Russia through a lens - Deloitte US...In Russia Through a Lens, we focus on current key trends in...

Russia through a lensDeloitte Research Centre | 12th issue | 3Q 2018

Macroeconomic outlookKey Russian macroeconomic indicators in 3Q 2018

Page 04

Media consumption in Russia 2018Recovery of tolerance for Internet advertising

8

Russian Pharmaceutical Market Trends in 2018Digital strategy: building digital bridges to end consumers

Page 26

Business and Financial Climate in the Far Eastern regionAsian markets are a key destination to expand business geography Page 34

Россия: сквозь призму последних событий

02

03

Russia through a lens

Contents

04Russia in figuresMacroeconomic outlook (GDP, inflation, trade indicators, currency rate, Central Bank key rate, commodity price dynamics etc.)

18Research Centre market analysis • Media consumption in Russia 2018

• Russian Pharmaceutical Market Trends in 2018

• Business and Financial Climate in the Far Eastern region

41Global windTop news: Russia and ChinaTop news: Russia and Europe

43Contacts

42Useful stickers

40Top M&A

We are pleased to present the latest edition of Russia Through a Lens, the macroeconomic journal produced by the Deloitte Research Centre in Moscow.

Established in December 2015, the journalis published quarterly and falls under the Research Centre’s monitoring activities.

In Russia Through a Lens, we focus on current key trends in the Russian economy and present our research in the following fields:

• Russia in Figures – statistical analysis

• Research Centre market analysis

• Top-5 M&As

If you have any questions or suggestions regarding this research, please do not hesitate to contact us at:[email protected]

Designed by the Deloitte Design Group, Moscow

mailto:cisresearchteam%40deloitte.ru?subject=

Russia through a lens | Russia in figures

04

Russia in figuresGDPGDP dynamics

Q3 GDP (at constant price 2016), bln RUB

«For this [economic] cycle, we expect to get past the lowest growth point in Q1 2019. Among other things, this has to do with higher VAT that will have a one-off negative impact. Starting from Q2 or Q3, our growth will continue to pick up.»Maxim Oreshkin, Minister of Economic Development of the Russian Federation

In January–August 2018, the GDP grew 1.6% according to the Russian Ministry of Economic Development. In July, the GDP growth rate was 1.8%, but in August it dropped to 1.0%. The deteriorated annual dynamics in agriculture, freight turnover, and manufacturing have contributed to the GDP growth slowdown.

Source: “Economic Snapshot. September 2018”, an overview by the Russian Ministry of Economic Development

The Russian Central Bank expects a YoY growth rate of 1.3–1.7 percent for Q3 2018.

Source: “Economy: facts, estimates, commentaries. August 2018” (analytical commentaries by the Russian Central Bank).

20,4

14 21,6

50

22,3

32

21,7

23

22,3

57

22,2

78

19,8

51

22,7

21

22,7

64

18,8

72 20,6

10

22,9

21

23,1

05

2009

2013

2017

2006

2010

2014

2018

*

2007

2011

2015

2008

2012

2016

In September 2018, Rosstat upgraded Russia’s 1H 2018 GDP growth forecast to 1.7 percent (previously, the growth was estimated at 1.6 percent). At the same time, the 2H 2018 forecast was increased to 1.9 percent (compared to the previous estimate of 1.8 percent).

1.8

6.8 10.8

1.5

33,2

48 60

,283

83,3

87

41,2

77 68

,164

86,1

49

38,8

07

73,1

34

92,0

37

26,9

17 46

,309

79,2

00

102,

000

2009

2013

2017

2006

2010

2014

2018

*

2007

2011

2015

2008

2012

2016

24.6 19.38.3

24.213.1

3.3-6.07.3

23.5 30.25.3

8.2 4.5 0.75.2 3.7 -0.2-7.8 1.88.5 4.3 -2.5 1.6

108,

900

2019

*

6.8

GDP, bln RUB GDP growth, % (at current prices)

GDP volume indices, %

Source: Rosstat, (*forecast) Institute for Economic Forecasting of the Russian Academy of Sciences (IEF RAS)

Source: Rosstat, (*forecast) Central Bank of Russia


05

Inflation rate, %

GDP forecasts

Inflation rate forecasts

Source 2018 2019 2020

Economist Intelligence Unit +1.7% +1.8% +1.6%

The Ministry of Economic Development

1.8% +1.3% 2.0%

Central Bank of Russia +1.5% -

+2.0%

+1.2% -

+1.7%

+1.8% -

+2.3%

IEF RAS +1.8% +1.6% +1.8%

Standard & Poor’s +1.8% +1.7% +1.7%

Moody’s +1.5% - -

Fitch +1.8% +1.5% +1.5%

Source 2018 2019 2020

European Commission +1.7% +1.6% -

World Bank +1.5% +1.8% +1.8%

International Monetary Fund (IMF) +1.7% +1.5% +1.5%

European Bank for Reconstruction and Development

+1.5% +1.5% -

Gaidar Institute +1.5% +1.4% +1.6%

Organisation for Economic Cooperation and Development

+1.8% +1.6% +0.8%

Inflation in January–September 2018*:2.52 percentInflation target** in 2018: 4.0 percent

*The inflation figure is the consumer price growth rate over the corresponding month of the previous year. (Source: Rosstat)

**The inflation target is set for the consumer price growth rate over the corresponding month of the previous year. (Source: Central Bank)

“The inflation risks arising from external conditions have come true<...>. We expect inflation to be in the range of 3.8–4.2% in 2018, in the range of 5–5.5% in 2019, and turning back to 4% in 2020.”Elvira Nabiullina Governor of the Bank of Russia

Source 2018 2019 2020

Central Bank of Russia 3.8% -

4.2%

5.0% -

5.5%

4.0%

IMF 3.5% 4.0% 4.0%

Vnesheconombank 3.5% 4.0% -

Bloomberg poll (consensus) 2.9% 4.0% -

Interfax poll (consensus) 4.0% 4.4% -

Economist Intelligence Unit 3.9% 4.4% 4.2%

Inflation

2006

2010

2014

2018

*

2007

2011

2015

2019

*

2020

*

2008

2012

2016

2009

2013

2017

11.9

6.1

12.9

8.8

6.5

9.0 8.8

11.4

13.3

6.6

5.44.3

3.42.5

5.34.0 4.0

3.8

Fact Central Bank of Russia (*forecast)

Ministry of Economic Development (*forecast)


06

Trade structurePeriod: January–July 2018

• Foreign trade turnover: USD 386.1 billion (+21.7% YoY)

• Trade balance: surplus of USD 112.2 billion (+USD 40.0 billion YoY)

• Exports: USD 249.1 billion (+27.9% YoY) Share of the CIS countries 12.7%, non-CIS countries 87.3%

• Imports: USD 136.9 billion (+11.8% YoY) Share of the CIS countries 11.8%, non-CIS countries 88.2%

Share of energy products in total exports, % (January 2006 – July 2018)

53.0

35.5

55.3

39.542.347.0

33.237.1

44.0 43.640.9

54.2

32.6

2006

2010

2014

Jan–

Ju

ly

201

8

2007

2011

2015

2008

2012

2016

2009

2013

2017

68.072.7

66.469.6

74.5

63.270.3 70.8 73.472.4 73.0

62.0

68.0

Share of products in total eхports to the CIS/non-CIS countries (January–July 2018)

Share of products in total imports from the CIS/non-CIS countries (January–July2018)

