Business and Financial Climate in the Far Eastern Region Deloitte CIS Research Center Moscow 2018 Business and Financial Climate in the Far Eastern Region
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.
06 Business and Financial Climate in the Far Eastern region
CHUKOTKA AUTONOMOUS REGION 69.6 73.9
1.7 1.6
0.6 2.1
1,399.9 1,484.6
MAGADAN REGION 168.8 185.5 REPUBLIC 4.0 4.2 OF SAKHA (YAKUTIA) 3.5 3.7 KAMCHATKA 939.4 1,022.4 1,172.0 1,299.1 REGION 22.3 22.8 222.0 238.5 KHABAROVSK 2.1 0.7 5.3 5.3 TERRITORY 2.4 3.2 970.9 1,052.8 683.9 729.6 705.2 755.6 16.2 16.3
1.5 1.4 SAKHALIN 510.4 540.4 REGION 888.7 922.8 AMUR 21.1 20.6 REGION -3.3 0.0 346.8 363.6 1,821.8 1,887.9 8.3 8.1
7.1 0.8
435.1 457.0
JEWISH AUTONOMOUS REGION 2018 69.3 76.2 2019 PRIMORYE 1.6 1.7 TERRITORY GRP forecast for 2018–2019 9.1 3.9 820.3 868.9 GRP, RUB billion 423.6 464.3 19.5 19.4 Share of the District’s GRP, % 2.0 2.5 Changes in real GRP, % 425.7 450.7 GRP per capita, RUB thousand
Source: Regional Far Eastern governments, social and economic development forecast orders (base scenario)
07 Business and Financial Climate in the Far Eastern region
Structure of the economy
GRP and employment structures
Economy structure Employment structure Gross value added in 2016 in 2016 per worker RUB billion % '000 people % RUB thousand Mining 1,059 28 114 4 9,334 Transport and communications 496 13 341 10 1,454 Commerce 398 11 562 17 708 Manufacturing 361 10 416 13 867 Finance and real estate 274 7 245 8 1,118 Agriculture and fishing 267 7 236 7 1,133 Construction 252 7 282 9 894 Healthcare 169 4 225 7 752 Education 135 4 281 9 482 Other 346 9 503 16 687
•• Key economic sectors are the mining industry (28 percent) •• In the Chukotka Autonomous Region, the Republic of Sakha as well as transport and communications (13 percent). and Magadan and Sakhalin Regions, the mining industry These industries also show the highest added value per worker accounts for 40–55 percent of the GRP. (RUB 9,334 thousand and RUB 1,454 thousand respectively). •• The transport and communication sector has the greatest •• Overall, value added per worker averages RUB 1,172 thousand, relevance in the Primorye and Khabarovsk Territories, which is 22 percent higher than for the country as a whole making up 24 and 20 percent of their GRP, respectively. (RUB 957 thousand).
YoY changes in own mining YoY changes in the freight products shipped, % moved by sea ports, %
142 138 128 127 116 118 112 112 107 107 108 108 109 * 104 106 103 129 103 122 110 110 106 106 106 105 107 103 105 103 104 102 104 103 102* 6 m 2011 2011 2012 2012 2013 2017 2013 2017 2015 2015 2014 2014 2016 2016 2018 2010 2010
Far East Far East Russia Russia
•• The Republic of Sakha and the Sakhalin Region •• With 144 million tonnes of freight moved account for 78 percent of the mining products in 2017, Far Eastern sea ports contribute shipped by District in 2017. 25 percent of the national sea traffic.
•• Sixty-two percent of the freight carried within the Far Eastern sea basin is represented by bulk cargo and 38 percent – by liquid cargo.
Source: Rosstat, Association of Commercial Sea Ports * % from January–June 2017
08 Business and Financial Climate in the Far Eastern region
CHUKOTKA AUTONOMOUS REGION 50% 18%
12% 14%
6% 7%
5% 6%
MAGADAN REGION 39% 13% REPUBLIC 8% 14% OF SAKHA (YAKUTIA) 8% 10% KAMCHATKA 52% 10% 7% 7% REGION 8% 8% 22% 10% KHABAROVSK 8% 11% 16% 14% TERRITORY 8% 14% 6% 12% 20% 11% 8% 14% 16% 15%
16% 18% SAKHALIN 9% 9% REGION 54% 4% AMUR 9% 9% REGION 6% 14% 16% 11% 6% 6% Share of GRP 16% 3% Share of employment 13% 12%
11% 19% Mining JEWISH Construction AUTONOMOUS REGION Transport and communications 18% 10% PRIMORYE Commerce 11% 9% TERRITORY Agriculture and fishing 11% 13% 24% 11%
Manufacturing 11% 7% 18% 21%
Finance and real estate 12% 14%
Healthcare 10% 7%
09 Business and Financial Climate in the Far Eastern region
Labor market
•• The District's unemployment rate Average unemployment rate Human capital development index has been reducing since 2013. during the year, % The Far East Human Capital Development However, it is still slightly above Agency calculates an integrated the national average (5.4 percent 6.5 6.4 6.3 index based on 146 indicators vs. 5.0 percent in 1H 2018). 5.8 5.6 5.4 grouped into three categories:
•• The average nominal monthly wage 5.5 5.6 5.5 5.2 5.2 •• Population size in the Far Eastern Federal District 5.0 (demographic and migration data) is around 25 percent higher than the all-Russian figure, which adds •• Human capital quality (health 6 m 2013 2017 2015 a burden to businesses due to higher 2014 2016 2018 and longevity, education and cultural payroll costs. level, economic activity) Far East •• In 1H 2018, the highest payroll level •• Living standards (welfare, quality of life, Russia (RUB 98 thousand) was recorded safety, labor market environment) by the Chukotka Autonomous Region, and the lowest level Changes in real income This data is used to generate the overall (RUB 38 thousand) – by the Jewish and average monthly wage rating and individual ratings for each Autonomous Region. of the categories. Based on these ratings, 102.7 102.2* all Far Eastern regions are broken •• Higher wages are explained by higher 99.2 98.9 down into three groups (developed, expenses. The subsistence level 94.4 99.4 98.3 98.5* developing and underdeveloped). in various regions of the Far Eastern 95.3 93.5 Federal District is 1.5x above the The Republic of Sakha leads country’s average (RUB 15.3 thousand 52.8 49.0 the pack with an overall rating 46.1 42.9 vs. RUB 10.0 thousand in Q1 2018). 42.5 39.1 40.7 34.0 36.7
