Business and Financial Climate in the Far Eastern Region Deloitte CIS Research Center Moscow 2018 Business and Financial Climate in the Far Eastern Region
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Business and Financial Climate in the Far Eastern region Deloitte CIS Research Center Moscow 2018 Business and Financial Climate in the Far Eastern region Introduction 03 Key findings 04 Economy in figures 06 Financial climate 20 Gross regional product 06 Outlook for businesses 20 Structure of the economy 08 Uncertainty and risks 24 Labor market 10 Business development strategies 28 External trade relations 12 Financing sources 31 Small and medium enterprises 14 Business customers 32 Investments 15 Innovations and digitalization 33 News 18 Expectations of Far Eastern Business calendar 19 business leaders 36 Our respondents 37 Contacts 38 02 Business and Financial Climate in the Far Eastern region Introduction We are pleased to present the results of our financial climate research of the Russian Far Eastern Federal District. In recent years, the Russian Far East has been a particular focus for both federal authorities and large Russian and foreign companies. The Far Eastern economy has great growth potential, Sergey Lavsky and the District is taking active steps to increase its investment Managing Director, appeal and to help businesses develop. Deloitte CIS, Vladivostok Office In the course of our research, we surveyed top managers of the leading Far Eastern companies. Based on this survey, we tried to measure the sentiment of the business community and identify key strategies and constraints for business development. We placed a strong emphasis on digitalization and innovation strategies implemented by Far Eastern companies. We also tried to gather the most relevant statistical information about the District's economy. The research covers the following key topics: • Macroeconomic overview of the Far Eastern economy • Labor and capital market • Financial climate This report has been prepared by the Deloitte CIS Research Center. We hope that you will find it informative and useful. If you have any questions or suggestions regarding this report, please contact us at [email protected]. 03 Business and Financial Climate in the Far Eastern region Key findings Key economic Financial climate indicators in 2018 Gross regional product (GRP) Business climate The level of financial optimism of the Far Eastern Federal District and investments in the Far Eastern Federal District aligns with the country’s average • Accounts for about 5.5 percent • In 2017, fixed asset investments (0.28). of the national figure. in the District amounted to RUB 1,217 billion, with an increase • Financial climate estimates are highly • In 2017, the Far Eastern GRP totaled of 22 percent from 2016. uneven: RUB 3,960 billion, and in 2018, it is – positive – 55 percent forecasted to reach RUB 4,209 billion. • The leading Far Eastern regions in terms – negative – 27 percent of investment growth are represented • Sixty-four percent of the District's GRP by Amur, Yakutia and Sakhalin Regions • About half of the respondents is contributed by the Republic of Sakha, (+44 percent, +40 percent in the Far Eastern Federal District expect Primorsky Territory and Sakhalin Region. and +25 percent, respectively). a growth in revenues (52 percent) • Key economic sectors include the mining and operating profit(44 percent). • At comparable prices, core capital industry (28 percent) and transport investments in the Far Eastern • One in three Far Eastern companies and communications (13 percent). economy grew by 17.1 percent (33 percent) plans to increase in 2017, which is significantly above its capital expenditures. Labor market the national level (4.4 percent). • Every third company (32 percent) • In 1H 2018, the average nominal wage plans to increase its headcount, in the Far Eastern Federal District was External trade relations and 42 percent report an anticipated RUB 52.8 thousand per month, which • The District's exports exceed imports salary increase. is 24 percent above the Russian average. by almost 4 times. • Moreover, the average subsistence • The main trading partners are China Top 3 financing sources: level for all Far Eastern regions and the Republic of Korea, which account Internal sources is 1.5 times higher than the average • for 27 and 25 percent of the District's for Russia (RUB 15.3 thousand total commodity turnover, respectively. • Borrowings from banks in Russia versus RUB 10.0 thousand). Russian and foreign investments • Key export categories: • • The average value added per worker – oil and oil products – 52 percent in the Far Eastern Federal District is – precious stones – 18 percent • Companies in the Far Eastern Federal RUB 1,172 thousand – 22 percent – fish and seafood –11 percent District are more open to Russian above the national average according and foreign investments than companies to data for 2016. • Key import categories: in Russia on average. – machinery and equipment – 35 percent • In 1H 2018, the unemployment rate – vehicles – 13 