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Russia through a lensDeloitte Research Centre | 13th issue | 4Q 2018

Macroeconomic outlookKey Russian macroeconomic indicators in 4Q 2018

Page 04

CFO Survey of the Leading Companies in RussiaA snapshot of corporate legal departments

8

Russian manufacturing sector in 2018Industry 4.0: are manufacturing companies ready?

Page 31

Overview of the Steel and Iron Ore MarketFederal programs stimulating market growth

Page 39

Россия: сквозь призму последних событий

02

03

Russia through a lens

Contents

04Russia in figuresMacroeconomic outlook (GDP, inflation, trade indicators, currency rate, Central Bank key rate, commodity price dynamics etc.)

18Latest from DeloitteResearch Centre • CFO Survey of the Leading Companies in Russia

• Russian manufacturing sector in 2018

• Overview of the Steel and Iron Ore Market

45Global windTop news: Russia and AsiaTop news: Russia and Europe

47Contacts

46Useful stickers

44Top M&A

We are pleased to present the latest edition of Russia Through a Lens, the macroeconomic journal produced by the Deloitte Research Centre in Moscow.

Established in December 2015, the journalis published quarterly and falls under the Research Centre’s monitoring activities.

In Russia Through a Lens, we focus on current key trends in the Russian economy and present our research in the following fields:

• Russia in Figures – statistical analysis

• Research Centre market analysis

• Top-5 M&As

If you have any questions or suggestions regarding this research, please do not hesitate to contact us at:[email protected]

Designed by the Deloitte Design Group, Moscow

mailto:cisresearchteam%40deloitte.ru?subject=

Russia through a lens | Russia in figures

04

Russia in figuresGDPGDP dynamics

Q4 GDP (at constant price 2016), bln RUB

"The next year will largely be transitionary, with a difficult first quarter. This is due to the fact that the VAT will be raised from January 1, 2019 while the active implementation of national projects won’t start until closer to mid-year. In addition to that, we estimate that the first quarter will see maximum slowdown in credit activity caused by financial markets volatility. Full year growth is set to remain positive. According to our estimates, it will slow to 1.3 percent."Maxim Oreshkin, Minister of Economic Development of the Russian Federation

According to the Russia’s Ministry of Economic Development, GDP grew by 1.7 percent in January-October 2018. In September, GDP growth reached 1.1 percent but in October it accelerated to 2.5 percent. This increase was primarily due to a reversal of annual agricultural production dynamics (it grew 11.9 percent in annual terms vs declines of 6 percent in September and 11.3 percent in August). Acceleration of industrial production and the volume of construction work also contributed to economic growth in October. However, a slowdown in retail turnover persisted.

Source: “Economic Snapshot. November 2018”, an overview by the Russian Ministry of Economic Development

The Russian economy is growing at a pace close to its potential. In October, the dynamics of economic activity indicators were in line with the forecast of the Bank of Russia that expects GDP growth of 1.5-2 percent in 2018.

Source: “Economy: facts, estimates, commentaries. October 2018” (analytical commentaries by the Russian Central Bank).

GDP, bln RUB GDP growth, % (at current prices)

GDP volume indices, %

Source: Rosstat, (*forecast) Institute for Economic Forecasting of the Russian Academy of Sciences (IEF RAS)

