Russian Economy General News: #8

There has been no shortage of big investment promises each time a Chinese government delegation has visited Moscow in recent years, but concrete deals have often been lacking.

So the $9.1bn stumped up by CEFC China Energy this month for a 14.16 per cent stake in Russian oil producer Rosneft was a welcome surprise for those keen for China to become a big investor in Russia.

As one of the largest Chinese investments in Russia and the second-largest oil and gas acquisition by a Chinese company, it strengthens the bonds between two of the world’s biggest producers and consumers of energy, at a time when relations between Moscow and the west are increasingly sour.

It also indicates that business relationships between China and Russia are maturing. 

“We think we will see increased energy co-operation through corporate partnerships between both countries,” said Alejandro Demichelis, director at boutique investment bank Hannam & Partners in London. “Corporate partnerships with China are one of the very few alternatives still open to Russian players to finance their expansion ambitions.” 

“The fact that the first large deal done by a Chinese company . . . is with Rosneft — arguably the closest Russian company to Mr Putin — shows the seriousness of the partnership push.”

CEFC will buy the stake from a consortium controlled by mining company Glencore and the Qatar Investment Authority, restructuring a complex and opaque transaction last year that highlighted the difficulties for western groups investing in Russian companies targeted by sanctions.



The deal will give CEFC access to oilfields in eastern Russia close to the Chinese border and is the first time a Chinese company has taken a stake in one of the most important businesses controlled by the Kremlin. 

Rosneft chief executive Igor Sechin said he was “happy that it was specifically a Chinese corporation” that had bought a stake. CEFC chairman Ye Jianming said the deal “will inject new energy” into the bilateral relationship. 

“This deal and the wider relationship makes sense for both sides,” said a person involved in the transaction. “Russia wants cash, and the Chinese want good assets.” 

Russian natural resources offer long-term supply opportunities for China just across its northern border, while Chinese cash offers Moscow an alternative to US and European investors. Russia’s increasing need as western sanctions have become tougher also makes it a buyer’s market for Chinese corporates. 

In May, a Chinese consortium led by Fosun agreed to buy as much as 15 per cent of Polyus, Russia’s largest gold producer, then in June, Beijing Gas Group bought 20 per cent of Rosneft’s Verkhnechonskneftegaz — one of eastern Siberia’s biggest oil and gasfields — for $1.1bn. 

CEFC is also in talks to acquire a stake in Russian hydropower and aluminium company EN+ as a cornerstone investor in the group's planned initial public offering. 

“It used to be really hard to do business with Russia. Because they are a resources-rich country, they wouldn't give an inch,” says Lin Boqiang, an energy expert at Xiamen University. “But now it's a lot easier. Because of the market conditions, they need it more and it's become a lot easier.” 

“It’s a big opportunity.”

Russia has long looked to China as a source of foreign investment, and has intensified its efforts since EU and US sanctions have cut off funding to some of the country’s largest banks and companies.

“Investors have started to look more to Russia because assets are so cheap, and political momentum is there, but are still very cautious,” says Alexander Gabuev, chair of the Russia in Asia-Pacific program at the Carnegie Moscow Center. 

“The recent CEFC agreement with Rosneft is viewed in China as a deal more about politics than business,” Mr Gabuev adds. “The magnitude of the deal and readiness of Igor Sechin to cede control over a large stake in Rosneft have caused people in the Chinese oil industry to raise their eyebrows.” 

Chinese lenders also stepped in to provide funding to Yamal LNG, a major Arctic gas project by Russia’s Novatek and France’s Total after its project financing was hit by sanctions, and last year Bank of China agreed to loan €2bn to Kremlin-controlled Gazprom, which is building the Power of Siberia pipeline that will export $400bn of gas to China through 2050. 

In July, during Chinese President Xi Jinping’s state visit to Moscow, China Development Bank agreed to provide $11bn to two Russian investment groups, while in the past four months a joint Russia-China Investment Fund has announced plans to invest in infrastructure development, tourism and healthcare.

