Russia & CIS Express: A look at key issues and trends

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Russia & CIS Express: A look at key issues and trends

By Nick Page

Following a challenging past year, when drought and heat-wave slowed down economic activity, Russia’s growth trajectory is firmly back on track. And with inflation predicted to recede in the second half of 2011, the climate for investment looks increasingly attractive.

This macro backdrop aligns favourably with government plans to privatise several state-owned enterprises through to 2013. And with a raft of business-friendly reforms scheduled – including the abolition of capital gains tax on long-term investments from 2011 – there are real causes for optimism.

In this issue of PwC’s Russia and CIS Express, we showcase some of the opportunities now coming on stream. Russia’s surging demand for new infrastructure investment is a case in point. Since President Putin’s 2007 announcement that US$1 trillion would be needed to modernise the country’s infrastructure over the next 10 years, all levels of government are focusing on fostering the right environment for private investment.

The sheer scale of demand is enormous, with a number of highprofile private investments already improved. These include multiple PPPs and concessions in the St Petersburg and Moscow regions, from the Western High-Speed Diameter, the Orlovsky Tunnel and the Nadex light rail project. The utilities sectors are seeing even more activity and government support for technology and innovation is another high-priority area.

Looking ahead, Russia’s host role in two major sporting events – the 2014 Olympic and Paralympic Winter Games and the 2018 World Cup – can only boost demand for foreign investor participation.

As we report in this issue, preparations for the Sochi 2014 Games are already well underway, with a massive programme of development ongoing in Russia’s Caucasian Black Sea region. Besides funding a new, state-of-the-art national winter sports centre, the US$9.7 billion investment is set to transform the local and regional infrastructures, turning the surrounding Krasnodar district into a year-round tourism destination supported by new air, road and rail links, alongside upgraded utility projects and 21st century communications.

Crucially too, the Sochi 2014 ‘journey’ will continue long after the Games have concluded. By ensuring compliance with rigorous local, national and international environmental regulation, a core priority is safeguarding the region’s ecosystem and setting a new standard for environmentally efficient construction throughout Russia. At a grass-roots level, Sochi’s sporting infrastructure should deliver lasting benefits to future generations. To take just one example, the new Russia International Olympic University, being built in Sochi, will produce a new generation of sports managers, satisfying demand in Russia and worldwide for highly-qualified specialists in event management.

The ambition driving progress to Sochi 2014 and the World Cup looks set to redefine the art of the possible in international event management. And with the eyes of the world trained on Russia, there is every incentive to ensure world-class performance at every level. That said, Russia (and the CIS) continue to demand a long-term view from foreign investors, as Sir John Stuttard, co-chair of the Kazakh British Trade & Industry Council, explains later in this edition.

This is especially true of Russia’s financial sector, where more needs to be done to improve the quality of underlying contract law and regulation. That said, investor interest in Russia’s banks is definitely on the increase. Although the sector has bounced emphatically since the financial crisis, recording a combined net profit for 2010 of around US$20 billion, multiples remain relatively low and many local banks, particularly in the mid-tier segment, are keen to attract foreign buyers to fund future growth.

Further afield, we report on surging growth in Mongolia’s economy – and, specifically, the opportunities that this is creating for rapid expansion in the domestic financial sector. As the country’s mining boom gathers pace, some observers believe that it has the natural resources and economic potential to become the ‘new Qatar’. Commercial bank assets have doubled in the past three years and, as the country’s vast mineral potential is further exploited, huge demand is predicted in both corporate lending and retail business.

The recent strategic partnership announced between the London Stock Exchange and the relatively under-developed Mongolian Stock Exchange should provide a welcome boost to the financial infrastructure, putting in place a firm foundation for IPOs, dual listings and strategic partnerships with international investors. And with ING one of only a few international banking groups on the ground, the potential for significant competitive advantage is there for other early movers, provided they are prepared to put down roots in the country.

Of course, the song remains the same in some ways. Financial sector reforms are urgently needed to strengthen governance, transparency and capital adequacy. But provided these are forthcoming, there is every indication that this country – long off the map for most foreign investors – will start to be seen as a sustainable engine for future growth across the region.

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