Source: Rosstat, (*forecast) Central Bank of Russia

1.8

6.8 10.9

1.5

33,2

48 60

,283

83,3

87

41,2

77 68

,164

86,1

49

38,8

07

73,1

34

92,0

37

26,9

17 46

,309

79,2

00

102,

100

2009

2013

2017

2006

2010

2014

2018

*

2007

2011

2015

2008

2012

2016

24.6 19.38.3

24.213.1

3.3-6.07.3

23.5 30.25.3

8.2 4.5 0.75.2 3.7 -0.2-7.8 1.88.5 4.3 -2.5 1.2

106,

300

2019

*

4.1

21,6

49 22,9

98

23,4

33

21,3

62 23,4

35

23,5

18

20,8

10

24,0

15

23,7

23

19,8

27 21,8

67 24,0

93

24,2

35

2009

2013

2017

2006

2010

2014

2018

*

2007

2011

2015

2008

2012

2016


05

Inflation rate, %

GDP forecasts

Inflation rate forecasts

Source 2018 2019 2020

Economist Intelligence Unit +1.7% +1.8% +1.6%

The Ministry of Economic Development

+1.8% +1.3% +2.0%

Central Bank of Russia + 1.5% to +2.0%

+ 1.2% to +1.7%

+ 1.8% to +2.3%

IEF RAS +1.8% +1.2% +2.5%

Standard & Poor’s +1.6% +1.8% +1.8%

Moody’s +1.7% +1.7% -

Fitch +1.8% +1.5% +1.9%

Source 2018 2019 2020

European Commission +1.7% +1.6% +1.8%

World Bank +1.5% +1.8% +1.8%

International Monetary Fund (IMF) +1.7% +1.8% +1.8%

European Bank for Reconstruction and Development

+1.5% +1.5% -

Gaidar Institute +1.5% +1.4% +1.6%

Organisation for Economic Cooperation and Development

+1.6% +1.5% +1.8%

Inflation in 2018*: 4.3 percent Inflation target** in 2018: 4.0 percent

*The inflation figure is the consumer price growth rate over the corresponding month of the previous year (Rosstat).

**The inflation target is set for the consumer price growth rate over the corresponding month of the previous year (Central Bank of Russia).

“We wouldn’t rule out that annual inflation may exceed 5.5 percent or even reach 6 percent in March-April [2019]. After some acceleration in 1Q 2019, inflation is set to slow down.”Elvira Nabiullina, Governor of the Bank of Russia

Source 2018 2019 2020

IMF 3.6% 5.7% 4.8%

Economist Intelligence Unit 3.8% 4.4% 4.2%

Vnesheconombank 3.5% 4.0% -

Interfax poll (consensus) 4.0% 4.4% -

Fitch 4.0% 4.5% -

Inflation

Fact Central Bank of Russia (*forecast)

Ministry of Economic Development (*forecast)

2006

2010

2014

2018

2007

2011

2015

2019

*

2020

*

2008

2012

2016

2009

2013

2017

11.9

6.1

12.9

8.8

6.5

9.0 8.8

11.4

13.3

6.6

5.44.34.3

2.5

5.34.0

3.8


06

Trade structurePeriod: January-October 2018

• Foreign trade turnover: USD 567.0 billion (+20.0% YoY)

• Trade balance: surplus of USD 170.8 billion (+USD 67.6 billion YoY)

• Exports: USD 368.9 billion (+28.2% YoY) Share of the CIS countries 12.3%, non-CIS countries 87.7%

• Imports: USD 198.1 billion (+7.3% YoY) Share of the CIS countries 10.9%, non-CIS countries 89.1%

Share of energy products in total exports, % (January 2006 – October 2018)

Share of products in total eхports to the CIS/non-CIS countries (January–October 2018)

Share of products in total imports from the CIS/non-CIS countries (January–October 2018)

To non-CIS countries

To the CIS countries

Energy products 68.3% 36.5%

Metal products 9.6% 12.9%

Chemical products 5.1% 12.9%

Machinery and auto 4.3% 17.1%

Food and agriculture products 5.1% 8.9%

Timber, pulp and paper products 3.0% 4.5%

From non-CIS countries

From the CIS countries

Machinery and auto 50.5% 20.5%

Chemical products 18.8% 14.3%

Food and agriculture products 11.0% 21.7%

Metal products 6.0% 18.0%

Textiles and footwear 6.3% 7.5%

Energy products 0.5% 4.3%

Source: Federal Customs Service

Percentage in Exports to non-CIS countries

Percentage in Exports to the CIS countries

53.0

35.5

55.3

39.542.347.0

33.2 36.5

44.0 43.640.9

54.2

32.6

2006

2010

2014

Jan–

O

ct

201

8

2007

2011

2015

2008

2012

2016

2009

2013

2017

68.072.7

66.469.6

74.5

63.270.3 70.8 73.472.4 73.0

62.0

68.3


07


08

Exports (January–October 2018):