“Russia’s credibility, creditworthiness still isn’t high but it’s true, they are more open and their attitude has changed,” a senior Chinese oil executive says. “China can get the oil or gas by pipeline and the resources are a known quantity. It's a better bet than taking the same amount of money to Africa or Venezuela.”

Russia improved its competitiveness indicators in the ranking of 137 countries, rising to five positions - to 38th place, according to a report on global competitiveness in 2017-2018, prepared by the World Economic Forum (WEF).

"The Russian Federation (38th place) has risen to five positions, mainly thanks to the (macroeconomic situation), recovering strongly after the recession of 2015-16," the document says.

Austin wrote:In Latest WEF Competitivensss Ranking Russia Jumped by 5 Positions to 38th Rank

Russia improved its competitiveness indicators in the ranking of 137 countries, rising to five positions - to 38th place, according to a report on global competitiveness in 2017-2018, prepared by the World Economic Forum (WEF).

"The Russian Federation (38th place) has risen to five positions, mainly thanks to the (macroeconomic situation), recovering strongly after the recession of 2015-16," the document says.

Austin wrote:Total amount of Russian defense contractor's export contracts reaches $44 bln

More:
http://tass.com/defense/967733


BTW can some one tell me if Russia Spends $1 to do something what is the US equivalent of that based on PPP ?

I was thinking of $44 billion for Russia in Defence Export would be how much equivalent for US based on PPP ?

kvs wrote:

Austin wrote:Total amount of Russian defense contractor's export contracts reaches $44 bln

More:
http://tass.com/defense/967733


BTW can some one tell me if Russia Spends $1 to do something what is the US equivalent of that based on PPP ?

I was thinking of $44 billion for Russia in Defence Export would be how much equivalent for US based on PPP ?

Taking nominal to PPP adjusted the factor would be about 2. So $44 billion in exports is more like $88 billion. But unfortunately
the PPP adjustment is biased to the civilian sector. For the military sector the real PPP factor is likely over 4. I have posted
on this already. Russia builds six project 636.3 diesel-electric boats for the price of 1 equivalent by western makers. A PPP
factor of 6 is likely on the high side, but a factor of 2 is simply wrong. A first guess is 4 based on other cases and not just
submarines.

September 27, 2017 12:46 GMT
MOSCOW -- Many advanced economies are wondering how breakthroughs in technology could leave whole swaths of the population unemployed,
but in Russia the government is pondering how to fill jobs with a dramatically shrinking work force.

Economy Minister Maksim Oreshkin this week called Russia's demographic situation "one of the most difficult in the world," saying that in the
next five to six years "we are going to lose approximately 800,000 working-age people from the demographic structure every year."

Speaking at Sberbank's Corporate University on September 25, Oreshkin cast it as a knock-on effect of the 1990s, when birthrates plunged
following the Soviet breakup that brought political freedom, but also economic hardship, rising crime, and a collapse of welfare.

"The lowest birthrate in the country was reached in 1999, and these people are now 18 years old; they are entering the work force. This
generation is very small," Oreshkin said in comments reported by state news agency RIA Novosti. According to Oreshkin, the
working-age population will contract by 4.8 million over the next six years.

Kremlin Narrative Undermined

The continued workforce decline in the country of just over 140 million would likely harm efforts to spur economic growth
after a deep two-year recession, and also undermines the Kremlin narrative that Russia is beating a slow-burning demographic
crisis that dates back to the Soviet Union, when its demography was deformed by tumultuous events, high mortality, and low-life expectancy.

"The challenge is, of course, serious, but the question is how to respond to this challenge," said Anatoly Vishnevsky, director
of the Moscow-based Demography Institute at the Higher School of Economics. "In some form, it will probably require a
greater flow of migrants to fill the deficit on the labor market. The second kind of answer is labor productivity, which is not very high with us."

