Russia: Slowing Despite High Oil Prices

The most obvious risk to Russia’s performance in 2013 is that a sharp decline in oil prices will result in a rapid deterioration of the country’s macroeconomic environment. Foreign multinationals operating in the market, however, have a much more immediate issue to deal with – the Russian economy is slowing, even as Brent prices remain above US$110.

Demand from business customers, consumers, and the government will be trending down in the next several months and continue in 2013; the timelines, however, will differ depending on the customer. Demand for business products and services is already slowing significantly as a result of stalling investment by Russian businesses. Consumer demand started to decelerate in late summer and will continue to weaken over the next several months as inflation, a weak currency, slowing salary growth, and the anticipation of a deterioration of the macroeconomic environment in the country weigh on consumer confidence. Finally, the Russian government plans to cut spending in 2013, including in sectors such as healthcare, education, and infrastructure. As a result, multinationals selling to the government can expect reductions in public sector demand starting from next year, or at best a slowdown in the implementation of existing public commitments.

Together, these trends will contribute to a slowdown in the Russian economy in H2 2012 and 2013. However, Russia’s slowdown has a broader set of implications for multinationals. As growth in many multinationals’ core markets – particularly in Western Europe – slows, companies are increasingly turning their attention to emerging markets as a source of growth that would compensate for Europe’s weak performance. Russia is high on the list of markets where multinationals will increasingly seek to grow their presence. As a result, multinationals operating in Russia will be facing increasing competition in the context of slowing market growth. Capturing opportunity in this environment will increasingly require a commitment of greater resources to the market, as well as excellence in execution through superior logistics, distribution, and marketing, among others. Thus, Russia’s slowdown should be a wake-up call for multinationals that taking advantage of Russia’s opportunity will increasingly require a sophisticated strategy and best-in-class execution.

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