percent in the District decreased to 5.4 percent. – metals – 9 percent 04 Business and Financial Climate in the Far Eastern region Uncertainties, risks Business customers and development strategies and innovations The level of uncertainty in the District is much higher than the national average, • Overall, 1H 2018 saw a re-alignment leading to a lower risk appetite. of the customer portfolios of Far Eastern businesses (a decrease in the share Risk factors with an extremely Priority business strategies of state orders and business refocusing negative impact on Far Eastern for the Far Eastern Federal District on the B2B segment). businesses in 2018–2019: in 2018–2019: • Forty-five percent of the respondents • Increased business regulation in Russia • Ongoing cost control in the Far Eastern Federal District report higher profitability through innovations. • Lower core business revenue • Cost cutting • Weakening of the Russian ruble • Increase of cash flows Top 3 technological • Geopolitical risks • Increase of domestic production innovations: Advanced accounting systems • Stagnation in the Russian economy • Organic growth • (50 percent) Full automation of selected The following risks are more important The following business strategies • business processes/chain for Far Eastern companies than for are more important for Far Eastern of business processes companies in Russia on average: companies than for companies ( and in Russia on average: 50 percent 36 percent • Higher trade barriers/protectionism respectively) • Increase of domestic production • Weaker external demand • Cloud technologies and big • Expansion into new markets data processing solutions • Increasing cost of capital ( and • Debt reduction 32 percent 27 percent respectively) In 2019, half of the companies The key development directions are planning a price increase for the Russian Far East One in two companies in the Far averaging 8 percent. are the CIS and Asia. Eastern Federal District (48 percent) does not engage in R&D. A third of the respondents • In 2018, R&D costs of Far Eastern in the Far Eastern Federal companies averaged 2.0 percent District (33 percent) expect of their revenues, which is almost additional price increase in 2019 half that of the average for Russia (by an average of 2 percent) due (3.7 percent). to the VAT rate’s hike to 20 percent. • R&D is generally carried out by dedicated units within a company, as indicated by 33 percent of the respondents. • Key digitalization drivers: – Management strategy – Market and competition • Key digitalization barriers: – Access to infrastructure – Staffing 05 Business and Financial Climate in the Far Eastern region Economy in figures Gross regional product Real GRP, GRP per capita, Trend % from the previous year RUB thousand • The GRP of the Far Eastern Federal District makes up around 106.8 105.4 641 607 5.5 percent of the national figure. 103.1 578 101.8 101.9 100.8 496 100.7 472 It amounted to RUB 3,960 billion 104.6 105.3 449 101.3 in 2017 and is projected to reach 100.3 98.6 99.1 99.4 RUB 4,209 billion in 2018. • In 2010–2016, the District's GRP grew at an average of 1.8 percent 2017 2015 2016 2011 2012 2013 2015 2014 2016 2010 per annum in real terms (net of inflation), which is slightly Far East Far East behind the national average Russia Russia of 2.3 percent. • The Far Eastern GRP per capita exceeds the national level by almost Real GRP forecast for the Far Eastern Federal District one third (29 percent as of 2017). 2017 2018 2019 2020 Physical GRP index,% 2.54% 1.42% 2.04% 2.55% Highlights The Republic of Sakha, Primorye Territory • Amur Region (growth forecast On the other hand, the Sakhalin and Sakhalin Region lead the way among for 2018 – 7.1 percent). This growth Region is expected to demonstrate all the Far Eastern regions in terms will be driven by increasing freight a 3.3 percent GRP decrease in 2018. of the size of the economy, accounting turnovers and construction volumes This is partly due to reduced production for 64 percent of the District’s GRP. for the Blagoveshchensk (Russia) – for the Sakhalin-II project as part Heihe (China) international border of the Piltun-Astokhskoye reservoir According to the base development crossing, Power of Siberia natural gas management plan. scenario, the highest mid-term growth pipeline and Amur Gas Processing of real GRP is anticipated for Far Eastern Plant near the city of Svobodny, Amur regions with smaller economies largely Region (one of the world's largest gas influenced by individual investment processing plants). projects. These are: • Magadan Region (growth forecast • The Jewish Autonomous District for 2018 – 3.5 percent). This progress (growth forecast for 2018 – 9.1 percent). will be fueled by the development The Kimkan and Sutar iron ore of gold-mining facilities concentration projects may also have in the Yano-Kolyma gold province a significant impact. and the implementation of investment projects in the energy sector. Source: Rosstat, Russian Ministry of Economic Development, macroeconomic forecasts of regional Far Eastern governments.