32.6 of 46.8. This region also has •• At the same time, real income the highest rating for population size in the Russian Far East has been falling (demographic and migration data). for three years now starting from 2015, and this trend persists over 1H 2018. Chukotka Autonomous Region 6 m 2017 2015 2014 2016 2018 is leading in terms of human capital •• The average inflation rate in 2017 was quality and living standards. ( 2.07 percent 0.45 percentage points * % from January–June 2017 below the national average). Changes in real monetary income, •• In the previous year, Yakutiya saw % from the previous year the largest increase in prices, Far East and the Amur Region saw the lowest Russia (4.44 percent and 1.71 percent, Average nominal monthly wage, respectively). RUB thousand •• In 1H 2018, inflation grew2.08 percent Far East from December 2017. Russia
Source: Far East Human Capital Development Agency
10 Business and Financial Climate in the Far Eastern region
CHUKOTKA AUTONOMOUS REGION 30.8 21.6
3.0 2.83
98.4 45.0
MAGADAN REGION 85.9 17.9 REPUBLIC 5.3 3.10 OF SAKHA (YAKUTIA) 82.4 43.9 KAMCHATKA 496.6 16.5 REGION 6.9 4.44 178.9 19.3 KHABAROVSK 66.5 46.8 5.2 2.09 TERRITORY 70.8 45.5 730.7 13.1
4.0 2.55
45.7 46.3 SAKHALIN REGION 275.1 13.5 AMUR 5.7 2.16 The Far East Human Capital REGION Development Rating 73.5 46.2 403.5 11.2 Developed: Ranked 1st to 3rd 5.8 1.71 Developing: Ranked 4th to 6th Underdeveloped: Ranked 7th to 9th 40.3 43.9
Value of indicators for 1H 2018
Manpower, JEWISH thousands of people AUTONOMOUS REGION
Unemployment rate, 79.4 12.7 PRIMORYE % 8.2 2.50 TERRITORY Average monthly wage, 37.7 42.1 RUB thousand 1,038.9 12.3
Subsistence level, 5.2 1.78 RUB thousand 41.0 46.0 Inflation, % (2017)
Human Capital Development Index (2017)
11 Business and Financial Climate in the Far Eastern region
External trade relations
Period: January 2017 – June 2018
•• Aggregate exports: USD 34.4 billion •• Aggregate imports: USD 9.2 billion
Top-3 commodity export categories Top-3 commodity import categories
Category Aggregate Share Category Aggregate Share exports, in exports imports, in imports USD billion USD billion Mineral fuels, oil and oil products 18.0 52% Machinery and equipment 3.2 35% Precious and semi-precious stones 6.3 18% Vehicles 1.2 13% Fish and seafood 3.9 11% Metals 0.8 9%
Top-5 export markets Top-5 import markets
Category Aggregate Share Category Aggregate Share exports, in exports imports, in imports USD billion USD billion Republic of Korea 9.6 28% China 4.2 45% China 7.8 23% Republic of Korea 1.2 13% Japan 7.6 22% Japan 0.9 9% Belgium 3.7 11% USA 0.6 7% India 1.2 3% Brazil 0.3 3%
•• The District's exports exceed imports •• Almost two thirds of the District’s by almost 4 times. imports (62 percent) are attributable to the Primorye Territory, and 19 percent – •• Key trading partners are the Republic to the Sakhalin Region. It is worth noting that of Korea and China. the Primoriye Territory is the only region •• The Sakhalin Region accounts in the Far Eastern Federal District with trade for almost half of the exports balance deficit (import exceeds export). (48 percent), and 22 percent – •• The Far Eastern Federal District by the Republic of Sakha. mainly imports equipment, vehicles •• Key export categories: (primarily ships) and ferrous metals. ––Mineral fuels – 77 percent of exports •• Key import categories: are generated by the Sakhalin Region ––Machinery and equipment ––Precious stones – 98 percent (Primorye Territory – 55 percent, of exports are generated Sakhalin Region – 24 percent) by the Republic of Sakha ––Vehicles (Primorye Territory – 57 percent, ––Fish and seafood – Primorye Territory Sakhalin Region – 32 percent) accounts for nearly 39 percent ––Metals (Primorye Territory – 46 percent, of all exports, and Sakhalin Sakhalin Region – 35 percent). and Kamchatka – for 24 percent each.
Source: Federal Customs Service
12 Business and Financial Climate in the Far Eastern region
CHUKOTKA AUTONOMOUS REGION 124 61 86% 29%
10% 22%
17%
MAGADAN REGION 582 92 REPUBLIC 73% 42% OF SAKHA (YAKUTIA) 24% 19% KAMCHATKA 7,425 304 9% REGION 83% 38% 8% 1,027 139 KHABAROVSK 16% 8% 92% 29% TERRITORY 4% 27% 3% 3,379 754 10% 28% 43%
19% 6% SAKHALIN 10% 6% REGION 16,604 1,739 AMUR Exports, USD million 90% 45% Imports, USD million REGION 6% 22% 500 365 14% Precious and semi-precious stones 49% 37%
Mineral fuels, oil 31% 18% and oil products 11% Ore and concentrates JEWISH Machinery and equipment AUTONOMOUS REGION Inorganic chemical products 202 47 PRIMORYE Animal products 65% 39% TERRITORY Ships and floating platforms 24% 25% 4,584 5,682 Ground vehicles 33% 31% Timber and woodware 19% 10%
Ferrous metals and products 13% 9%
Plant products 9%
Fish and seafood
13 Business and Financial Climate in the Far Eastern region
Small and medium enterprises
Changes in the key performance Government support for SMEs Far-Eastern Hectare metrics of SMEs •• In 2016, federal government grants •• During its first two years, this initiative for Far Eastern SMEs totaled yielded some 120 thousand land plot 26% 19% 19% RUB 522 million. applications (41 percent – for a main 9% 10% house, 13 percent – for a country 26% •• Total loans to SMEs issued by the Russian house (“dacha”) and 46 percent – 12% Ministry of Economic Development 7% 7% 5% for business purposes). The last category amounted to RUB 8.5 billion in 2016. is represented by agricultural, tourism 1,846 2,025 2,551 3,033 3,186 Source: Small and Medium Businesses and other business projects (26, 12 in Russia–2017 (statistical digest) and 8 percent respectively). 278 379 297 The Affordable Loans for SMEs •• As of July 2018, 42.2 thousand 2,908 243 Program, implemented in collaboration applicants received a land plot, 240 2,655 2,254 with the leading Russian banks, seeks 7.5 thousand obtained approval to support and facilitate the development and the remaining 70 thousand 1,606 1,782 of small and medium-sized businesses were under consideration. The average in the Russian Far East. There are two rejection rate for all regions is 4 percent. standard loan products: a working •• Four out of five applications capital loan (maximum maturity: are filed by the District’s residents. 