongoing violence, and low levels of government accountability are severe weaknesses.

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Bilateral relations

Russia is Australia’s 47th largest trading partner in 2015-2016, down from 31st in 2013-2014. Australia has levied various trade and investment sanctions against Russia following the occupation of Crimea, consistent with many other western countries. In retaliation, Russia has enforced bans on Australian food exports.

Australian exports of goods and services to Russia were worth US$660m in 2015-2016, up 2% from a year earlier. Russian sanctions weighed heavily on beef, dairy and wheat exports—which constitute the bulk of our shipments to Russia. Import payments to Russia totalled US$312m—comprised mainly of petroleum.

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Service exports to Russia were worth a mere A$114m in 2015-2016 or 0.2% of total service exports. This comprised mainly of tourism and education related services. Though both contracted in 2015 as a result of the weak rouble and sanctions.

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Bilateral investment between Russia and Australia were a miniscule A$1.4b in 2015 or 0.03% of total investment in and out of Australia.

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Bilateral investment between Russia and Australia were a miniscule A$7.2b in 2013 or 0.2% of total investment in and out of Australia.

Useful links

Department of Foreign Affairs
Country brief

Austrade
Market Profile