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19
ECONOMIC OUTLOOK
Opportunity and risk
Opportunity and risk
Growth is forecast for Russia’s construction market in the coming years, but factors such as currency,
finances and a lack of transparency are holding things back.
Scott Hazelton
reports.
A
number of factors affecting the Russian
economy are expected to keep growth
moderate for the medium term at least.
Economic expansion is slowing amid declining
export earnings and slackening domestic demand,
and the country remains overly dependent on
energy exports (71.3% of export revenues in the
first half of 2013) to drive growth.
With this in mind, it is worth noting that energy
prices are expected to remain relatively stable at
somewhat lower than recent levels in the near-
to-medium term. This is down to geopolitical
tensions in producing regions, which are offsetting
the impact of moderate global demand, even as
alternative supplies of energy are rapidly coming
on stream.
Although domestic credit markets have thawed
since the global recession, commercial lending
rates are still high. At the same time, capital
continues to leave Russia as investors seek safer
havens.
GDP growth for the first half of the year was a
paltry +1.4%. While the second half of the year
appears stronger, IHS Global Insight still expects
2013 GDP growth to average just +2.4%. Some
traction is expected to be regained in 2014, when
Russian economic growth will rebound to +3.3%,
before it returns to the +3.8% range for the
medium term.
The currency, which has suffered from a sell-off
and slipping oil prices, looks set to regain some
strength in real terms against the US Dollar and
Euro when international capital markets grow
calmer. Fiscal revenues will slip with slower
economic growth and will not cover spending
commitments for expansive social spending and
public sector investment programs in 2013 to
2014.
Given the importance of investment, the
Ministry of Finance will allow up to half of the
National Prosperity Fund (NPF) to be spent
on major infrastructure projects. The US$ 86.9
billion NPF and the US$ 85.4 billion Reserve
Fund accumulate windfall hydrocarbon revenues
and were originally created to provide emergency
funds in case of a major economic downturn.
Hydrocarbon funds
However in April, the government decided to use
hydrocarbon royalties to plug the growing budget
deficit. And in June, President Putin indicated
that money from the NPF would be used to fund
construction of a high-speed rail link between
Moscow and Kazan, modernisation of the Trans-
Siberian railway and construction of the Central
Ring Road in Moscow.
The President also hopes public-private
partnerships will play a greater role in stimulating
growth. Even so, IHS Global Insight expects
only very slow progress on market-oriented
institutional and structural reforms.
Indeed, finances and a lack of transparency
in business practices create a high risk for
construction companies in Russia. The natural
resource extraction sector, which represents
25% of the entire Russian economy, faces
capacity constraints due to an extended period of
insufficient investment.
The situation adds to the urgency of improving
the investment environment to attract resources.
This is necessary to both shore up the extractive
sector and to modernise the manufacturing sector
to reduce dependence on production and export
of basic commodities.
Construction
Residential construction in Russia grew just +0.2%
in 2012 and is likely to decline -3.2% in 2013
as real per capita GDP slows. However, Russia is
committed to increase housing construction with
a goal to have 33% of Russian families able to
afford their own home by 2015 (up from 12%
in 2011).
This is partly an effort to reverse population
declines with a goal of having three children per
family. For example, St. Petersburg is poised to
see residential construction on 22 sites over the
next 15 years as € 11.6 billion (US$ 16 billion)
is invested to provide 450,000 new apartments.
The residential sector will turn the corner in
2014, with an increase of +4.5% as the economy
improves, and the medium term is positive with
+2.4% annual growth expected through 2017.
The headliners for non-residential construction
are world class sporting events – the 2014 Winter
Olympics and 2018 FIFA World Cup. Most of
the estimated US$ 10 billion Sochi construction
is completed or nearing final stages, however,
another US$ 22 billion is expected to be spent by
federal and local governments as well as private
investment for the World Cup.
Roughly one fifth of this will be spent on
stadiums in 13 different cities with another two
fifths dedicated to road projects, such as a highway
connecting Moscow and St. Petersburg. The
budget also includes the expansion of Russian rail
projects including the Baykal-Amur mainline.
Real spending on the construction of non-
residential structure grew +2.5% in 2012, with
institutional structures leading and industrial
structures lagging as export demand slumped.
november 2013
international
construction
Relative risk & reward in Eastern Europe and parts of the CIS
15
2
0
4
6
8
25
35
CONSTRUCTION SPENDING GROWTH
FIVE-YEAR RISK SCORE
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Global Average
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Hungary
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Ukraine
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Czech Republic
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Russia
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Bulgaria
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Slovakia
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Romania
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Poland
2