3 years, maximum interest rate: Other Russian regions are 12.5 percent p.a.) and an investment 2013 2017 2015 2014 2016 primarily represented by Moscow loan (maximum maturity: 10 years, and Moscow Region (3.7 thousand maximum interest rate: 13.5 percent p.a.). Revenues of small and micro-sized businesses applications), Saint Petersburg in the Far Eastern, RUB bln and Leningrad Region (1.4 thousand Progress as of September 2017: Revenues of medium businesses applications), Krasnodar Territory in the Far Eastern, RUB bln •• Number of projects financed:382 (730 applications) and Sverdlovsk Region Changes in aggregate SME revenues, % (around 700 applications). •• Total cost of the projects: RUB 9.6 billion Far East (businesses, the Far East Development •• The highest demand has been Russia Foundation, and banks invested recorded for land in Primorye Territory, RUB 4.4 billion, RUB 3.0 billion the Republic of Sakha, Khabarovsk •• In 2017, Far Eastern SMEs earned and RUB 2.2 billion, respectively) Territory and Sakhalin Region, RUB 3.2 trillion. However, with its with 47.4 thousand, 20.4 thousand, •• Number of businesses financed: 5 percent YoY growth rate, the District 17.3 thousand and 15.2 thousand 332 (micro-sized businesses – 258, is well behind the national average applications, respectively. small businesses – 67, of 19 percent. medium businesses – 7) •• Applicants can enjoy 35 government •• The SME sector creates 20 percent support measures including beneficial •• Number of new jobs: 7,000 of jobs in the District. borrowing conditions, government grants Source: Far East Development Foundation and promotion programs. However, Source: Rosstat, Federal Tax Service only 1.6 thousand applicants have used these measures over the program’s life (i.e. less than 4 percent of the total number of applicants who received a land plot). Government support granted totaled RUB 257 million (an average of RUB 160 thousand per applicant).
Source: Надальнийвосток.рф federal information system
14 Business and Financial Climate in the Far Eastern region
Investments
Changes in core capital investments
•• The Far Eastern Federal District More than 50 percent 106.3 126.5 117.1 has seen an increase in core capital of the total 17-percent 106.8 100.8 98.5 98.9 99.8 investments since 2014. In 2017, investment growth 110.8 106.1 98.8 104.4 investments totaled RUB 1,217 billion is attributable to residents 93.4 89.9 88.1 83.2 (22 percent growth YoY). of TASEGs (Territories of Advanced Social 1,217 •• The Amur Region, the Republic and Economic Growth) of Sakha and Sakhalin Region lead and the Free Port of Vladivostok. 1,061 the way in terms of investment 1,001 These include foreign investors 971 growth (+44 percent, +40 percent that invested over RUB 90 billion 905 and +25 percent, respectively). 842 in the District’s economy – 788 811 •• At comparable prices, core capital 26 percent of the total foreign investments in the Far Eastern investments in the Russian economy grew by 17.1 percent economy in the previous year.”
in 2017, which is significantly above Aleksandr Galushka the national level (4.4 percent). Minister for the Development 2011 2012 2013 2017 2015 2014 2016 2010 of the Russian Far East until May 2018
Changes in core capital investments in the Far East, RUB bln
Index of core capital investments, comparable prices, %: Far East Russia
Successful Far East investment projects
Project Investor Amount invested Region Expectations in 2017 (aggregate) Natalka Mining PJSC Polyus RUB 60 billion Magadan Region •• Five percent increase in annual gold and Processing Plant (RUB 126–158 billion) production •• Status of the world's second largest gold producer for Russia (No. 1 is China).
Kimkano-Sutar Mining Petropavlovsk – RUB 23.5 billion Jewish Autonomous •• The plant will be completed in late 2018 and Processing Plant (Iron ore) Iron Ore LLC Region •• Upon commissioning of the Nizhneleninskoye – Tongjiang bridge, production will be export oriented.
Production of planed Amur Timber RUB 7.5 billion Khabarovsk Territory •• Forty percent increase in timber and dimensional timber Company (RFP (RUB 12 billion) (Komsomolsk production and 80 percent increase Group) TASEG) in wood pellet production by 2020
Pig breeding facility JSC Mersi Agro RUB 2.3 billion Sakhalin Region •• Construction of an advanced pork Sakhaklin (Yuzhnaya TASEG) processing plant to be launched in 2019 •• Covering regional demand Amur Oil Extracting Factory Amuragrocenter LLC RUB 2.4 billion Amur Region •• Production of soy protein isolate to meet (Belogorsk TASEG) 65 percent of the domestic demand
Production of container board and LLC USSURIYSK RUB 1.2 billion Primorye •• Phase-out of the District’s imports corrugated packaging materials Industrial Park (RUB 2.8 billion) Territory, Free Port (corrugated packaging) of Vladivistok
15 Business and Financial Climate in the Far Eastern region
Investments
Government support for Far Eastern investment projects
TASEGs Benefits and preferential treatment Free Port of Vladivostok The Far Eastern Federal District An area with special regimes in customs, has 18 TASEGs designed to facilitate TASEG FPV tax, investment, and related regulation. international competitiveness and market Income tax The special regime extend to the key expansion in the Asia-Pacific countries. 0% year 1–5 0% harbors of the Far East (the Khabarovsk 5%* Krai, the Sakhalin Region, the Kamchatka Results for 2017: 12% over 5 years 12% Krai, the Chukotka Autonomous District, Land tax and the Primorsky Krai). •• Number of TASEG residents: 251 0% year 1–5 0% •• Total investments: RUB 2,720 billion Results for 2017: Property tax •• Anticipated number of jobs – 0% year 1–5 0% •• Number of residents: 432
43 thousand ** to 2.2% over 5 years from 0.5% •• Total investments: RUB 366 billion to 1.1% ** “Two hundred new companies Unified social tax •• Number of new jobs: 36 thousand and 15 thousand new jobs will appear 7.6% year 1–10 7.6% in Far Eastern TASEGs and the Free Port of Vladivostok by the end of 2018. * For Kamchatka Krai ** By 2020 we will have as many as 350 new Depending on the region companies and 34 thousand new jobs.”