Percentage of exports In monetary terms YoY

In physical terms YoY

Categories

Energy products

64.4% 36.3% 5.2%

18.0% Kerosene

10.3% Coal

7.0% Natural gas

-10.1% Liquid fuels

-9.6% Coke

-3.1% Electricity

Metal products 10.0% 25.4% 11.6%

28.9% Cast iron

16.1% Copper and copper alloys

12.1% Semi-finished products of iron or non-alloy steel

5.4% Aluminium

-4.9% Flat iron non-alloy steel

Chemical products

6.0% 14.0% 3.9%

24.2% Products of inorganic chemistry

6.5% Plastics

6.4% Pharmaceuticals

1.9% Abstergent

-1.4% Fertilizers

-1.0% Paint

Machinery and auto

5.9% 5.1% n/a

29.9% Electrical equipment

9.9% Mechanical equipment

-3.6% Optical instruments and apparatus

6.5% Passenger cars

3.8% Trucks

Food and agriculture products

5.5% 26.2% 29.7%

64.5% Meat

50.0% Wheat

Timber, pulp and paper products

3.1% 20.0% 2.9%

8.5% Plywood

6.0% Lumber

1.6% Cellulose

-4.9% Rough wood


09

Imports (January–October 2018):

Percentage of imports In monetary terms YoY

In physical terms YoY

Categories

Energy products 0.9% 6.9% -1.7%

Metal products 7.3% 11.3% 4.9%

5.3% Ferrous metals

-26.4% Pipes

-3.3% Flat rolled products of iron or non-alloy steel

Chemical products

18.3% 9.5% 1.0%

8.2% Abstergent

6.5% Rubber

3.0% Plastics

0.2% Organic chemistry

Machinery and auto 47.2% 5.1% n/a

15.5% Electrical equipment

9.6% Optical instruments and apparatus

15.0% Passenger cars

-10.2% Trucks

Food and agriculture products

12.2% 3.3% 1.1%

18.3% Palm oil

13.2% Sunflower

9.3% Citrus

7.3% Cheese and curds

-38.0% Meat

-20.9% Butter

-20.1% Milk

Textiles and footwear 6.4% 10.3% 2.2%


10

EUR vs. RUB USD vs. RUB

USD forecasts (average per year), RUB

EUR forecasts (average per year), RUB

Euro US dollar

Source 2018 2019 2020

Ministry of Economic Development 61.7 63.9 63.8

IEF RAS 62.7 67.0 68.6

Economist Intelligence Unit 62.9 66.9 68.4

Source 2018 2019 2020

IEF RAS 73.9 78.1 80.9


Currency rate

100

90

80

70

60

50

40

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-A

pr-2

018

01-Ju

l-201

8

01-Ja

n-20

19

01-O

ct-2

018

RUB vs. EUR, RUB vs. USD

Average 2015EUR 68.0USD 61.3




Source: Central Bank of Russia


0%

3Q

20

18

4Q

20

18

4Q

20

17

4Q

20

18

75.9 75.976.2

68.8

+10% +1%

3Q

20

18

4Q

20

18

4Q

20

17

4Q

20

18

66.5 66.565.6

58.4

+14%


11

Central Bank of Russia key rate, %

Forecast of the key rate year-end, %


“The decision [to raise the key rate] was preemptive and aimed at reducing inflation risks which remain elevated, especially in the short horizon. It is still uncertain how external conditions would develop and how prices and inflationary expectations would respond to the upcoming VAT hike.”Source: Bank of Russia press service

Indexes (daily): October 2014 – December 2018

Source: Moscow Exchange

MICEX Index, RUB RTS Index, USD

Russia's credit ratings

Agency Rating Outlook Date

S&P BBB- Stable 20 Jul 2018

Moody's Ba1 Positive 31 Jul 2018

Fitch BBB- Positive 17 Aug 2018

On 14 December 2018, the Russian Central Bank resolved to increase a key rate by 0.25 percentage points to 7.75 percent.

On 3 October 2018, the MICEX index hit its all-time high of 2,494 points. Following that, it witnessed a decline and throughout 4Q it traded in the 2,300 to 2,450 range. The RTS index traded in the 1,100 to 1,200 range.

