Markets in the Commonwealth of Independent States (CIS) Russia, Belarus, Ukraine and Kazakhstan show potential for more foreign investment, according to a report by the RZB Group. In the outlook for 2020, the RZB Group expects the CIS to maintain strong economic growth but face demographic challenges.
Since the fall of the Soviet Union, the CIS has faced a rough period of transformation and restructuring, but from 2000 on, the CIS managed a rebound. From 2000 to 2007 the CIS economy outpaced those of the fast growing Central and South Eastern European countries, the report says.
After a period of rather cautious foreign direct investment (FDI) growth in the CIS mainly as a result of the Russian financial crisis in the late 1990s activity of foreign investors took off only in 2003. However, the countries in the CIS show a rather low inward FDI stock per capita compared to other economies, the report says.
But the potential to acquire new technology is not limited to attracting foreign investors, says Brezinschek. FDI flows therefore are no one-way street. Russia clearly pursued a strategy of gaining a foothold in high-tech companies abroad.
The RZB report expects both the FDI and the GDP to increase in the CIS by 2020.
The FDI in Russia and Kazakhstan is expected to double by 2020; in Ukraine it is also expected to increase. Kazakhstan already showed a high level of FDI per capita, but has been effected by the U.S. sub-prime mortgage crisis, as much of its boom relied on the financial and real estate sector.
By 2020, the report says the GDP per capita to increase to between 50% and 65% of the EU 27 average (2006: between 29% and 42%). But the decreasing population is a potential problem.
Demographic development appears to be a key limiting factor for overall economic growth in a medium to long-term perspective, summarized Peter Brezinschek, chief analyst at Raiffeisen Zentralbank (RZB). Therefore, there is a need for policies to counter the population decline, improve the institutional environment and increase spending on education.
The report also expects fundamental changes in the GDP structure of Russia.
In the upcoming years we will see a shift from the manufacturing industry, which has been growing for the last 15 years driven by the natural resources sector, towards the service industry, Brezinschek says. He also expects the restructuring to boost construction and for trade to flourish with the regional development.
The report identified four sectors (construction, oil and gas, telecom, utilities) that will be key factors for the development of the CIS. The most important of these from the EUs point of view will be the oil and gas sector. Despite the growth of alternative energy sources, RZB analysts do not expect a decrease in the demand for oil and gas in the EU or Asia. These areas rely on imports from the CIS with Russia carrying the largest reserves.
With more than doubling of GDP per capita at purchasing power parities from 9,890 in 2006 to around 920,700 in 2020 expected according to RZBs baseline scenario, the degree of financial intermediation (banking assets ass percentage of GDP) will more than double as well, from around 60% of GDP at 2007 to around 130% of GDP by 2020. This would correspond to an annual average growth of banking assets of almost 19% in ruble terms, Brezinschek says. This means an increase of total banking assets of more than six times. The average annual volume of new loans extended to the economy would amount to around 9.5% of the GDP.
Brezinschek expects more consolidation in Russia s banking sector, with the number of banks decreasing by 30 to 40% by 2020. From still over 1,100 banks as of year end 2007, there will be only 600 to 700 left, Brezinschek says. Russias five largest banks, most of them more or less state-owned, control almost half the market in terms of banking assets.
There appears to be huge consolidation potential especially among the 300 largest banks, Brezinschek says. Smaller targets will be identified and acquired by larger players, banks will also seek cooperation and transform into larger banking groups and alliances.
A lot of Russias big players are expanding into underbanked regions and rapidly building branch networks. The report says this will give foreign banks incentive to buy into existing entities rather than building new banks from scratch.
The RZB report was based on a fully re-specified conditional beta-convergence model of the Independent Centre for Economic Studies (NOBE). According the model, the projected long-term growth is dependent on the initial relative GDP per capita, political stability, economic stability, policies aimed at acceleration the absorption of technology as well as policies aimed at enhancing human capital and saving and investment ration. As the beta convergence model forecasts per capita GDP, overall GDP forecasts are devised by using population projections by the United Nations.