Aleksandr Krutikov Deputy Head of the Ministry for the Development of the Russian Far East
Social and Economic Development of the Russian Far East and the Baikal Region Government Program
The program aims to create conditions for advanced social and economic development of the Russian Far East, as well as the Irkutsk Region, the Republic of Buryatia and the Trans-Baikal Krai, ensure support to local investment projects and improve the District’s investment appeal. The program includes a federal target initiative focused on the development of the Kuril Islands in 2016–2025.
KPI 2017 2025 (actual performance) (target) Progress (target) Accumulated investments RUB 294 billion RUB 202 billion 146% RUB 2,352 billion Number of jobs 23.6 thousand 15.8 thousand 149% 113.1 thousand Population increase 10.6 million people 10.7 million people — 11.2 million people Tax collection RUB 1,006 billion RUB 1,062 billion 95% RUB 2,113 billion
2017 2018 2019 2020 2021 2022 2023 2024 2025 Funding***, RUB mln 13,586.1 20,516.9 20,552.6 20,306.8 46,652.3 46,652.3 46,652.3 46,652.3 46,652.3
*** Pursuant to Russian Government Decree No. 362 “Amendments to the Russian Government Program ‘Social and Economic Development of the Russian Far East and Zabaikalye Territory’” dated 30 March 2018
Source: Russian Far East Development Ministry, Russian Far East Development Corporation
16 Business and Financial Climate in the Far Eastern region
TASEG 1 2 3 TASEG 1 2 3 1 Beringovskiy 25 22.5 1.8 10 Priamurskaya 6 124.4 1.5 2 Kangalassy 12 92.6 0.5 11 Khabarovsk 29 44.7 3.7 3 Kamchatka 51 37.7 5.3 12 Kurils 1 6.3 0.7 Pevek 4 Southern Yakutia 7 32.9 3.7 13 Amuro-Hinganskaya 4 15.5 1.2 5 Nikolayevsk 5 2.9 0.6 14 Gorniy Vozdukh 13 18.2 1.2 CHUKOTKA 1 6 Svobodniy 3 948.4 2.7 15 Mikhailovskiy 11 77.0 3.9 AUTONOMOUS 7 Belogorsk 5 4.5 0.6 16 Nadezhdinskaya 39 33.5 6.2 REGION 8 Komsomolsk 20 81.6 5.5 17 Bolshoy Kamen 15 223.9 14.3 12 (-8%) 9 Yuzhnaya 4 14.6 0.9 18 Neftekhimicheskiy 1 939.2 8.3 3С2 As of 13.04.2018
1 Number of residents 2 Investments: RUB billion MAGADAN 3 Number of new jobs: thousand REGION 44 (+6%) KAMCHATKA REPUBLIC 3B2 REGION OF SAKHA (YAKUTIA) 37 (-1%) 3С2 385 (+40%) 2 3 3B1
KHABAROVSK Petropavlovsk- Kamchatsky TERRITORY 117 (-2%) SAKHALIN 3B1 REGION 4 299 (+25%) 5 3B1
6 AMUR Vanino 7 TASEG REGION 8
Free Port of Vladivostok 187 (+44%) 9 3B2 10 Korsakov T Core capital investments in 2017, RUB billion 11 12 (YOY growth, %) JEWISH 13 14 Investment grades T AUTONOMOUS REGION PRIMORYE TERRITORY 3B1 – low investment potential, moderate risk 3B2 – limited investment potential, moderate risk 10 (-19%) 126 (-4%) 3C2 – limited investment potential, high risk 3С2 3B1 15 16
17
18 Vladivostok Source: Russian Far East Development Ministry, Russian Far East Development Corporation
17 Business and Financial Climate in the Far Eastern region
News
Top news: Russian Far East and China
21 August 2018 11 July 2018 Center for International China proposed to build a high- Dongjin Group (China) to invest USD Cooperation on Russkiy Island speed highway between Vladivostok 120 million in an agricultural cluster and the Chinese border city of Suifenhe in Khabarovsk Territory •• In the course of the Eastern The cost of the project is estimated at USD The joint project agreement envisages Economic Forum–2017, 7 billion, the highway will be 180 km long. the construction of a dedicated the Far East Development seaport for agricultural shipments, Foundation and the Silk Road 20 August 2018 and the development of agricultural Research and Planning Chinese conglomerate CCCC storage infrastructure. Center signed an agreement will conduct dredging work as part of the preparation in the Primorsky Krai 13 February 2018 and implementation of a project China Communications Construction Dung Dairy Farming to invest to establish the Center Company Ltd. (CCCC) won a tender USD 302 million in milk production for International Cooperation to conduct work for LLC Shipbuilding in the Russian Far East on Russkiy Island (Vladivostok). complex Zvezda for RUB 15.3 billion. A memorandum of intent between Dung The project investments totaled Dairy Farming and the Mikhaylovskiy RUB 45 billion. TASEG outlines an agreement to implement an investment project Russian-Japanese investment involving the construction of animal platform (JPPV) farming units in Primorye Territory. •• In April 2018, the Far East Development Foundation, the Far East Investment and Export Agency, and Japan Bank for International Top news: Russian Far East and Japan Cooperation created a platform to promote Japanese investments 28 May 2018 24 May 2018 in the Russian Far East. Iida Group Holdings to consolidate Mitsui (Japan) to establish Primorsklesprom a ship management company •• The key objective is to facilitate The Japanese investor intends to build in Primorye Territory Japanese investments in the Far two added-value wood conversion Japanese ship operator Mitsui O.S.K. Eastern TASEGs and the Free and timber production facilities Lines Ltd. intends to establish a ship Port of Vladivostok and to provide in Primorye Territory. A portion of their management company in Primorye Territory end‑to-end support to investors, products will be exported and the rest for managing ships and storage barges. from investment decision will be used in the manufacturing through project launch. of prefabricated houses. The company’s 15 December 2017 •• Over the first few months investments into Russia may reach A new engine plant to appear the platform yielded four projects as much as USD 220 million. in Primorye Territory with a total worth of RUB 3.5 billion. Mazda Sollers – a Russia-Japan JV 25 May 2018 resident in the Nadezhdinskaya TASEG A USD 85 million soy and rapeseed in Primorye Territory will invest RUB 5 billion growing facility to be constructed in the construction of an engine plant. in Primorye Territory Previously, the company invested RUB 3 billion Sojitz Corporation (Japan) and MKR in a local car manufacturing project. Capital (Russia) signed a memorandum to implement a full-cycle soy and rapeseed production facility in Primorye Territory.