Source 2018 2019 2020

IEF RAS 7.75 7.75 6.75


The Central Bank’s key rate, indexes and credit rating

01-O

ct-2

014

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-O

ct-2

018

01-Ja

n-20

19

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-A

pr-2

018

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-ju

l-201

8

01-Ja

n-20

19

01-O

ct-2

014

01-O

ct-2

015

01-O

ct-2

016

01-O

ct-2

017

01-Ja

n-20

15

01-Ja

n-20

16

01-Ja

n-20

17

01-Ja

n-20

18

01-O

ct-2

018

01-A

pr-2

015

01-A

pr-2

016

01-A

pr-2

017

01-A

pr-2

018

01-Ju

l-201

5

01-Ju

l-201

6

01-Ju

l-201

7

01-ju

l-201

8

3,000

2,500

2,000

1,500

1,000

500

9.50

14.00

10.509.00

10.50

12.50

10.008.50

17.00

11.509.75

8.258.00

15.00

11.00

9.25 7.75

7.25

7.50 7.507.75


12

Foreign debt and reserves


Source: U.S. Treasury

Russian external debt International reserves of Russia, USD bln

Russia's investments in US treasury bonds, USD bln

Government, USD bln

CB and banking sector, USD bln

Business sector, USD bln

Share of external debt in reference to GDP, %

Monetary gold

Currency reserves

Other reserves

Ja

n-20

14

Sep-

2014

May

-201

5

Jan-

2016

Ja

n-20

18

Sep-

2016

May

-201

7

Mar

-201

4

Nov

-201

4

Jul-2

015

Mar

-201

6

Mar

-201

8

Nov

-201

6

Jul-2

017

Nov

-201

7

May

-201

4

Jan-

2015

Sep-

2015

May

-201

6

May

-201

8

J

an-2

017

Sep-

2017

Jul-2

014

Mar

-201

5

Nov

-201

5

Jul-2

016

Jul-2

018

Sep-

2018

Mar

-201

7

14012010080604020

0

31 D

ec 2

013

31 D

ec 2

017

31 D

ec 2

010

31 D

ec 2

014

30 S

ep 2

018

31 D

ec 2

011

31 D

ec 2

015

31 D

ec 2

012

31 D

ec 2

016

489 600 467 636 512 729 518 539 518

35

30

54

39 62

56

35

42

47

174

143

217

132

230

118

156

182

103

330

345

365

341

437

344

298

376

317

31 D

ec 2

013

31 D

ec 2

017

31 D

ec 2

010

31 D

ec 2

014

30 N

ov 2

018

31 D

ec 2

011

31 D

ec 2

015

31 D

ec 2

012

31 D

ec 2

016

479 385 462538 378510 433499 368

45

49

51

60

40

77

36

46 83

435

309

472

308

453

346 43

3

328

369

19

10

15

10

17

10

10

11

10

3229 2929

40

32 33

26

38


13

Household finances

Source: Rosstat

* The December interest rate is presented for 2011-2017, the October interest rate is presented for 2018

Inflation in 2018: 4.3%

• Food products: 4.7%

• Non-food products: 4.1%

• Services: 3.9%

Household income

Individual loan portfolio Mortgage market

Source: Central Bank of Russia, National Credit Information

Average monthly nominal salary, RUB thousand

Nominal salary dynamics compared to the same period last year, %

Real disposable household income compared to the same period last year, %

Debt on individual loans, RUB bln

Debt dynamics on individual loans compared to the same period last year, %

Share of debt to population income, %

Mortgage loans issued for the period, RUB bln

Average weighted interest rate on long-term individual loans*, %

Average weighted mortgage interest rate, %

Mortgages issued in January–October 2018 are up by 44 percent from the same period in 2017.

23.4

34.0

26.6

36.7

29.8

39.2

21.0

32.5

42.8

2013

2017

2010

2014

Jan

–N

ov

2018

2011

2015

2012

2016

112 109 109114

108112

107112

105

10699 100105

94104

98101 97

746 1,

169

1,05

4 1,48

1

1,38

5 2,02

8

418

1,80

9 2,37

5

2013

2017

2010

2014

Jan–

Oct

20

18

2011

2015

2012

2016

17.4

12.5

19.7

15.517.3

12.9

17.1 17.5

13.3 12.59.6

12.3 12.512.510.612.0 13.4

5,53

5

10,

634

7,71

2 10,

774

9,92

6 12,

135

4,06

4

11,2

95

14,2

83

2013

2017

2010

2014

Jan–

Oct

20

18

2011

2015

2012

2016

13

24 24

19

20

22

22

16

2014

14 18

39

1

29

13

36

-6


14

Nickel forecast, USD/t

Copper forecast , USD/t

Nickel and copper

Source 2018 2019 2020

World Bank 13,821 13,895 14,007

IMF 13,734 13,776 13,968

Economist Intelligence Unit 13,272 12,645 11,984

Citigroup 13,200 14,375 15,500

JP Morgan 14,258 13,306 13,125

Fastmarkets 13,100 16,125 -

Source 2018 2019 2020

World Bank 6,732 6,642 6,572

IMF 6,542 6,208 6,279


Citigroup 6,300 6,700 7,000

JP Morgan 7,015 7,650 6,500


Top pricing (nickel and copper)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Oct