Dmitry Kulikov, an expert at the Analytical Credit Rating Agency, told the state news agency RIA Novosti that the fall in the work force
combined with lower migration flows could shave 0.4 percent potential growth from Russia's economy every year.

Vishnevsky, however, doesn't believe raising the retirement age would alleviate the problem. "Old people in no circumstances can replace the
young," he said. "They are not effective workers. They cannot master new technology. So if your entire work force gets older, it's not clear
what the effect will be."

He also noted how a policy of attracting labor migrants from Central Asia or elsewhere might risk inflaming nationalist sentiment.
"It's another matter that Russia is not very hospitable toward migrants," he said. "There is fairly strong anti-migrant sentiment,
so it's difficult to say how the situation will develop."

More than 10 million labor migrants are estimated to work in Russia.

The Russian branch of American bank Citi has significantly cut its operations, reports Kommersant daily. Experts believe the lender is preparing to leave the Russian market should the relations between Moscow and Washington deteriorate further.

gaurav wrote:Deepening Demographic crisis undermining Russian Deep state


Russia labour force participation
Despite massive efforts on part of Russian deep state to increase economy (without people eh ehe he) , threats loom of 10 percent GDP write/cut off.

See this is not western media hype but details from Russian gov ,ministers , top deep state officials.  

September 27, 2017 12:46 GMT
MOSCOW -- Many advanced economies are wondering how breakthroughs in technology could leave whole swaths of the population unemployed,
but in Russia the government is pondering how to fill jobs with a dramatically shrinking work force.

Economy Minister Maksim Oreshkin this week called Russia's demographic situation "one of the most difficult in the world," saying that in the
next five to six years "we are going to lose approximately 800,000 working-age people from the demographic structure every year."

Speaking at Sberbank's Corporate University on September 25, Oreshkin cast it as a knock-on effect of the 1990s, when birthrates plunged
following the Soviet breakup that brought political freedom, but also economic hardship, rising crime, and a collapse of welfare.

"The lowest birthrate in the country was reached in 1999, and these people are now 18 years old; they are entering the work force. This
generation is very small," Oreshkin said in comments reported by state news agency RIA Novosti. According to Oreshkin, the
working-age population will contract by 4.8 million over the next six years.

Kremlin Narrative Undermined

The continued workforce decline in the country of just over 140 million would likely harm efforts to spur economic growth
after a deep two-year recession, and also undermines the Kremlin narrative that Russia is beating a slow-burning demographic
crisis that dates back to the Soviet Union, when its demography was deformed by tumultuous events, high mortality, and low-life expectancy.

"The challenge is, of course, serious, but the question is how to respond to this challenge," said Anatoly Vishnevsky, director
of the Moscow-based Demography Institute at the Higher School of Economics. "In some form, it will probably require a
greater flow of migrants to fill the deficit on the labor market. The second kind of answer is labor productivity, which is not very high with us."

Does Russia China partnership (without people) compensate this ..?

Dmitry Kulikov, an expert at the Analytical Credit Rating Agency, told the state news agency RIA Novosti that the fall in the work force
combined with lower migration flows could shave 0.4 percent potential growth from Russia's economy every year.

Vishnevsky, however, doesn't believe raising the retirement age would alleviate the problem. "Old people in no circumstances can replace the
young," he said. "They are not effective workers. They cannot master new technology. So if your entire work force gets older, it's not clear
what the effect will be."

He also noted how a policy of attracting labor migrants from Central Asia or elsewhere might risk inflaming nationalist sentiment.
"It's another matter that Russia is not very hospitable toward migrants," he said. "There is fairly strong anti-migrant sentiment,
so it's difficult to say how the situation will develop."

More than 10 million labor migrants are estimated to work in Russia.

par far wrote:

I don't think/hope that the Russian government see this as a short term issue, but this is actually a long term problem(don't worry about the next 5- 10 years, worry about the next 15-20 years). The Russian government should try to increase the native Russian population and not get migrants, this will hurt short term but will be good long term. Promote marriage, family, going to Church, so mostly everything the west hates.

