Russia through 2020: Moscow chooses stability over growth

While the worst of the economic crisis is thankfully over in Russia, growth over the next four years will remain weak. Tighter political control will remain top priority for the Russian government, with all other considerations subservient – including economic. Ultimately, without substantial structural reforms that improve the investment environment, Russia’s economy will continue to rely on the slow, gradual rise in commodity prices supported by general macroeconomic stability. Thus, very conservative economic policies focused on stability will shape the market. MNCs can therefore capture additional opportunities in the coming years, but should be prepared to win through superior execution, rather than by benefiting from a significant recovery in the market.

Political consolidation

President Putin has embarked on a policy of consolidating political control to ensure his continued rule in the face of years-long economic stagnation. Putin will increasingly strengthen his support base so as to guarantee that any alternative to his rule is equivalent to the destabilization of the state. Thus, MNCs can expect increasingly conservative policies focused on maintaining macroeconomic and political stability, which will limit growth potential and fail to improve the business climate. In particular, the government has made decisions in the past several months which indicate the direction of the country’s outlook:

  • Budget spending cuts in order to lower the deficit. Social spending will be maintained while investments in the national economy are cut
  • Replenishment of forex reserves at the expense of spending on the economy. Additional budget revenues from oil revenues above the forecast US $40/bbl in the budget will accrue to the Reserve Fund instead of increasing outlays for public salaries, pensions or other social programs
  • Potential future tax increases. Following the 2018 presidential elections, tax increases will likely include a rise in the VAT rate and/or the income tax as well as corporate tax hikes

By increasing pressure on the population with these policies, Putin is clearly confident that the real threat to his rule is not from large-scale popular protests but rather potential macroeconomic instability and an elite struggle.

Russia still remains a priority emerging market

Although Russia’s growth is likely to disappoint for several more years, particularly compared to the country’s strong growth prior to 2014, companies should consider this in the context of weak emerging markets growth globally. Russia’s problems are, for the most part, not unique and its size will provide opportunity for many companies even if expansion is slow. MNCs will find it difficult to fully compensate for Russia’s weaknesses by prioritizing other markets; instead, companies should find ways to optimize their performance in Russia.

Growth rates for Russia

Importantly, the Russian economy will face less risk factors in the coming years than most major emerging markets, while growth levels will be similar. Numerous other markets will contend with varying internal threats, from political instability in South Africa and Brazil, to currency-related risks in Nigeria.

Opportunities remain

Despite the recent downturn and mild recovery, consumers, as well as business and government customers, will increasingly rely on MNCs for the provision of goods, services and technology. More than two decades of Western imports has entrenched Russians’ desire in improving their living standards and enjoying a Western lifestyle. Meanwhile, years of weak domestic investment and entrepreneurial activity – which are set to continue – have left the local business environment unable to adequately satisfy this demand for many consumer, healthcare, industrial, and technological products. As result, Russian consumers and businesses will increasingly look to MNCs to fill this gap in the future.

Investment levels in Russia

Opportunities will remain, but execution will be critical to winning in the market. Despite the weak growth outlook, MNCs can plan with greater confidence and predictability than the past few years as growth levels are stabilizing, and there is less volatility with regard to the ruble and inflation. Firms should thus focus on their segmentation strategies and ensure they are targeting the right customers currently, which is particularly important since today’s customer segments will be relevant for the rest of this decade.


FSG clients can access our Russia 2020 report for a deeper analysis of the country’s long-term outlook and its implications for MNC strategies.

Not a client? You can purchase the report, Adapt to Win in Slowing Russia, from FSG’s online store.

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