To non-CIS countries

To the CIS countries

Energy products 68.0% 37.1%

Metal products 10.2% 13.0%

Chemical products 5.1% 13.2%

Machinery and auto 4.1% 16.3%

Food and agriculture products 4.8% 8.9%

Timber, pulp and paper products 3.0% 4.5%

From non-CIS countries

From the CIS countries

Machinery and auto 50.1% 20.4%

Chemical products 19.2% 14.3%

Food and agriculture products 11.6% 21.6%

Metal products 5.9% 18.5%

Textiles and footwear 6.1% 7.2%

Energy products 0.5% 4.4%

Source: Federal Customs Service

Percentage in Exports to non-CIS countries

Percentage in Exports to the CIS countries


07


08

Exports (January–July 2018):

Percentage of exports In monetary terms YoY

In physical terms YoY

Categories

Energy products

64.2% 31.7% 3.6%

18.2% Kerosene

9.9% Coal

6.3% Natural gas

2.2% Gasoline

-10.8% Liquid fuels

-8.5% Coke

-8.3% Electricity

Metal products 10.6% 34.5% 15.4%

32.1% Cast iron

20.0% Copper and copper alloys

14.8% Semi-finished products of iron or non-alloy steel

12.7% Aluminium

-10.5% Flat iron non-alloy steel

Chemical products

6.1% 14.6% 5.7%

28.8% Products of inorganic chemistry

7.8% Abstergent

3.9% Plastics

-0.7% Fertilizers

Machinery and auto

5.6% 13.4% n/a

34.8% Electrical equipment

11.3% Ground transportation

2.0% Optical instruments and apparatus

4.9% Trucks

2.1% Passenger cars

Food and agriculture products

5.3% 31.9% 45.8%

80.2% Wheat

54.2% Cattle meat

Timber, pulp and paper products

3.2% 22.2% 2.5%

9.1% Plywood

5.0% Lumber

2.2% Cellulose

-4.5% Rough wood


09

Imports (January–July 2018):

Percentage of imports In monetary terms YoY

In physical terms YoY

Categories

Energy products 0.9% 7.4% -4.3%

Metal products 7.3% 15.2% 14.3%

15.5% Ferrous metals

-31.7% Pipes

-3.2% Flat rolled products of iron or non-alloy steel

Chemical products

18.6% 15.1% 3.6%

11.0% Abstergent

7.4% Rubber

5.4% Plastics

2.7% Inorganic chemistry

Machinery and auto 46.8% 10.2% n/a

19.1% Electrical equipment

12.7% Optical instruments and apparatus

3.7% Mechanical equipment

18.8% Passenger cars

-4.3% Trucks

Food and agriculture products

12.7% 7.6% 4.5%

11.6% Milk

11.3% Citrus

6.3% Cheese and curds

-36.9% Meat

-33.4% Butter

Textiles and footwear 6.2% 14.0% 2.1%


10

EUR vs. RUB USD vs. RUB

USD forecasts (average per year), RUB

EUR forecasts (average per year), RUB

Euro US dollar

Source 2018 2019 2020

Ministry of Economic Development 61.7 63.9 63.8

IEF RAS 62.5 66.5 67.0

Economist Intelligence Unit 63.3 66.9 68.4

Source 2018 2019 2020

IEF RAS 74.6 78.5 79.1


Currency rate

+3%

2Q

20

18

3Q

20

18

3Q

20

17

3Q

20

18

76.2 76.2

73.8

69.3

+10% +6%

2Q

20

18

3Q

20

18

3Q

20

17

3Q

20

18

65.6 65.6

61.959.0

+11%

100

90

80

70

60

50

40

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-A

pr-2

018

01-Ju

l-201

8

01-O

ct-2

018

RUB vs. EUR, RUB vs. USD

Average 2015EUR 68.0USD 61.3



Average 9m 2018EUR 73.5USD 61.6

Source: Central Bank of Russia



11

Central Bank of Russia key rate, %

Forecast of the key rate year-end, %


“The Board of Directors of the Bank of Russia resolved to increase the key interest rate to 7.5% per annum in order to limit inflation risks, including risks of increased prices and inflation expectations arising from exchange rate volatility. The forthcoming VAT increase should also be considered.”Elvira Nabiullina Governor of the Bank of Russia

Indexes (daily): October 2014 – September 2018

Source: Moscow Exchange

MICEX Index, RUB RTS Index, USD

Russia's credit ratings

Agency Rating Outlook Date

S&P BBB- Stable 20 Jul 2018

Moody's Ba1 Positive 31 Jul 2018

Fitch BBB- Positive 17 Aug 2018

On 14 September 2018, the Russian Central Bank resolved to increase a key rate by 0.25 percentage points to 7.50 percent.

On 18 September 2018, the MICEX index hit a fresh all-time high and surpassed the mark of 2,400 points for the first time ever. By the end of September, MICEX index also saw a 75 point increase.Similarly to the previous year, the USD-denominated RTS index is traded at the level of 1,100–1,200 points.

Source 2018 2019 2020

IEF RAS 7.25 6.75 6.50


The Central Bank’s key rate, indexes and credit rating

01-O

ct-2

014

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-O

ct-2

018

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-A

pr-2

018

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-ju

l-201

8

9.50

14.00

10.509.00

10.50

12.50

10.008.50

17.00

11.509.75

8.258.00

15.00

11.00

9.25 7.75

7.25

7.50 7.50

01-O

ct-2

014

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-O

ct-2

018

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-A

pr-2

018

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-ju

l-201

8

3,000

2,500

2,000

1,500

1,000

500


12

Foreign debt and reserves


Source: U.S. Treasury

Russian external debt International reserves of Russia, USD bln

Russia's investments in US treasury bonds, USD bln

Government, USD bln

CB and banking sector, USD bln

Business sector, USD bln

Share of external debt in reference to GDP, %

Monetary gold

Currency reserves

Other reserves

Ja

n-20

14

Sep-

2014

May

-201

5

Jan-

2016

Ja

n-20

18

Sep-

2016

May

-201

7

Mar

-201

4

Nov

-201

4

Jul-2

015

Mar

-201

6

Mar

-201

8

Nov

-201

6

Jul-2

017

Nov

-201

7

May

-201

4

Jan-

2015

Sep-

2015

May

-201

6

May

-201

8

J

an-2

017

Sep-

2017

Jul-2

014

Mar

-201

5

Nov

-201

5

Jul-2

016

Jul-2

018

Mar

-201

7

14012010080604020

0

31-D

ec-2

013

31-D

ec-2

017

31-D

ec-2

010

31-D

ec-2

014

30-Ju

n-20

18

31-D

ec-2

011

31-D

ec-2

015

31-D

ec-2

012

31-D

ec-2

016

489 600 491636 512729 518539 518

35

31

54

39 62

56

35

42

50

174

143

217

131

230

118 15

6 182

109

330

345

365

341

437

345

298

376

332

31-D

ec-2

013

31-D

ec-2

017

31-D

ec-2

010

31-D

ec-2

014

30-S

ep-2

018

31-D

ec-2

011

31-D

ec-2

015

31-D

ec-2

012

31-D

ec-2

016

479 385 459538 378510 433499 368

45

49

51

60

40

77

36

46 77

435

308

472

308

453

346 42

6

328

372

19

12

15

10

17

11

18

12

10

3229 3029

40

32 33

26

38


13

Household finances

Source: Rosstat

* The December interest rate is presented for 2011–2017, the August interest rate is presented for 2018