Source: InvestinRussia.com, TASS, Interfax
18 Business and Financial Climate in the Far Eastern region
Business calendar
Vladivostok Khabarovsk 2nd International Environmental Festival 20th Interregional Amur Trade GreenFest and Industry Fair–2018 27–29 September 2018 20–23 September 2018
26th International Construction Trade Show 21st World of Medicine Trade Show Health 27–29 September 2018 and Beauty TourExpoService–2018 20–23 September 2018 Vladivostok Russkiy Island 22nd Annual ASPA Conference Science. Education. Youth Policy. 3–5 October 2018 Trade Show–2018 20–23 September 2018 Russian Meetup: APR IT Community Forum 5–6 October 2018 22nd Far Eastern Transport. Special-purpose Machinery, Vehicles and Transportation International Active Living Trade Show Trade Show–2018 ActiveLife Expo 20–23 September 2018 15–17 November 2018 Yakutsk 5th International Medical Technology, Telecommunications. Safety–2018: Equipment and Products Trade Show 8th Interregional Information MedHealth Expo Technology Fair. 15–18 November 2018 6–8 November 2018
Moscow 8th Interregional Fair New Projects in Eastern Siberia SAKHAPROMEXPO–2018 and the Far East: 3rd Annual Eastern Oil 6–8 November 2018 and Gas Forum and Trade Show 3–4 July 2019 16th Interregional Fair Northern Construction Industry. Energy Industry. Utilities Sector–2019 12–14 March 2019
Interregional Fair MEDEXPO. Health and Beauty – 2019 3–5 April 2019
19 Business and Financial Climate in the Far Eastern region
Financial climate
Outlook for businesses
Financial prospects
In July 2018, Deloitte CIS surveyed businesses operating in the Far Eastern Federal District. When analyzing the survey findings, we compared them with the insights from the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia.
What do you think of your Trend Highlights company’s financial prospects today •• Overall, the Far Eastern respondents •• Companies with revenues from RUB 2 as compared to the situation are rather optimistic about financial to 10 billion were the most optimistic. 6 months ago (early 2018)? (%) prospects. The District demonstrated The share of CFOs who gave an optimistic the same level of sentiment (0.28) response is 28 percentage points as the country as a whole. higher than the average figure. 9 27 •• More than half of the Far Eastern •• Consumer sector representatives respondents (55 percent) expressed also reported higher-than-average 55 an optimistic view of their company’s (+23 percentage points) estimates future financial position. This is of the business outlook for their inconsistent with the views of CFOs from companies. 18 other Russian regions who generally •• Pessimistic sentiments were recorded do not expect significant changes – 0.28 for the oil and gas and energy sectors, this response was given more often 0.27 and for companies with revenues less than in the Far Eastern Federal District than RUB 2 billion (43 percent each). 55 (by 37 percentage points).
•• A pessimistic scenario was more often voiced in the Far East. The share of this 36 response exceeds the national average by 18 percentage points.
•• The differences in the views in the Far Eastern Federal District and nationwide generally indicate differences in the business environment Optimistic * across various segments. No change
Russia Pessimistic Far East Index**
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01
20 Business and Financial Climate in the Far Eastern region
Expected changes in key corporate financial metrics
What changes do you expect in the key metrics of your company Trend over the next twelve months? •• Revenue and operating profit growth expectations in Russia as a whole Company revenue, Operating profit, Operating costs, % % % are higher than in the Far Eastern Federal District. 71 62 •• Currently, half of the Far Eastern 60 companies surveyed (52 percent) expect 52 50 their revenues to grow by an average 44 of 13 percent, and only 44 percent anticipate an operating profit growth by an average of 14 percent.
•• Changes in operating costs are expected by 13% by 14% by 11% by two thirds of the respondents (67 percent), with most of them (75 percent) more inclined to predict an increase in costs by 11 percent on average.
11 14 by 36% 16 17 by 29% 17 by 22% Highlights 16 39 •• Revenue growth, on the other hand, 32 33 is more often anticipated by the oil and gas and energy sectors 24 24 (57 percent) 18 as well as companies with revenues from RUB 2 to 10 billion (60 percent).
•• Companies with revenues from RUB 2 to 10 billion tend to project Increase * * * an increase in operating revenues. No change The share of this response for this
Russia Russia Russia Decrease Far East Far East Far East category is 16 percentage points above the average.
•• An increase in operating costs is more often expected by companies with revenues of less than RUB 2 billion (23 percentage points above the average).
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
21 Business and Financial Climate in the Far Eastern region
Expected changes in key corporate financial metrics
What changes do you expect in the key metrics of your company over the next twelve months?
Cost of capital, Capital expenditure, % %
22 •• An absolute majority of the Far Eastern businesses surveyed (82 percent) do not 12 7 expect significant changes in capital by 10% by 20% costs. Only 12 percent anticipate 33 an increase in the cost of capital.
6 •• Over half of the companies surveyed (60 percent) think that their 13 82 capital expenditure will remain flat. At the same time, one in three 60 65 respondents (33 percent) anticipates an upward trend, the average estimate being +20 percent.
Increase * No change
Russia Decrease Far East
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
22 Business and Financial Climate in the Far Eastern region
Expected changes in key corporate financial metrics
What changes do you expect in the key metrics of your company over the next twelve months?
Headcount, Salaries, % % Trend Highlights 73 •• One in three respondents •• Companies with revenues of less (33 percent) anticipates an average than RUB 2 billion are more likely headcount increase of 12 percent. to increase their headcount Forty‑two percent expect salary growth (17 percentage points above
42 (an average increase of 7 percent). the average).
35 •• Salary increases are more often 32 anticipated by consumer sector companies and companies with by 12% by 7% revenues of less than RUB 2 billion (20 percentage points above the average).
by 29% 16 20 58 52 45
27
Increase * * No change
Russia Russia Decrease Far East Far East
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
23 Business and Financial Climate in the Far Eastern region
Uncertainty and risks
What is your assessment of political Do you think now is a good time Trend and economic uncertainties affecting to take risky decisions impacting •• The level of uncertainty in the Far the strategic decision-making your business? Eastern Federal District significantly in your company? exceeds the national level. The net level of uncertainty for the District Uncertainties in strategic decision making, Risk appetite, % % is 0.54, being 56 points above the Russian average. 49 77 25 18 •• The majority of the Far Eastern respondents (77 percent) rate the current political and economic 0.54 situation as highly uncertain. 82 75 •• Given that the national CFO survey was held in March 2018, the high uncertainty level of the today’s political and economic environment cited 51 by the Far Eastern Federal District may be attributable to recent political developments such as new US sanctions against Russia introduced in May 2018. -0.02
23 -0.50 •• A rather high level of uncertainty -0.64 reported by the Far Eastern respondents resulted in a subdued risk appetite (-0.64 – 14 points below the national average). Low Yes * * High No Highlights ** Russia Net level Russia Risk appetite Far East Far East of uncertainty** •• Eighty-three percent of the Far Eastern companies surveyed with revenues of RUB 2 to 10 billion cite a high level of uncertainty, and none of the respondents in this group are prepared to make risky decisions.