-18

Sep-

17

Sep-

18

Dec

-18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Nov

-18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

10,0

45

8,53

0

9,31

5

10,4

25 11,8

50

10,9

60

13,7

45

9,37

5

14,9

40

8,85

5

8,49

5 10,6

35

11,1

70

11,3

85

10,0

20

13,3

90

10,2

20

14,0

65

11,5

40

10,5

20 12,5

45

10,6

45

8,82

0

9,42

5

9,77

0

10,0

55

12,6

45

9,45

5

13,6

75

11,7

95 12,8

10

11,0

95

8,61

0

8,46

5 10,5

15

9,96

5

13,4

90

8,95

0

15,3

00

5,10

6

4,66

6

4,84

7

4,87

2 6,93

8

6,01

2

6,92

0

5,96

8

6,53

6

4,57

1

4,81

6

4,91

0

5,87

9

6,78

0

5,85

4

6,66

5

6,38

2

6,18

3

5,86

3

6,49

8

6,15

0

5,82

7

4,70

7

5,03

1

4,60

3

5,53

0 7,26

4

5,72

8

6,74

8

6,84

1

5,87

6

6,15

5

4,49

9

4,56

7

4,88

0

6,00

4

7,05

7

5,67

5 6,74

6

Maximum for the period

Minimum for the period

15-year minimum


Nickel, LME, USD/t Copper, LME, USD/t

Source: Finam Holdings

“We believe the Central Bank will now likely take a pause at the end of the year in terms of the rate increase. Another increase (after the increase in September from 7.25 percent to 7.5 percent) by 25 basis points will likely be implemented in 2019 due to risks of volatility increase across financial markets, increase in inflation expectations of households and further tightening of US sanctions. Therefore, the decrease in the rate will be possible only in 2020, if the Central Bank makes sure that inflation and inflation expectations have started to decrease.”Source: Global Economic Outlook, Fitch


15

Gold forecast, USD/oz

Aluminium forecast, USD/t

Source 2018 2019 2020

World Bank 1,304 1,264 1,229

UBS Group AG 1,275 1,320 1,350

Goldman Sachs Group 1,375 1,450 -


RBC Capital Markets 1,226 1,338 1,338

Citigroup 1,200 1,269 1,350

JP Morgan 1,355 1,412 1,460

Source 2018 2019 2020

World Bank 2,198 2,162 2,132

UBS Group AG 2,050 2,067 2,188

IMF 2,145 2,105 2,137


RBC Capital Markets 2,094 1,902 2,094

Citigroup 2,200 2,225 2,350

JP Morgan 2,237 2,265 2,150


Gold and aluminium

Top pricing (gold and aluminium)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Oct

-18

Sep-

17

Sep-

18

Dec

-18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Nov

-18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

1,48

1

1,57

2

1,62

6

1,73

7

2,16

1

1,92

1 2,1

32

1,92

3 2,1

32

1,44

9

1,52

1

1,64

0

1,73

1 2,04

6

1,96

1

2,0

05

1,91

8 2,0

78

1,95

6

2,10

6

2,0

54

1,85

3

1,50

1

1,67

2

1,61

5

1,68

8

2,2

80

1,91

8 2,2

50

2,12

8

2,1

18

1,95

0

1,51

5

1,55

7

1,67

3

1,82

1

2,2

10

1,93

1 2,2

96

1,14

2

1,24

5

1,32

3

1,27

7

1,27

0

1,24

5

1,31

4

1,24

1

1,25

4

1,07

1

1,23

3

1,35

7

1,17

7

1,27

8

1,25

2

1,32

5

1,27

6

1,23

0

1,22

0

1,28

3

1,19

2

1,28

5

1,06

1 1,29

5

1,31

3

1,15

2

1,30

5

1,26

5

1,31

3

1,32

5

1,20

7

1,22

8

1,12

2

1,21

7

1,31

9

1,21

1

1,34

7

1,27

1

1,30

3






Aluminium, LME, USD/t Gold, COMEX, USD/oz


16

Brent oil and natural gas

In a move to tackle a global glut and support oil prices, OPEC and non-OPEC producers, including Russia, took a decision in December 2016 to cut joint oil output by 1.8 million bpd, with the October 2016 output as a baseline.