Inflation for January–September 2018: 2.52%

• Food products: 1.34%

• Non-food products: 2.99%

• Services: 3.57%

Household income

Individual loan portfolio Mortgage market


Average monthly nominal salary, RUB thousand

Nominal salary dynamics compared to the same period last year, %

Real disposable household income compared to the same period last year, %

Debt on individual loans, RUB bln

Debt dynamics on individual loans compared to the same period last year, %

Share of debt to population income, %

Mortgage loans issued for the period, RUB bln

Average weighted interest rate on long-term individual loans*, %

Average weighted mortgage interest rate, %

23.4

34.0

26.6

36.7

29.8

39.2

21.0

32.5

42.4

2013

2017

2010

2014

Jan–

Aug

20

18

2011

2015

2012

2016

112 109 111114

108112

107112

105

10699 102105

94104

98101 97

697

1,15

8

1,01

7 1,47

2

1,33

9

2,02

1

365

1,75

3

1,81

8

2013

2017

2010

2014

Jan

–Au

g

2018

2011

2015

2012

2016

17.4

12.9

19.7

15.517.3

12.9

17.1 17.5

13.1 12.59.6

12.3 12.512.410.611.9 13.4

11,2

95

5,53

5

10,6

34

7,71

2 10,7

74

9,92

6 12,1

35

4,06

4

13,8

54

2013

2017

2010

2014

Jan–

Aug

20

18

2011

2015

2012

2016

13

24 24

19

20

22

22

16

2014

14 21

39

1

29

13

36

-6

Mortgages issued in January–August 2018 are up by 65 percent from the same period in 2017.


14

Nickel forecast, USD/t

Copper forecast , USD/t

Nickel and copper

Unlike other base metals, nickel prices dropped moderately amid the US-China trade standoff, which has upset the global economic growth and demand for base metals. Nickel was insulated from a major price fall on buoyant outlook due to increased demand from electric vehicle producers and the stainless steel industry.

Source: Geojit Financial Services

Source 2018 2019 2020

World Bank 13,983 14,043 14,144

IMF 13,781 14,077 14,251

Economist Intelligence Unit 13,856 14,293 13,418

Citigroup 14,000 15,500 15,500

JP Morgan 14,258 13,306 13,125

Metal Bulletin Research 14,400 15,200 -

Source 2018 2019 2020

World Bank 7,043 6,923 6,824

IMF 7,132 7,228 7,242


Citigroup 6,500 6,800 7,000

JP Morgan 7,015 7,650 6,500


Top pricing (nickel and copper)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Sep-

17

Sep-

18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

10,0

45

8,53

0

9,31

5

10,4

25 11,8

50

10,9

60

13,7

45

9,37

5

14,9

40

8,85

5

8,49

5 10,6

35

11,1

70

11,3

85

10,0

20

13,3

90

10,2

20

14,0

65

10,5

20 12,5

45

8,82

0

9,42

5

9,77

0

10,0

55

12,6

45

9,45

5

13,6

75

11,7

95 12,8

10

8,61

0

8,46

5 10,5

15

9,96

5

13,4

90

8,95

0

15,3

00

5,10

6

4,66

6

4,84

7

4,87

2 6,93

8

6,01

2

6,92

0

5,96

8

6,53

6

4,57

1

4,81

6

4,91

0

5,87

9

6,78

0

5,85

4

6,66

5

6,38

2

6,18

3

6,49

8

6,16

6

4,70

7

5,03

1

4,60

3

5,53

0 7,26

4

5,72

8

6,74

8

6,84

1

5,87

6

4,49

9

4,56

7

4,88

0

6,00

4

7,05

7

5,67

5 6,74

6

Maximum for the period

Minimum for the period

14-year minimum


Nickel, LME, USD/t Copper, LME, USD/t

Source: Finam Holdings


15

Gold forecast, USD/oz

Aluminium forecast, USD/t

On the news of U.S. sanctions targeting Russian companies and their owners – including Russian aluminum giant Rusal, the second-biggest aluminum producer in the world – prices spiked on fears of Rusal’s supply being pulled from the market. However, the U.S. Treasury announced an extension [a delay in implementation], allowing businesses until Oct. 23 to unwind their business activities with Rusal (among others). As a result, the price has come steadily down since then.

Source: Metalminer

Source 2018 2019 2020

World Bank 1,346 1,302 1,263

UBS Group AG 1,315 1,330 1,350

Goldman Sachs Group 1,375 1,450 -


RBC Capital Markets 1,324 1,351 1,300

Citigroup 1,265 1,384 1,370

JP Morgan 1,355 1,412 1,460

Source 2018 2019 2020

World Bank 2,253 2,133 2,106

UBS Group AG 2,227 2,177 2,205

IMF 2,208 2,235 2,261


RBC Capital Markets 1,874 1,874 1,984

Citigroup 2,150 2,200 2,300

JP Morgan 2,237 2,265 2,150


Gold and aluminium

Top pricing (gold and aluminium)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Sep-

17

Sep-

18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

1,48

1

1,57

2

1,62

6

1,73

7

2,16

1

1,92

1 2,1

32

1,92

3 2,1

32

1,44

9

1,52

1

1,64

0

1,73

1 2,04

6

1,96

1

2,0

05

1,91

8 2,0

78

2,10

6

2,0

54

1,50

1

1,67

2

1,61

5

1,68

8

2,2

80

1,91

8 2,2

50

2,12

8

2,1

18

1,51

5

1,55

7

1,67

3

1,82

1

2,2

10

1,93

1 2,2

96

1,14

2

1,24

5

1,32

3

1,27

7

1,27

0

1,24

5

1,31

4

1,24

1

1,25

4

1,07

1

1,23

3

1,35

7

1,17

7

1,27

8

1,25

2

1,32

5

1,27

6

1,23

0

1,28

3

1,19

3

1,06

1 1,29

5

1,31

3

1,15

2

1,30

5

1,26

5

1,31

3

1,32

5

1,20

7

1,12

2

1,21

7

1,31

9

1,21

1

1,34

7

1,27

1

1,30

3






Aluminium, LME, USD/t Gold, COMEX, USD/oz


16

Brent oil and natural gas

In a move to tackle a global glut and support oil prices, OPEC and non-OPEC producers, including Russia, took a decision in December 2016 to cut joint oil output to 1.8 million bpd, with the October 2016 output as a baseline.

In July and September 2018, US President Donald Trump urged OPEC to ramp up oil production in order to reduce gasoline prices. However, at the joint meeting of OPEC and non-OPEC producers held on 23 September 2018 it was decided that no further increase in oil output should take place in the short term. The OPEC members agreed to keep oil production quotas at the June level. This decision drove the price of oil higher to a four-year high.

Natural gas forecast, USD/mmbtu

Crude oil forecast, USD/bbl

Source 2018 2019 2020

U.S. Energy Information Administration

3.0 3.1 -

World Bank 3.1 3.1 3.2

IMF 2.8 2.8 2.8


Source 2018 2019 2020

U.S. Energy Information Administration

71.7 70.6 -

European Commission 72.8 71.8 -

IMF 64.7 60.7 58.0

IEF RAS 72.0 71.0 70.0

JP Morgan 70.0 70.0 -


Central Bank of Russia (Urals)

69.0 60.0 55.0

The Ministry of Economic Development (Urals)

69.6 63.4 59.7

Top pricing (oil and gas)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Sep-

17

Sep-

18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

2.31

1.70

2.96

3.00

2.91

2.77

2.653.

04

2.92

2.25

1.95

2.84 3.

34

3.063.

19

2.732.83

2.783.

02

3.02

2.35

2.14

2.87

3.74

2.723.

28

2.783.05

2.92

2.22

2.28

2.90 3.