•• Companies with annual revenues over RUB 10 billion are more likely to take risks (by 26 points).
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01
24 Business and Financial Climate in the Far Eastern region
Key risks for businesses in the Far Eastern Federal District in 2018–2019
Tighter government regulation of business in Russia 2.18 •• Tighter government regulation is seen 2.04 as a key risk, which is estimated to be
Lower operating income 2.14 significantly higher than the average 2.15 for Russia (by 14 points).
Weakening of the Russian ruble 2.05 •• Also, respondents from the Far Eastern 2.04 Federal District are more concerned Top-5 risks Geopolitical risks 2.05 with geopolitical risks (by 34 points 1.71 than in Russia on average). This Stagnation in the Russian economy 1.91 may be because of the higher level 2.33 of uncertainty driven by the new
Rising competition in the market 1.86 sanctions against Russia introduced 2.29 after March 2018 when the national CFO survey was conducted; higher trade Rising trade barriers/protectionism 1.82 1.25 barriers/protectionism (+57 points) and an increase in the cost of capital Weaker domestic demand 1.73 2.49 (+39 points).
Decreasing cash flows 1.68 •• At the same time, the Far Eastern 1.73 respondents are less concerned
Increasing operating costs in Russia 1.64 with the risks having the largest 1.60 impact on the business environment in Russia according to the national Increasing cost of capital 1.64 1.25 CFO survey, such as weaker domestic demand, stagnation in the Russian Weaker foreign demand 1.50 1.07 economy and rising competition (76, 42 and 43 points respectively). Rising barriers for entry into new markets 1.50 1.16 •• Importantly, risks relating to innovative products were rated the lowest among Capital deficit 1.45 1.13 all the key risks and significantly lower than in Russia on average. Cyber threats 1.36 1.29
Social risks: impact of business 1.14 process automation (staff cuts) 1.07
Increasing operating costs abroad 1.09 0.89
Lower consumer interest in new products 1.09 1.53
Risk of competitors launching innovative products 0.95 1.53
Lower information transparency 0.95 1.29
Risks of implementing innovative projects 0.86 1.31
Far East Russia*
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
25 Business and Financial Climate in the Far Eastern region
Impact of recent developments on Far Eastern businesses
What impact have these events had on your company?
Positive impact Negative impact
Establishment of TASEGs, % Draft law on the raising Adoption of the Yarovaya Law, % of the retirement age, %
Positive 6 No impact 28 Negative 33 +45% -27% 33 -28% 56 61 72 11
Establishment of the Free Port Draft law on VAT increase to 20%, Introduction of US sanctions of Vladivostok, % % against Russia, %
Positive 6 No impact 22 Negative 28 33 +45% -66% -72% 56 72 11 72
•• More than half of the Far Eastern •• The majority of the District’s respondents •• The draft law for the 20% VAT respondents noted a positive impact believe that the passing of the draft and the new US sanctions against Russia from TASEGs and the Free Port law on the raising of the retirement will have a negative impact on businesses of Vladivostok (the overall impact age and the Yarovaya Law will not have according to the estimations was rated at +45 percent). an impact on their companies. These of most respondents. The overall responses were given by 61 percent impact is estimated at -66 percent •• The impact of these developments and 72 percent of the respondents, and -72 percent respectively). is estimated as extremely positive respectively. However, around by companies with revenues over •• US sanctions present higher one third of the respondents RUB 2 billion (19 percentage points concerns for oil and gas and energy assess the impact of the above above the average). At the same companies and companies with events as negative (33 percent time, representatives of oil and gas revenues of over RUB 10 billion and 28 percent, respectively). and energy companies more often (by 14 and 16 percentage points, (by 13 percentage points) indicate respectively). a negative impact from TASEGs.
26 Business and Financial Climate in the Far Eastern region
Currency risk management
Ruble-based financing/borrowing 50% 49%
Hedging 50% 24%
Currency diversification of the transaction portfolio 45% 27%
Use of the currency clause 27% 35%
Increasing the working capital 14% 20%
Refinancing of foreign-currency loans from Russian banks 14% 2%
Increasing the capital stock 5% 15%
Far East Russia*
Trend Highlights
•• Companies adapt their currency risk •• Ruble-based financing/borrowing management strategies to the market has higher appeal for consumer environment. Ruble-based financing and sector companies and companies hedging both came out as the number with revenues of less than RUB 2 billion one risk mitigation strategy used (28 and 21 percentage points above by the Far Eastern respondents the District’s average, respectively). (50 percent each). In addition, smaller businesses more often tend to use a currency clause •• We noted that ruble-based financing in their contracts (16 percentage points is equally popular in the Far East above the District’s average). and nationwide, while hedging is widespread in the Far East by a margin •• Hedging is the most attractive strategy of two to one (by 26 percentage points). for companies with annual revenues over RUB 10 billion (28 percentage points above the District’s average).
•• Currency diversification of the transaction portfolio is the favorite risk management strategy of the oil and gas and energy sectors (12 percentage points above the average).