ATLASCUB wrote:https://www.rt.com/business/404985-citi-russia-leave-sanctions/

The Russian branch of American bank Citi has significantly cut its operations, reports Kommersant daily. Experts believe the lender is preparing to leave the Russian market should the relations between Moscow and Washington deteriorate further.

Highly interesting.

gaurav wrote:Deepening Demographic crisis undermining Russian Deep state


Russia labour force participation
Despite massive efforts on part of Russian deep state to increase economy (without people eh ehe he) , threats loom of 10 percent GDP write/cut off.

See this is not western media hype but details from Russian gov ,ministers , top deep state officials.  

gaurav wrote:Deepening Demographic crisis undermining Russian Deep state
Russia labour force participation

Russia's Finance Ministry published forecast of main parameters of the Russian economy for a long-term period. According to this data, average dollar exchange rate will rise to 82.5 rubles in 2031-2035. It is reported that this data is included in the draft long-term budget forecast, presented by the Ministry to the State Duma together with budget.

However, the Ministry noted that it was talking about the nominal exchange rate, whereas the real effective ruble exchange rate will be "relatively stable". A serious increase in the nominal exchange rate of the dollar is explained by "inflation differential", in other words, difference in the prices growth rates in Russia and the United States.

It is reported that in 2017-2020 the average nominal dollar exchange rate will be 64.8 rubles, in the next five-years - 71.5 rubles, in 2026-2030 - 77.1 rubles.

Overall, according to basic scenario growth of the global economy will slow down. Russia's GDP growth rate will be around 2.3-2.4% in 2021-2035.

According to the Finance Ministry, domestic demand will be the main driver of economic growth. In addition, due to relatively low interest rates and "predictable environment," an increase in investment activity is also expected.

According to a conservative scenario, the US currency will grow from 68.4 rubles in 2017-2020 to 84.2 rubles in 2031-2035. This forecast takes negative external shocks effect on the Russian economy into account.

Third scenario predicts that for the specified period the dollar will be traded at 75.6 rubles. External conditions will remain similar to the basic scenario, but a set of government measures aimed at eliminating constraints on production will create conditions for the growth of the Russian economy at a rate not lower than the world average.

GarryB wrote:Would be very funny if US sanctions forced countries to stop using the US dollar as a trading currency....

The economy would already grow faster today, if the expenses of the entire state in 2011-2017. were distributed more efficiently, according to the article of the chairman of the Center for Strategic Research (CSR) Alexei Kudrin and director of the Center for International Trade Studies of the Russian Academy of Science and Technology Alexander Knobel.

Expenditure on education for this period decreased from 3.7% to 3.5% of GDP, for health and sports - from 3.5% to 3.3%, for security and law enforcement from 2.5% to 2.3%. But the defense grew from 2.5 to 3.1% of GDP, especially in 2014-2016: from 3.2 to 4.4%. According to the authors of the article, such a redistribution of costs annually deprives the economy of 0.3 pp growth rates.

In early September, Kudrin published an article that revealed part of Russia's development strategy until 2024, presented by the CSR to President Vladimir Putin. The key proposal is a budget maneuver: to increase spending on education, healthcare, road construction and transportation by 0.9%, 0.7% and 0.9%, respectively, while cutting spending on security forces (by 0.5%) and defense (by 0 , 3%). Such a maneuver Kudrin proposed back in 2011 in the strategy 2020. And if it was undertaken even then, for 5-7 years, an additional contribution to the growth rate of the economy would be 0.4 pp, for 10-15 years - 0.8 pp, and for 20-30 years this would increase GDP by 20-25%. This is the minimum provided only by the redistribution of costs, without reforms and increasing the effectiveness of institutions, explains Knobel.