16

2.963.09

2.95

50

37

50

49

61

56 65

49

79

45

40 43

52

63

54

69

53

74

57

83

38 47

47 57

64

52

75

53

78

36

50

50 55

69

51

78






Brent crude oil, ICE, USD/bbl Natural gas, NYMEX, USD/mmbtu

Russia through a lens | Latest from Deloitte Research Centre

17


18

Latest from Deloitte Research CentreMedia consumption in Russia 2018Key findings

1 Proportion of the respondents who have indicated the Internet resource as the key one.

In 2015–2018, average outreach for the nine selected media channels remained at 53%

Media consumption patterns

Moscow is leading in terms of media outreach (on average for all nine channels) Media outreach is higher for men than for women

Employed respondents consume media more actively than the unemployed.

45%56%Employed Unemployed

Share of users, 2018

54% 51%60%Moscow Men Women

Video games and printed media audiences continue to decline

44%57%2015 2018

Printed media

45%53%2015 2018

Video games

Share of users, 2018

Russians of all ages name the Internetas the key source of information in 2018

Top 3 news sources

Top 3Internet resources

Internet preferences by age1

Information content

30%Internet (social media and blogs)

67%Television

Internet (news, analytics and official websites)

79%

62%YouTube

VKontakte

70%

42%Odnoklassniki

Over 65

61%Aged 16–24

Instagram

1%

91%Aged 16–24

VKontakte

44%Over 65

8%Aged 16–24

Facebook

34%Over 65

13%Aged 16–24

News websites

51%Over 65


19

1 Based on the usage index [proportion of those who own and use a device minus proportion of those who own a device without using it]2 Based on the feature usage index [proportion of those who have indicated a more frequent use minus the proportion of those who have indicated a less frequent use]3 Based on the media usage index: [proportion of those who have indicated a more frequent use minus proportion of those who have indicated a less frequent use]

There is a shift in Internet usage, with smartphones used for longer connections

Messengers are the most in demand smartphone feature among Russians

Technology dimension

57%35%2015 2018

Smartphone

Proportion of the respondents who often go online for long periods with smartphone

Increasing penetration of smartphones2

+40%Messengers

+30%Mobile calls

+19%Internet calls

+15%Social network apps

Usa

ge in

dex2

Messengers have gained popularity over the year1

The proportion of Russians using messengers

47%2017

WhatsApp

58%2018

33%2017

Viber

38%2018

7%2017

Telegram

10%2018

Growth in the usage of smartphone functionality1

87%72%2015 год 2018 год

Smartphone

Overall, media usage3 grew by +6%

Growth in media usage3 in 2018

Change in media usage

+29%E-books

+59%Internet

Between 2015 to 2018 the pace of decline of printed media usage accelerated.

The decline of radio usage stopped in 2018.

-26%-17%2015 2018

Printed media

0%-7%2015 2018

Radio

Decline in media usage3 in 2018

-12%E-books

-26%Internet


20

Top 3 product categories purchased online2

Top 5 advantages of online shopping

• possibility to compare products and prices across various stores

• possibility to get product information and read external customer reviews

• cheaper prices

• faster shopping

• 24/7 working hours

Top 5 disadvantages of online shopping

• difficulties in assessing physical characteristics of products (size, material quality)

• discrepancies in size and quality vs advertised or sale of counterfeit products

• long delivery after ordering

• complicated return procedures

• general lack of trust in products purchased online

19%Electronics

Games, movies and software

37%

14%Home appliances

75% of Internet users shop online

Online purchases

1 Based on the advertising loyalty index: [proportion of those favoring advertising minus the proportion of those who disapprove]2 Proportion of the respondents who generally shop online by product category.

Key reasons for blocking Internet ads

• Annoying advertisements

• Too Much advertising

The most annoying types of advertisements

• Full-screen banners

• Commercials interrupting videos

• Pop-up banners

• Videobanners with sound

Recovery of tolerance for online advertising1 after a decline in 2017

0%-5%2017 2018

Internet

37% of Internet users block online ads

Online ad blocking

10%7%Ad blocking

softwareIn-browser ad-blocking

tools

Smartphone/tablet

17%Total: Total:

15%21%Ad blocking

softwareIn-browser ad-blocking

tools

Computer/laptop

36%

Almost half of those using ad blockers would leave a website if it limits access to content when an ad blocker is running

Acceptable fees for online ad blocking service (only respondents willing to pay)

Potential demand for fee-based Internet ad blocking services

44%

RUB 300

39%


21


22

1 Average audience outreach for the 9 selected media channels.

Media consumption by category

Which of the following types of media have you consumed in the last two weeks (percentage)?

* Due to data collection method (an online survey)

Trend

• In 2018, average media reach1 in Russia remained at 53%, down 2 pp from last year.

• A decrease in video games and printed media consumption (down 8 pp and 13 pp from 2015, respectively) remains a stable trend.

• Attendance of theaters and concerts grew by 4 pp over the last two years

Highlights

• The highest media consumption1 is in Moscow (60%), and, on the average, people living in cities with a million+ population are more active when it comes to media usage: 55% vs 51% in smaller cities and towns.

• Men are more active in using various media channels than women (54% vs 51%).

• It is interesting to note that respondents who live alone are less active media users than those who don’t (a 7 pp difference).

• Pensioners and unemployed respondents are the least active media users (8 pp below the average).

• Respondents with a bachelor’s or master’s degree are significantly more active in using media channels than their less-educated peers (an 8 pp difference).

2018 2017 2016 2015

100*

93

59

45

44

42

39

34

17

Internet

Television

Radio

Video games

Printed media

Printed books

E-books

Cinema

Theater/concert

100*

92

62

50

50

45

42

36

15

100*

92

58

54

52

41

39

33

13

100*

94

61

53

57

44

44

37

16

Mos

cow

Men

Pens

ione

rs

Resp

onde

nts

with

sec

onda

ry e

duca

tion

St. P

eter

sbur

g

Wom

en

Stud

ents

Resp

onde

nts

with

mas

ter’s

or

bac

helo

r’s d

egre

es

Maj

or c

ities

Resp

onde

nts

who

live

alo

ne

Une

mpl

oyed

re

spon

dent

s

Citie

s an

d to

wns

Resp

onde

nts

who

do

not l

ive

alon

e

Empl

oyed

res

pond

ents

55 51 49 5551 55 5660 54 45 4755 48 45

53%

Aver

age

audi

ence

re

ach1


23

We asked our respondents to describe their attitude to the most annoying types of Internet advertising.

TrendAdvertising in the news feed in social networks, static banners and contextual advertising on websites are considered to be the most acceptable types of Internet advertising (loyalty index is at least -8%). Native advertising, muted video banners, in-text advertising and commercials before the video are treated neutrally by the respondents (loyalty index is at least -20%). Other types of advertising have loyalty index below -26% and may be considered as the most annoying, including: commercials interrupting a video (-29%), and full-screen banners which cannot be closed immediately (-33%).

HighlightsYoungest respondents aged 16–19 are more tolerant to native advertising, advertising in social media (loyalty index is at +6%), and contextual advertising (+3%).

In contrast, people over 65 are less tolerant to native advertising and advertising in social media (-10 pp and -7 pp below the average, respectively). The respondents of this age category are also less tolerant to in-text advertising (-8 pp).

What is your attitude towards various Internet advertising media?

1 The advertising loyalty index: [proportion of those favoring advertising minus the proportion of those who disapprove]

Perceived loyalty1

-6

-7

-8

-10

-11

-16

-20

-26

-26

-26

-29

-33

News feed in social networks

Static banners on websites

Contextual advertising

Native advertising

Muted videobanners

In-text advertising

Commercials before videos

Videobanners with sound

Full-screen banners which can be closed immediately

Pop-up banners

Commercials interrupting videos

Full-screen banners which cannot be closed immediately

Tolerance to Internet advertising


24

TrendAlthough the overall perception of Internet advertising has returned to 2015 figures, the most annoying and aggressive types of ads are forcing users to get protection against them.

