Russia slashed its long-term growth target this week, admitting that its economic slowdown is a trend that is here to stay for the next several years.
While the reasons for the slowdown have been discussed extensively, one topic has remained overlooked – the slowdown is not playing out uniformly across Russia’s geography. This has significant implications for multinationals, the majority of which are not planning to pull out of Russia, but are instead looking to allocate their resources more efficiently and to capture growth niches on a segment and geographical level.
To help our clients prioritize Russia’s geographic opportunity, we analyzed the economic health of the country’s regions. We found massive region-level variations in performance. More importantly, we found that the slowdown has been much more pronounced across many regions than the headline numbers indicate – a sign that next year’s outlook could deteriorate further.
Three trends stand out:
Trend #1: Pockets of growth are driven by one-off factors
- Relatively fast growth in the Far East, Southern, and North Caucasus federal districts is driven by one-off projects, such as the Sochi Olympics, and federal government subsidies
Trend #2: Leading federal districts are underperforming
- Traditional engines of economic growth, such as the Central and Urals federal districts, are stagnating because of depressed investment by large industrial enterprises in their regions
Trend #3: Slower growth is geographically widespread
- In every federal district, there are at least several regions that are underperforming significantly, indicating that the economic slump is not isolated to a particular part of the country
The map below (click map to enlarge) summarizes our assessment of the economic health of Russia’s regions so far in 2013. We analyzed regional trends in the consumer and business sector, as well as among the increasingly-indebted regional governments, to find that demand in Russia is being driven by pockets of high growth that are geographically dispersed. This is likely to increase costs for companies looking to capture all growth pockets, and will push more multinationals to prioritize only a small number of regions, which are increasingly likely to outperform the rest. As a consequence, we are likely to see more multinationals focus on profitability and cost optimization of their local operations, rather than on making the kind of large investments that could help jump-start the country’s economy.
FSG clients can access the full report here.