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
** Fixing finished product prices in a currency other than currency of contract
27 Business and Financial Climate in the Far Eastern region
Business development strategies
Priority business strategies in 2018–2019
Ongoing cost control 1.82 Trend 1.80 •• Ongoing cost control is the unrivaled Cost cutting 1.73 1.51 leader both in the Far Eastern Federal District and in Russia in general, Increase of cash flows 1.45 with an index of 1.82 and 1.80, 1.22 respectively. The following two strategies 1.36 Expansion of domestic production strategiesTop-5 in the Far East ranking differ from those 0.76 identified for Russia as a whole. Business development through organic growth 1.32 1.55 •• Cost cutting ranks second, with an index of 1.73, which is 22 points above Expansion into new markets 1.23 0.67 the national figure). Increase of cash flows, with an index of1.45, is the third Mitigation of currency risk 1.18 favored strategy. 0.87 •• Increase of domestic production Digitalization of business functions 1.14 1.29 and expansion into new markets hold much higher appeal for Far Eastern Launch of new products/services 1.05 1.38 businesses than for Russia as a whole (the Far East index exceeds the national Mitigation of financial risks (interest rates, derivatives, etc.) 1.05 0.60 index by 60 and 56 points, respectively). •• Notably, digitalization and the launch Talent investments 1.00 0.96 of new products are used below average (by 15 and 33 points, respectively). Debt reduction 0.95 0.49 Highlights Use of external capital sources 0.91 0.45 •• Organic growth and cost cutting are more often rated as relevant strategies Increase of capital costs 0.59 0.58 by companies with revenues less than RUB 10 billion (by 34 and 26 points Increase of marketing research and PR costs 0.41 0.58 respectively). Oil and gas and energy companies hold the same view. Investments in startups (domestic 0.36 and international accelerators) 0.53 •• Experts from the consumer sector favor
Acquisitions in Russia 0.27 an increase in domestic production 0.38 20 points above the average.
Disposal of assets 0.27 •• Debt reduction is more highly rated 0.16 by companies with revenues less Increase of dividends or share buyback 0.23 than RUB 2 billion (by 34 points). 0.18
Increase of production abroad 0.23 0.22
Acquisitions abroad 0.09 0.25
Far East Russia*
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
28 Business and Financial Climate in the Far Eastern region
Pricing policies
Implemented in 2017, % Planned for 2018–2019, % Trend
50 •• Over half of the Far Eastern 47 45 respondents (55 percent) reported 40 35 that their companies did not 35 change their pricing policies in 2017. 34 However, another 40 percent of the companies surveyed increased +12% +8% their prices by an average of 12 percent. •• In 2019, half of the companies 19 are planning a price increase averaging 5 5 8 percent.
-5% 13 -5% 16 55 •• Remarkably, price increases are primarily anticipated in the oil and gas 49 45 40 and energy sectors (71 percent). •• A third of the respondents in the Far Eastern Federal District (33 percent) expect additional price increase in 2019 (by an average of 2 percent) due to the VAT rate’s hike to 20 percent.
Price increase * * No change Russia Russia
Far East Far East Price decrease Net balance
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
29 Business and Financial Climate in the Far Eastern region
Prospects of developing business abroad
of the companies of the companies surveyed surveyed 80 % cooperate 20 % do not cooperate with foreign partners with foreign partners
plan to expand their do not plan to expand business relations the geography of their 35 % into other regions 65 % business ties CIS EUROPE ASIA NORTH AMERICA
38% 38% 57% 43% 56% 43% 88% 100%
сurrent business partnership geography broadening the geography of business partnership in the future
When comparing the current business geography with expansion plans we noted that Far Eastern companies generally intend to develop business ties with the CIS countries (19 percentage points) and Asia (12 percentage points). The results for developing business ties with Asia align with the national trend.
30 Business and Financial Climate in the Far Eastern region
Financing sources
Please rate the attractiveness of the following financing sources Attractive financing sources for your organization. •• Internal sources
•• Borrowings from banks in Russia 9% 18% 10% 45% 45% 59% 59% 32% 36% 28% •• Russian and foreign investments
0.50 0.36
0.31 •• The first and second positions 0.27 in the Far East ranking coincide completely 0.08
0.05 with those in the national rating.
Attractive •• Internal sources are mostly favored Unattractive by companies with revenues of less -0.04
-0.09 Net balance than RUB 2 billion (12 percentage -0.18 -0.17 points above the average).
•• Borrowing from Russian banks is highly relevant for most companies in the oil and gas and energy sectors
-9% (71 percent). -14% -18% -27% -27% -27% -27% -28% -32% -23% Also respondents from those * industries more often prefer foreign investments (12 percentage points in Russia Leverage above the average). Borrowing Issuing bondsIssuing Issuing sharesIssuing •• Companies with revenues of RUB 2 Internal sources to 10 billion rate the efficiency from banks abroad Crowdfunding,ICO Foreign investments Foreign Russian investments Russian Government financing Government Borrowing from banks of borrowing 14 percentage points above the average.
•• Companies in the Russian Far East are more focused on raising Russian and foreign investments than companies in Russia in general. In the country as a whole, both sources are generally viewed as unattractive.
* Crowdfunding – the practice of funding a project or venture by raising donations from a large number of people. ICO (Initial Coin Offering) – a blockchain-based fundraising tool similar to crowdfunding.
31 Business and Financial Climate in the Far Eastern region
Business customers
Customer focus, %
13 Company Customer 5 policy 0.05 0.19 needs
41 -1 0 +1
Far East 41 Russia*
Company policy has absolute priority •• Forty-one percent of companies •• Forty-one percent Company policy has somewhat higher priority in the Far East have well-balanced of the business representatives than customer interests/needs internal policies. indicated the primacy Company policy and customer interests of customer interests. have equal priority •• One in five respondents (18 percent) Customer interests/needs have somewhat stated that their company prioritizes higher priority than company policy internal policy over customer interests. For most of the businesses, company policy is an absolute priority.
Customer portfolio
Customers by segment Customers by loyalty Customers by payment capacity
B2B New customers +22% +11%
Customers +20% with an adverse -20% B2G financial -28% situation Loyal customers**
-11% B2C ** Over 2 years +6%
•• Overall, 1H 2018 saw the re-alignment •• Respondents generally point to a minor •• On average, the District's share of the customer portfolios of Far Eastern increase in the share of new customers of customers with an adverse financial businesses (decrease in the share in their company’s portfolios. situation has remained at the same level. of state orders and business refocus While 20 percent of the respondents •• This is consistent with the “expansion on the B2B segment). have managed to reduce the share into new markets” strategy of such customers, another above, which is a strong priority 20 percent say that it has increased. for companies in the Far East.
* Based on the findings of the 1H 2018 Deloitte CFO Survey
32 Business and Financial Climate in the Far Eastern region
Innovations and digitalization
Innovations and profitability, %
What is the economic effect of innovation on your company's profitability?
17
Growth 5 •• Forty-five percent of the respondents Up to 5% in the Far Eastern Federal District 5–10% reported higher profitability after 45 22 10% or more they had introduced innovations. 50 Unchanged Among them, 17 percent indicated Decrease an increase in profitability of up to 5 percent, and 22 percent noted that the increase was from 5 to 10 percent.