Thus, 36% of PC and laptop users block advertising online: 21% of respondents have a special app, and 15% of respondents use a browser’s embedded functionality. Another 13% of respondents intend to start blocking ads on their devices.

17% of smartphone users block Internet advertising using: special apps (7%) and a browser’s embedded functionality (10%). The proportion of smartphone users who intend to start blocking advertising is much greater at 23%.

Overall, two out of five Russians block Internet advertising (37%): 22% of respondents block ads on PCs only, 2% of respondents block ads on smartphones only and 13% of respondents block ads on both devices.

HighlightsYoungsters aged 16–19 are more active in blocking Internet advertising (57% on PCs and 31% on smartphones). At the same time, respondents over 65 are less active in using ad blockers (26% on PCs and 7% on smartphones). This is mainly due to the awareness of Internet ad blocking, which is twice as low in the second group.

Adblocking apps

Do you use ad blockers (apps which block Internet advertising)? Which ad blockers do you use?

Use an ad blocker

Use browser adblocking functions

Think of having an ad blocker

Neither use nor plan to use an ad blocker

Not aware of ad blocking apps

23

26

20

17

20

22

21

21

28

25

29

18

26

16

18

20

16

23

25

19

19

13

14

14

22

14

21

19

42

33

50

29

40

42

44

47

37

38

35

52

40

58

17

21

14

31

15

17

16

19

21

23

14

16

13

7

Average

Men

Women

Aged 16–19

Aged 20–24

Aged 25–29

Aged 30–34

Aged 35–39

Aged 40–44

Aged 45–49

Aged 50–54

Aged 55–59

Aged 60–64

Over 65

13

14

11

11

7

11

16

11

11

14

18

12

19

5

10

12

8

3

11

9

12

6

14

9

12

10

8

10

41

32

51

29

41

42

44

47

37

38

35

52

41

59

36

42

30

57

41

38

28

36

38

39

35

26

32

26

PC/laptop users Smartphone/tablet users


25


26

Russian Pharmaceutical Market Trends in 2018Key findings

In 2017, the pharmaceutical market grew by 7.9 percent in ruble terms and by 5.9 percent in unit terms.

Pharmaceutical prices were up 0.3 percent.

The growth was driven by sales increasing in unit terms and a shift toward more expensive drugs.

Market growth forecasts for 2018 (in ruble terms):

• DSM Group: up by 4.3 percent

• RNC Pharma: up by 4-6 percent

• QuintilesIMS: up by 5 percent

• ALPHA Research & Marketing: up by 7 percent

Market growth forecasts for 2018 (in unit terms)

• DSM Group: up by 1 percent

• QuintilesIMS: up by 4.7 percent

• IPT Group: up by 4-6 percent

• ALPHA Research & Marketing –Commercial segment: up by 2 percent Public segment: no growth

In Russia pharmaceutical output increased by 3.2 percent to RUB 295 billion while medical product output grew by 0.4 percent to RUB 53 billion.

In 2017, imports grew faster than exports, in monetary terms adding 21.6 percent vs 14.6 percent respectively.

Russia comes in 14th place in the world by pharmaceutical market size.

View of the current state of:

• The pharma industry – positive perception: 63 percent, down 13 percent on the previous year

• Pharmaceutical businesses – positive perception: 88 percent

View of the future prospects of:

• The pharma industry – positive perception: a negative net balance of 8 percent

• Pharmaceutical businesses – positive perception: a positive net balance of 24 percent, down 18 percent on the previous year

Change in the share of imports as expected by the Russian market: down by 5 percent in monetary terms and down by 6 percent in unit terms.

The respondents named restricted admission to the public procurement system for imported drugs along with incentives for Russian pharma companies as the most effective tools for reducing drug imports on the Russian market.

Demand for more efficient regulation:

• Medicine pricing (85 percent)

• Regulation of the online market for medicines and healthcare services (online drugstores and telehealth providers) (84 percent)

• Public procurement regulation (82 percent)

Expectations for key indicators:

• Sixty percent expect an average growth of 10 percent in ruble terms in 2018

• Almost half of the respondents (48 percent) expect to see operating costs grow by 7 percent on average while another 40 percent anticipate an average decrease of 10 percent.

Delivering more marketing campaigns and initiatives is cited by Russian pharmaceutical companies as a top development strategy.

Shortcomings of government regulation, insufficient purchasing power of households and heightened importance of geopolitical risks have come to the forefront.

According to experts, track & trace technology will deliver better logistics, marketing and control over working capital.

Every fifth company (21 percent) has purchased track-and-trace equipment.

With 75 percent planning to take advantage of digitalization strategies, only 25 percent have implemented digital strategies so far.

Two out of three companies (62 percent) have incorporated end-consumer communication into the strategies they have developed or are in the process of doing so.

Market snapshot Pharmaceutical market sentiment Business development strategy


27

Russian pharmaceutical industry.Current situation

TrendSummer 2018 is characterized by a deterioration in the sentiment on the Russian pharmaceutical market, with positive responses down by 13 pp to 63 percent.

HighlightsGeneric manufacturer companies tend to be most optimistic about the situation on the market (+14 pp). However, their optimism is down 15 pp on the previous year.

Retailers of medicines and medical products maintain the least optimistic view, with negative responses up by 30 pp to 62 percent.

This negative sentiment has resulted in the overall sentiment among Russian pharmacies to go down by 24 pp. At the same time, all of the Russian producers surveyed expressed positive views of the situation in the industry.

The sentiment among foreign companies operating production sites in Russia has decreased significantly, down by 18 pp. This may be due to tightened criteria for obtaining a localization status for products.

4%13%

50%

33%

* Beneficiary owners are Russian residents** or the Russian subsidiary of a foreign company

Positive

Rather positive

Rather negative

Negative

Share of positive responses

63%

61%

75%

38%

62%

69%

54%

76%

68%

90%

67%

86%

73%

72%

20172018

Production (including foreign production) and/or wholesale of generics

Retail sales of medicines and medical products

Production (including foreign production) and/or wholesale of original products

Non-localized foreign company**

Localized foreign company**

Russian company*

All -13 pp

-7 pp

-15 pp

-29 pp

-24 pp

-4 pp

-18 pp

Change over the year


28

TrendFifty percent of respondents do not expect significant changes on the market. At the same time, pessimistic views are dominant among those predicting changes.Optimistic views have remained at 21 percent while pessimistic responses have increased from 13 percent to 29 percent, with a negative net balance of 8 percent.

Respondents who have expressed positive views on the situation tend to be similarly optimistic about the outlook for the industry, with 27 percent predicting the situation to improve while another 15 percent expect the opposite.

At the same time, there is a reverse trend among less optimistic respondents, a majority of 53 percent, who predict the situation will continue to deteriorate, compared to another 37 percent who do not expect any improvements.

HighlightsOriginal drug manufacturers maintain more positive views on what the future holds for the industry in 2018 (+9 pp).

Retailers are in their least optimistic mood, with 38 percent predicting the situation to deteriorate and only 12 percent expecting the opposite.

Localized foreign companies more often tend to mention that the industry situation will deteriorate in 2018 (39 percent). At the same time, a majority of non-localized foreign producers surveyed do not expect any changes (58 percent).

* Beneficiary owners are Russian residents** or the Russian subsidiary of a foreign company

A.B.C.

