FSG recently hosted an event with regional executives in Moscow that was centered on how to best accelerate growth amid Russia’s economic downturn. Below are the key takeaways from the discussion, as well as numerous other client meetings held in Moscow during the week:
Clients believe the worst is over and expect stronger business performance next year
Particularly compared to a year ago, clients have more optimistic expectations for their business in the coming year. Most clients are planning for a notable rise in both revenues and profits next year as compared to 2016. While some of this growth may arise from very minor improvements in the external market, there is a clear understanding that growth will primarily be achieved by a focus on execution and changes in their approach to the market.
MNCs continue to recognize the large and attractive market that Russia is and, despite expected prolonged slow growth over the long-term, corporate headquarters are not looking to cut down on their Russia investment in the coming year. Instead, many clients are reporting that their firms are planning to invest for further growth, or at a minimum commit enough resources to stabilize the business next year and wait for a recovery.
Demand dynamics will not be fundamentally different in 2017
Although MNCs anticipate better performance, they recognize that demand will remain relatively weak. FSG forecasts only slight depreciate (about 4% depreciation from the 2016 average rate to USD:RUB 70.5 in 2017) – in line with most clients’ expectations – as well as slower price growth. While the external environment will improve mildly, consumer, business, and public demand will remain muted as current private sector confidence and spending habits persist and government spending is cut further. For this reason, most clients are intending to raise prices, but by less than average inflation expected for 2017.
At FSG, we believe that the economy will return to positive growth in 2017 after two straight years of recession, thanks to stronger business activity and a minor uptick in consumer spending.
Government policy changes are coming, but are unclear
As the government has failed to choose a clear direction regarding its economic policy, our clients expect some regulatory changes, but are unclear what they will look like or how to respond to them. In particular, numerous taxes – ranging from a rise in the VAT rate to an increase in the Mineral Resource Extraction Tax (MET) to various taxes on targeted products – are under discussion, and some will likely be implemented in the coming year to 18 months, negatively impacting demand across the board. Moreover, in healthcare and other industries, the government is pressuring companies to localize but under-shifting and ambiguous rules; some companies have localized some aspects of production (packaging, for example) but struggle to localize further due to insufficient local supply chain options.
The MNCs we work with expect government spending to be cut further in 2017 and government tenders to continue to prefer local players. Public wages will likely be frozen in the budget as the government seeks to cut the deficit.
Firms are focusing increasingly on improving execution to win in the market
In adapting to the massive changes in the market in the past two years, our clients are adjusting the customer segments they are targeting, as well as increasing focus on improving their route-to-market and introducing new products. Most of our clients reported either having re-evaluated their customer segments or planning to do so in the near future. As segments have evolved, MNCs are introducing new products in order to adjust to the shifting demand and differentiate themselves from the competition, particularly on quality. MNCs are also trying to get more sophisticated support from their channel partners, demanding that partners place greater focus on brand building and demand generation, and increase information sharing.
After a challenging two years, MNCs are looking to the future with greater optimism than in recent years, but it is clear that the challenge is for business leaders to excel in execution in order to capture Russia’s large opportunities. Clients can download our latest outlook for Russia here for more information.