Russian investment slow to take off in hesitant recovery

Post-crisis recovery in the Russian and global economies has turned out to be slower and more tenuous than we had expected. This, in particular, has had direct implications for credit and investment activities as Russian banks and firms have shown considerable reluctance to put money into new projects due to the existing (or perceived) high risks of a potential slowdown. So investment that played the role as the most important driver of growth in the precrisis period has thus far failed to support the postcrisis recovery process.

We believe this situation will gradually change in 2011 as Russian and global economies get on a more solid footing, risks of a turnaround continue to moderate and investment activity starts to pick up. We estimate that in 2011 fixed investment volumes in the Russian economy could go up by 12% yearon- year, not least due to the low base factor of 2009-10. Domestic demand will also remain robust with incomes rising 3% year-on-year and retail sales up by over 5% year-on-year.

We note that there is an upside risk to our consumer demand forecast for 2011-12. These will be years when Russians will vote in parliamentary and presidential elections, so it would not surprise us if the state decides to increase its social spending as the elections draw nearer.

Another upside risk is linked to our view of future recovery trends in credit/ investment and in industrial output. We do not rule out that as early as the first half of 2011 the global economy could show far more consistent signs of recovery in both demand and trade – a process that is likely to boost output in Russia’s export sectors.

Our current view is that the export sector is not likely to play an important role in economic growth next year, although under a more optimistic global scenario that could possibly change.