15%

53%

58%50%

37%

27%11%

21%

29%

Situation to improve

Situation not to change much

Situation to deteriorate

A. All

B. Optimistic about the current situation

C. Pessimistic about the current situation

Situation to deteriorateSituation to improve Situation not to change much

21%

30%

13%

12%

23%

19%

23%

50%

44%

56%

50%

46%

58%

38%

29%

26%

31%

38%

31%

23%

39%

Production (including foreign production) and/or wholesale of generics

Retail sales of medicines and medical products

Production (including foreign production) and/or wholesale of original products

Non-localized foreign company**

Localized foreign company**

Russian company*

All

Russian pharmaceutical market.Outlook for 2018


29


30

The survey has provided us with insights into how our respondents assess implementation risks facing their business units and what preparations they are taking to prepare for the changes.

TrendAccording to the responses, track & trace technology will definitely deliver a positive impact on logistics, marketing and control over working capital (a positive net balance of 0.47-0.52).

Even though respondents have generally provided positive responses as regards a potential impact from the technology on document flow and internal controls, almost one third (29 percent) expect a negative impact.

At the same time, respondents are nearly equally divided when it comes to the impact on tax and financial accounting, with the share of positive responses almost the same as the share of negative responses.

What is more interesting, almost one third believe that the track & trace system will have no impact on these business processes. This may be an indicator of a significant uncertainty in the market over the track & trace system.

When referring to negative impacts from the implementation of the track & trace system, respondents link these to a potential increase in controls and reports, as well as to higher production costs, both in terms of time and money.

Please indicate how the track & trace system will impact the business processes listed below?

Positive impact

Negative impact

Net impact*

*Positive responses minus negative responses

Preparations for implementing the mandatory track & trace system

0.48 0.19 0.08 0.060.52 0.47

62%

-13%

48%

-29%

35%

-29%

69%

-17%

56%

-9%

38%

-31%Lo

gist

ics

Prod

uctio

n

Prom

otio

n an

d sa

les

Man

agem

ent o

f wor

king

cap

ital

Doc

umen

t flow

and

inte

rnal

con

trol

s

Tax

and

finan

cial

acc

ount

ing


31

TrendAs in the previous year, preparations are primarily focused on software development and integration (60 and 79 percent, respectively) and equipment purchases (71 percent).

Most companies (69 percent) are also making plans to assess potential risks and business process optimization areas.

At the same time, most respondents (67-87 percent) have not included hiring new talent, providing focused training and obtaining loans to finance implementation initiatives into the necessary steps.

The table below shows how many companies have completed or are in the process of completing necessary initiatives. Equipment purchases and assessments of risks and optimization areas have seen the most significant progress over the year.

HighlightsLocalized foreign companies are more prepared for the implementation of a track & trace system, with 38 percent reporting completed software integration and equipment purchases.

Russian companies most often tend to consider obtaining loans to finance their track & trace implementation initiatives (39 percent), which generally includes companies with a turnover below RUB 10 billion.

Please specify whether your company is implementing or planning to implement these initiatives as part of the preparations for implementing the track & trace system.

2018 2017 Change over the year

Equipment purchases 21% 9% +12 pp

Development of related software 17% 13% +4 pp

Software integration 15% 14% +1 pp

Assessment of risks and business process optimization areas 17% 9% +8 pp

Integration of software with the existing accounting systems

IT staff training/hiring

Use of loans

Purchases of labelling, scanning and monitoring equipment

Commercial function staff training/hiring

Assessment of potential risks and business process optimization areas based on generated data

Production staff training/hiring

Development of related software

Finance staff training/hiring

17% 52%

17% 42%

4% 19%

13%

4% 17%

13%

15% 64%

21% 50%

2% 31%

Completed / implementing

Planning


32


33

How will the share of pharmaceutical imports change on the Russian market over the next two years?

TrendBased on the consensus forecast by representatives from pharmaceutical companies, pharmaceutical imports will decline by 6 percent in unit terms and by 5 percent in monetary terms.

Of the respondents surveyed, 64 percent expect that pharmaceutical imports will decrease within a range of up to 10 pp in unit terms and 54 percent expect a similar decrease in monetary terms while only 21 to 22 percent expect a more significant decrease.

At the same time, every fourth respondent (25 percent) expects an increase in pharmaceutical imports in monetary terms. Fourteen percent expect a growth in pharmaceutical imports in unit terms.

HighlightsCompanies operating in the hospital segment expect a stronger decline in pharmaceutical imports, both in monetary and unit terms (9 percent).

Original and generic drug manufacturers are divided in their view of how pharmaceutical imports will change in monetary terms, with a decline of 6 percent expected by original drug manufacturers and a decline of 3 percent predicted by generic producers.

Localized foreign companies expect pharmaceutical imports to see a sharper decline of 7 percent in monetary terms.

Larger companies with a turnover above RUB 10 billion and businesses employing more than 1,000 people tend to be more conservative in their estimates, predicting a decline of 4 percent, both in monetary and unit terms.

Economic expectations.Share of imported drugs

In monetary terms

In monetary terms

–5%

–6%

19%

6%

29%

21%

22%

27%

8%

6%

25% 37%

Growth by 5-10 pp

Growth by 1-5 pp

Decline by 1-5 pp

Decline by 5-10 pp

Decline by 10 pp and more


34

Business and Financial Climate in the Far Eastern regionKey findings

Gross regional product (GRP) of the Far Eastern Federal District

• Accounts for about 5.5 percent of the national figure.

• In 2017, the Far Eastern GRP totaled RUB 3,960 billion, and in 2018, it is forecasted to reach RUB 4,209 billion.

• Sixty-four percent of the District's GRP is contributed by the Republic of Sakha, Primorsky Territory and Sakhalin Region.

• Key economic sectors include the mining industry (28 percent) and transport and communications (13 percent).

Labor market

• In 1H 2018, the average nominal wage in the Far Eastern Federal District was RUB 52.8 thousand per month, which is 24 percent above the Russian average.

• Moreover, the average subsistence level for all Far Eastern regions is 1.5 times higher than the average for Russia (RUB 15.3 thousand versus RUB 10.0 thousand).

• The average value added per worker in the Far Eastern Federal District is RUB 1,172 thousand – 22 percent above the national average according to data for 2016.

• In 1H 2018, the unemployment rate in the District decreased to 5.4 percent.

Business climate and investments

• In 2017, fixed asset investments in the District amounted to RUB 1,217 billion, with an increase of 22 percent from 2016.

• The leading Far Eastern regions in terms of investment growth are represented by Amur, Yakutia and Sakhalin Regions (+44 percent, +40 percent and +25 percent, respectively).

• At comparable prices, core capital investments in the Far Eastern economy grew by 17.1 percent in 2017, which is significantly above the national level (4.4 percent).

External trade relations

• The District's exports exceed imports by almost 4 times.

• The main trading partners are China and the Republic of Korea, which account for 27 and 25 percent of the District's total commodity turnover, respectively.

• Key export categories: – oil and oil products – 52 percent – precious stones – 18 percent – fish and seafood – 11 percent

• Key import categories: – machinery and equipment – 35 percent – vehicles – 13 percent – metals – 9 percent

The level of financial optimism in the Far Eastern Federal District aligns with the country’s average (0.28).

• Financial climate estimates are highly uneven: – positive – 55 percent – negative – 27 percent

• About half of the respondents in the Far Eastern Federal District expect a growth in revenues (52 percent) and operating profit (44 percent).

• One in three Far Eastern companies (33 percent) plans to increase its capital expenditures.

• Every third company (32 percent) plans to increase its headcount, and 42 percent report an anticipated salary increase.

Top 3 financing sources:

• Internal sources

• Borrowings from banks in Russia

• Russian and foreign investments

• Companies in the Far Eastern Federal District are more open to Russian and foreign investments than companies in Russia on average.