6
Use of innovative technologies, %
Advanced accounting systems (CRM, SAP, etc.) 50 27 23
Full automation of selected business processes 50 23 27
Full automation of the business process chain 36 18 46
Cloud technologies 32 14 54
Big data processing solutions 27 18 55
Internet of Things solutions (V2V communication, IoT technologies) 18 14 68
Blockchain settlements [2] 14 5 81
Process robotics 5 18 77
Augmented or virtual reality 5 14 81
Artificial intelligence [1] 0 18 82
Implemented/implementation in process To be implemented within the next 12 months Neither implemented nor to be implemented
Trend Highlights
•• Advanced accounting systems •• Companies with revenues of more •• Full automation of the business and full automation of selected than RUB 10 billion implement process chain, big data processing business processes are the most innovative technologies more often and blockchain-based settlements popular technological innovations than other companies. Almost eight are also popular among the largest in the companies of the Far Eastern out of 10 respondents representing companies of the Far Eastern Federal Federal District (50 percent large companies (78 percent) reported District (11, 15 and 19 percentage each). These technologies also a full automation of selected business points above the average, respectively). demonstrate leading positions processes. Oil and gas and energy •• Oil and gas and energy companies in other Russian regions. companies gave this response more often (by 14 percentage points) somewhat less often (57 percent). tend to implement cloud technologies.
[1] Artificial intelligence (computers that model and deliver various types of human intellectual processes or behavior)
[2] Blockchain (a special structure for recording groups of transactions)
33 Business and Financial Climate in the Far Eastern region
Map of innovation sources
•• Almost half of the companies in the Far Dedicated division Eastern Federal District (48 percent) in the company do not engage in R&D (11 percentage
61% points above the average for Russia). •• A dedicated unit within the company serves as the main source of innovation State-owned 33% Outsourcing: educational institutions major both in the Far Eastern Federal and scientific research hi-tech company District and in Russia as a whole institutes 10% 7% 7% 14% (33 and 61 percent, respectively).
0% 5% 12% 10% However, only one in three Far Eastern companies has such a dedicated unit in place.
Technology parks, Outsourcing: •• Technology parks, venture funds venture funds, minor and accelerators are the least popular accelerators high-tech startup sources of innovation used only by 5 percent of Russian companies and none of the Far Eastern companies. Far East Russia*
R&D expenses in 2018–2019
Average R&D expenses in the Far East (% of the revenue)
Trend Highlights 64 59 •• In 2018, research and development •• Companies earning more than expenses averaged 2.0 percent RUB 10 billion a year tend to spend 27 23 % of the revenue in the Far Eastern 5 to 10 percent of their revenue 14 13 2.0 2018 Federal District and 3.7 percent on R&D (19 percentage points in other Russian regions. above the average).
•• In 2018, most Far Eastern companies •• Three out of four companies % 2.2 (67 percent) invested less than 1 percent in the Far Eastern consumer sector 2019 of their annual revenues in R&D. (75 percent), and 83 percent of companies with revenues of RUB 2 1%–5% • In 2019, average anticipated R&D 6%–10% • Up to 1% to 10 billion have R&D expenses of less investments will total 2.2 percent 2019 than 1 percent of their revenue. of revenues. 2018
* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia
34 Business and Financial Climate in the Far Eastern region
Digitalization drivers and barriers
of Far Eastern companies see a need for improving their cost efficiency through the automation of key processes. 82 % •• Management strategy came as an absolute leader among all 41% 55% 95% 36% 73% 68% drivers, with a balance of 0.90). Market and competition was ranked second, with a balance of 0.46. The Russian 0.90 experts surveyed named both drivers 0.46 as the key drivers. 0.36
0.10 •• Notably, the findings of the all-Russian
Drivers survey revealed that infrastructure Barriers is a driver of the digitalization strategy Net balance (the balance is 0.13), while respondents -0.18 in the Far Eastern Federal District -0.28 classified this strategy as a true barrier (the balance is -0.28). -5% -27% -32% -59% -45% -64% Staffing Financing Management strategyManagement Access to infrastructure Market and competition Organizational structure
Investments in business unit automation
•• Most often, Far Eastern companies invest in the automation of document Administration, document flow 73 9 18 flow and the finance function Finance 73 4 23
(73 percent each). HR 59 23 18 •• Oil and gas and energy companies Production 55 9 36 more willingly invest in production Marketing and sales 46 27 27 automation (by an average of 19 percentage points), while Yes Plan to implement No and do not plan 25 percent of the consumer sector to implement companies only plan to do so.
35 Business and Financial Climate in the Far Eastern region
Expectations of Far Eastern business leaders
Anticipated changes in the key metrics
We asked our Far Eastern respondents about their expectations regarding changes in exchange rates and commodity prices for autumn 2018.
USD/RUB EUR/RUB
Growth 60% 60% Same level 30% 66 30% 77 RUB RUB Decrease 10% 10%
Oil price (Brent) Gold price
Growth 65% 25% Same level 35% 80 70% 1, 270 USD USD Decrease 0% 5%
Refinancing rate Inflation
Growth 20% 85% Same level 55% 7.25 10% 3.35 % % Decrease 25% 5%
Bitcoin/USD
Growth 5% Same level 60% 6,050 USD Decrease 35%
36 Business and Financial Climate in the Far Eastern region
Our respondents
Revenue in 2017, % Number of staff, %
9 17 28
36
32 14
28 36
RUB 0–0.8 bln Up to 100 employees RUB 0.8–2 bln From 100 to 1,000 employees RUB 2–10 bln Over 1,000 employees RUB 10–100 bln Over RUB 100 bln
Industries, % Strategy implementation horizon, %
9 20
45 36
35 55
Consumer sector 1–2 years Oil and gas and energy sector 3–5 years Other: Over 5 years • TMT • FSI
37 Business and Financial Climate in the Far Eastern region
Contacts
Authors: If you have any questions about this research, please do not hesitate to contact us.
Ian Colebourne Lora Zemlyanskaya CEO Research Center Leader Deloitte CIS Business Development Deloitte CIS [email protected]
Joe Pacelli Mikhail Gordeev Partner Senior Research Specialist Head of Business Development, Research Center Deloitte CIS Deloitte CIS [email protected]
Sergey Lavsky Victoria Pigalkina Managing Director Analyst Vladivostok Office Research Center Deloitte CIS Deloitte CIS [email protected] [email protected]
38 Business and Financial Climate in the Far Eastern region
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