Key economic indicators

Financial climate in 2018


35

The level of uncertainty in the District is much higher than the national average, leading to a lower risk appetite.

Risk factors with an extremely negative impact on Far Eastern businesses in 2018–2019:

• Increased business regulation in Russia

• Lower core business revenue

• Weakening of the Russian ruble

• Geopolitical risks

• Stagnation in the Russian economy

The following risks are more important for Far Eastern companies than for companies in Russia on average:

• Higher trade barriers/protectionism

• Weaker external demand

• Increasing cost of capital

In 2019, half of the companies are planning a price increase averaging 8 percent.

A third of the respondents in the Far Eastern Federal District (33 percent) expect additional price increase in 2019 (by an average of 2 percent) due to the VAT rate’s hike to 20 percent.

Uncertainties, risks and development strategies

• Overall, 1H 2018 saw a re-alignment of the customer portfolios of Far Eastern businesses (a decrease in the share of state orders and business refocusing on the B2B segment).

• Forty-five percent of the respondents in the Far Eastern Federal District report higher profitability through innovations.

Top 3 technological innovations:

• Advanced accounting systems (50 percent)

• Full automation of selected business processes/chain of business processes (50 percent and 36 percent respectively)

• Cloud technologies and big data processing solutions (32 percent and 27 percent respectively)

One in two companies in the Far Eastern Federal District (48 percent) does not engage in R&D.

• In 2018, R&D costs of Far Eastern companies averaged 2.0 percent of their revenues, which is almost half that of the average for Russia (3.7 percent).

• R&D is generally carried out by dedicated units within a company, as indicated by 33 percent of the respondents.

• Key digitalization drivers: – Management strategy – Market and competition

• Key digitalization barriers: – Access to infrastructure – Staffing

Business customers and innovations

Priority business strategies for the Far Eastern Federal District in 2018–2019:

• Ongoing cost control

• Cost cutting

• Increase of cash flows

• Increase of domestic production

• Organic growth

The following business strategies are more important for Far Eastern companies than for companies in Russia on average:

• Increase of domestic production

• Expansion into new markets

• Debt reduction

The key development directions for the Russian Far East are the CIS and Asia.


36

Outlook for businesses

Financial prospects

In July 2018, Deloitte CIS surveyed businesses operating in the Far Eastern Federal District. When analyzing the survey findings, we compared them with the insights from the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia.

Trend

• Overall, the Far Eastern respondents are rather optimistic about financial prospects. The District demonstrated the same level of sentiment (0.28) as the country as a whole.

• More than half of the Far Eastern respondents (55 percent) expressed an optimistic view of their company’s future financial position. This is inconsistent with the views of CFOs from other Russian regions who generally do not expect significant changes – this response was given more often than in the Far Eastern Federal District (by 37 percentage points).

• A pessimistic scenario was more often voiced in the Far East. The share of this response exceeds the national average by 18 percentage points.

• The differences in the views in the Far Eastern Federal District and nationwide generally indicate differences in the business environment across various segments.

Highlights

• Companies with revenues from RUB 2 to 10 billion were the most optimistic. The share of CFOs who gave an optimistic response is 28 percentage points higher than the average figure.

• Consumer sector representatives also reported higher-than-average (+23 percentage points) estimates of the business outlook for their companies.

• Pessimistic sentiments were recorded for the oil and gas and energy sectors, and for companies with revenues less than RUB 2 billion (43 percent each).

What do you think of your company’s financial prospects today as compared to the situation 6 months ago (early 2018)? (%)

* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia

** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01

279

0.280.27

18

55

55

36

Russ

ia*

Far E

ast Optimistic

No change

Pessimistic

Index**


37

Uncertainty and risks

Uncertainties in strategic decision making, %

Risk appetite, %

What is your assessment of political and economic uncertainties affecting the strategic decision-making in your company?

Do you think now is a good time to take risky decisions impacting your business?

7749

0.54

-0.0223

51

Russ

ia*

Far E

ast

1825

-0.64

-0.50

82

75

Russ

ia*

Far E

ast Low

High

Net level of uncertainty**

Yes

No

Risk appetite**

Trend

• The level of uncertainty in the Far Eastern Federal District significantly exceeds the national level. The net level of uncertainty for the District is 0.54, being 56 points above the Russian average.

• The majority of the Far Eastern respondents (77 percent) rate the current political and economic situation as highly uncertain.

• Given that the national CFO survey was held in March 2018, the high uncertainty level of the today’s political and economic environment cited by the Far Eastern Federal District may be attributable to recent political developments such as new US sanctions against Russia introduced in May 2018.

• A rather high level of uncertainty reported by the Far Eastern respondents resulted in a subdued risk appetite (-0.64 – 14 points below the national average).

Highlights

• Eighty-three percent of the Far Eastern companies surveyed with revenues of RUB 2 to 10 billion cite a high level of uncertainty, and none of the respondents in this group are prepared to make risky decisions.

• Companies with annual revenues over RUB 10 billion are more likely to take risks (by 26 points).

* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia

** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01


38

Impact of recent developments on Far Eastern businesses

Positive impact Negative impact

What impact have these events had on your company?

Positive

No impact

Negative

Positive

No impact

Negative

+45%33

11

56

+45%33

11

56

-27%

6

33

61

-66%

6

72

22

-28%

28

72

-72%72

28

Draft law on the raising of the retirement age, %

Draft law on VAT increase to 20%, %

Adoption of the Yarovaya Law, %

Introduction of US sanctions against Russia, %

• More than half of the Far Eastern respondents noted a positive impact from TASEGs and the Free Port of Vladivostok (the overall impact was rated at +45 percent).

• The impact of these developments is estimated as extremely positive by companies with revenues over RUB 2 billion (19 percentage points above the average). At the same time, representatives of oil and gas and energy companies more often (by 13 percentage points) indicate a negative impact from TASEGs.

• The majority of the District’s respondents believe that the passing of the draft law on the raising of the retirement age and the Yarovaya Law will not have an impact on their companies. These responses were given by 61 percent and 72 percent of the respondents, respectively. However, around one third of the respondents assess the impact of the above events as negative (33 percent and 28 percent, respectively).

• The draft law for the 20% VAT and the new US sanctions against Russia will have a negative impact on businesses according to the estimations of most respondents. The overall impact is estimated at -66 percent and -72 percent respectively).

• US sanctions present higher concerns for oil and gas and energy companies and companies with revenues of over RUB 10 billion (by 14 and 16 percentage points, respectively).

Establishment of TASEGs, %

Establishment of the Free Port of Vladivostok, %


39

Prospects of developing business abroad

When comparing the current business geography with expansion plans we noted that Far Eastern companies generally intend to develop business ties with the CIS countries (19 percentage points) and Asia (12 percentage points). The results for developing business ties with Asia align with the national trend.

of the companies surveyed cooperate with foreign partners

of the companies surveyed do not cooperate with foreign partners

plan to expand their business relations into other regions

do not plan to expand the geography of their business ties

80 % 20 %

35 % 65 %

сurrent business partnership geography

broadening the geography of business partnership in the future

EURO

PE

43%56%

ASIA100%88%

57%38%

CIS

NO

RTH

AM

ERIC

A

43%38%


40

Top 5 M&As*Target company Industry Bidder

companySeller company

Deal value (USD, mln)**

Additional information

Baim Copper Project (Chukotka Autonomous Region)

Energy and resources: mining industry

KAZ Minerals PLC

Aristus Holdings Ltd

900 According to the contract, Kaz Minerals will acquire 75% of the deposit first, and then acquire the remaining 25% depending on the project’s efficiency. As the copper market is expected to face significant supply shortages, the transaction will help the company to improve the copper production and increase the company’s value.

Blagosostoyanie NPF (50% Stake)

Financial services OJSC Gazprombank

OJSC RZD 160 Blagosostoyanie NPF plans to improve its competitive position on the financial market as a result of the transaction. As a result of the transaction, PJSC Gazprombank would hold 50% interest plus two shares, OJSC RZD – 25% interest plus one share, LLC RSHB Asset Management – 19.5% interest, and the remaining 5.5% interest would be distributed among minority shareholders.

PJSC MTS Bank (28.63% Stake)

Technology, media and telecommunications

OJSC Mobile TeleSystems

OJSC JSFC Sistema

131 The transaction will help OJSC Mobile TeleSystems to consolidate its business in the emerging Russian financial technology market and speed up the company’s access to the FinTech market. As a result of the transaction, OJSC Mobile TeleSystems increased its interest in PJSC MTS Bank to 55.24%, and OJSC JSFC Sistema decreased its interest in PJSC MTS Bank to 43.24%.

CJSC KapitalAgro

Consumer business: agriculture

LLC Rusagro Group

Sergey Chebotarev (Private Investor)

58 LLC Rusagro Group intends to modernize pig farms and a slaughterhouse, investing an additional USD 4.7 mln. As a result of the transaction, the holding company plans to increase its share in the consumer market.

LLC PET-Technology (49.9% Stake)

Healthcare JSC Pharm-standard

JSC Rosnano 46 The transaction will help the company to continue the geographical development of its network and extend the variety of nuclear medical services. JSC Pharmstandard will hold 100% interest in LLC PET-Technology.

(Russian companies)

* Mergers and acquisitions

** Public information about the transaction value

Source: Merger Market


41

Global windTop news: Russia and China

Top news: Russia and Europe

12 September 2018CJSC Biocad, a pharmaceutical manufacturer based in St. Petersburg, is planning to develop a plant in China. An agreement for the establishment of two joint ventures together with Shanghai Pharmaceuticals Holding Co. Ltd., a Chinese pharmaceutical company, was signed during the Eastern Economic Forum 2018. The companies are planning to commence the clinical development, manufacturing, and marketing of pharmaceuticals for oncological and serious autoimmune diseases.

21 August 2018China has suggested to build a speed highway between Vladivostok and the border town of Suifenhe in China. The estimated cost of the project is USD 7 bln. The speed highway is expected to reach 180 km.

24 September 2018Rostelecom and Nokia set up joint ventureRTC – Network Technologies, a joint venture between Rostelecom and Nokia, will focus on the production of telecommunication software and equipment. Nokia is ready to invest RUB 10 billion in this project.

13 September 2018Three companies have agreed to engage in the construction of pillars for wind turbines.PJSC Severstal, JSC Rosnano, and Spanish Windar Renovables S.L. signed an agreement on establishing LLC WRS Towers, a joint venture for manufacturing steel towers for wind turbines in the Rostov Region. Windar Renovables will hold 51% interest, Rosnano and Severstal will hold 24.5% interest in the joint venture. Total investments at the first stage are expected at RUB 750 mln.

20 August 2018China Communications Construction Company Ltd. (CCCC), a Chinese consortium, is planning to perform bottom deepening operations in the Primorye Territory.CCCC, a Chinese public consortium, won a contract for Shipbuilding Complex Zvezda LLC for RUB 15.3 bln.

15 August 2018The plant for manufacturing Haval sport utility vehicles has been developed in the Tula Region. Total funds invested by Great Wall, a Chinese automotive company, in the development of a plant for manufacturing Haval SUVs are estimated at USD 500 mln. The manufacturing of SUVs will commence in the first quarter of 2019.

11 July 2018Bishi, a Chinese company, is planning to establish a shipbuilding steel plant in the Primorye Territory. Bishi is going to establish a shipbuilding steel plant with a capacity of 1 mln tons as well as a coking plant and an electric power station in the Primorye Territory. Total investments in this project are estimated at USD 1–1.5 bln, and the construction will take around five years. The implementation of the project would provide employment opportunities for approximately 10 thousand people.

3 September 2018Leroy Merlin has been developing a major warehousing project.PNK Group is planning to develop a distribution center for Leroy Merlin with a floor space of 140 thousand sq. m in the northern part of the Moscow Region. Total investments in this project are estimated at RUB 10 bln. A transaction between PNK Group and Leroy Merlin will be the largest built-to-suit transaction over the history of the warehousing property market.

1 August 2018Hyundai has set a date for the construction of an engine plant. In November 2018, Hyundai is commencing the construction of a new plant for manufacturing 1.6-liter engines in Levashovo, Leningrad Region. Total investments in the new plant are estimated at RUB 27 bln.

31 July 2018Icelandic companies are engaged in the construction of a fish processing plant in Russia and share fish processing technologies. Skaginn 3X and Frost hf, two Icelandic companies, signed an agreement with a Russian party to provide technological support and equipment for a fish processing plant in Petropavlovsk-Kamchatsky.Through the use of new technologies, fish and sea products could be sorted by size, processed, and frozen.The preliminary cost of the project is estimated at USD 56-66 mln.

Source: InvestinRussia.com, Kommersant


42

Useful stickers

RESULTS OF THE MOSCOW FINANCIAL FORUM 2018“Finance for development: a new platform for the development of stable and balanced relationships” was the central focus of the forum.

TOP-250 MAJOR GLOBAL ENERGY COMPANIES, ACCORDING TO S&P GLOBAL PLATTSLUKOIL moved up four notches and now ranks second after ExxonMobil. Gazprom lost its top-one position, retreating to 17th place.

RESULTS OF THE EASTERN ECONOMIC FORUM 2018The Eastern Economic Forum 2018 has set an all-time record in terms of delegates and contracts: 6,002 delegates and 220 contracts for the total value of RUB 3,108 bln.

RBC TOP 500 RATINGFifty-one new companies were included in the rating; however, the Top 10 companies remain unchanged. The aggregate revenue of the companies increased by almost 10% for the year.

(In Russian)

TIMES HIGHER EDUCATION UNIVERSITY RANKINGS 2019The rating comprised more than 1,250 higher education institutions from 86 countries including 35 Russian universities.

FORBES PUBLISHED THE RATING OF RUSSIA’S LARGEST PRIVATE COMPANIESThe total revenue of Russia’s 200 private companies increased by 12 percent year on year in rouble terms to RUB 36 trillion.

(In Russian)

https://forumvostok.ru/en/news/itogi-raboty-vostochnogo-ekonomicheskogo-foruma-2018/

http://mff.minfin.ru/en/news/

https://www.rbc.ru/rbc500/

https://www.timeshighereducation.com/world-university-rankings/2019/world-ranking#survey-answer

http://www.forbes.ru/rating/367067-200-krupneyshih-rossiyskih-chastnyh-kompaniy-2018-reyting-forbes

https://top250.platts.com/Top250Rankings

Joe [email protected]

Lora ZemlyanskayaResearch Centre [email protected]

Dmitriy KasatkinSenior Research [email protected]

Mikhail GordeevSenior Research [email protected]

Vladimir SokolovSenior Research [email protected]

Yulia AfanasyevaAnalyst [email protected]

Victoria PigalkinaAnalyst [email protected]

Contacts

deloitte.ruAbout Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 264,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2018 AO Deloitte & Touche CIS. All rights reserved.

Russia through a lens - Deloitte US...In Russia Through a Lens, we focus on current key trends in...

Documents

Transcript of Russia through a lens - Deloitte US...In Russia Through a Lens, we focus on current key trends in...