In December 2018, the participants of the deal agreed to additionally curb oil output by 1.2 million bpd compared to October output from January 2019. As part of the agreement, Russia will curb its output by 228 thousand bpd (about 2 percent).

Qatar announced it will be withdrawing from OPEC on 1 January 2019 to concentrate on its plans to boost its natural gas production from 77 million to 110 million tonnes a year.

Natural gas forecast, USD/mmbtu

Crude oil forecast, USD/bbl

Source 2018 2019 2020

U.S. Energy Information Administration

3.1 3.1 -

World Bank 3.0 2.7 2.7

IMF 2.9 2.8 2.7


Source 2018 2019 2020

U.S. Energy Information Administration

73.1 71.9 -

Fitch 73.0 75.0 -

European Commission 75.1 80.6 -

World Bank 74.6 75.2 68.9

IMF 71.9 72.3 69.4

IEF RAS 71.0 62.0 65.0

JP Morgan 70.0 73.0 -


Central Bank of Russia (Urals) 72.0 63.0 55.0

The Ministry of Economic Development (Urals)

69.6 63.4 59.7

Top pricing (oil and gas)

Oct

-15

Feb-

16

Jun-

16

Oct

-16

Oct

-17

Feb-

17

Feb-

18

Jun-

17

Jun-

18

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Nov

-17

Mar

-17

Mar

-18

Jul-1

7

Jul-1

8

Oct

-18

Sep-

17

Sep-

18

Dec

-18

Dec

-15

Apr

-16

Aug-

16

Dec

-16

Dec

-17

Apr

-17

Apr

-18

Aug-

17

Aug-

18

Nov

-18

Jan-

16

May

-16

Sep-

16

Jan-

17

Jan-

18

May

-17

May

-18

2.31

1.70

2.96

3.00

2.91

2.77

2.653.

04

2.92

2.25

1.95

2.84 3.

34

3.063.

19

2.732.83

2.78

3.27

3.02

3.02

2.96

2.35

2.14

2.87

3.74

2.723.

28

2.783.05

2.92

4.64

2.22

2.28

2.90 3.

16

2.963.09

2.95

50

37

50

49

61

56 65

49

79

45

40 43

52

63

54

69

53

74

75

57

83

54

38 47

47 57

64

52

75

53

78

59

36

50

50 55

69

51

78






Brent crude oil, ICE, USD/bbl Natural gas, NYMEX, USD/mmbtu

Russia through a lens | Latest from Deloitte Research Centre

17


18

Deloitte CFO Survey of the Leading Companies in Russia

Key findings

Latest from Deloitte Research Centre

In 2H 2018, the expectations of CFOs regarding financial prospects of their companies became more pessimistic.

• 37 percent of CFOs negatively assess the situation. The share of pessimistic answers increased by 28 p.p.

The confidence in growth of operating costs increased by 8 points compared to the spring of 2018 while expectations of revenue and operating profit growth pace decreased by 8 points and 13 points, respectively.

• The majority of CFOs (69 percent) do not expect cost of capital to change much for their companies.

• 56 percent of the respondents do not anticipate significant changes in the number of employees in their companies.

• Two-thirds of CFOs (63 percent) expect salaries to grow. However, the share of such respondents decreased by 10 p.p. in the past six months.

Fifty-seven percent of the companies stated that they had decided to hike prices by the average of 7 percent in 1H 2018.

• The prices were raised mainly by manufacturing companies (92 percent); they have also stated their intention to increase prices again by end-2018 more often than others (by 14 p.p.).

According to 45 percent of the respondents, the demand for end products of their companies did not change in 1H 2018. Forty-one percent of the companies indicated that demand grew (by 17 percent), while 14 percent stated that demand fell (by 11 percent).

• Consumer companies tend to forecast a reduction in demand twice as often, while life science and health care companies anticipate a growth in demand more frequently (23 p.p. above the average).

Financial climate in 2018

Business drivers:

• Production costs

• Digitalization

Barriers for business:

• Focus on core business

Attractive financing sources:

• Internal sources

• Borrowing from Russian banks

Business drivers and barriers


19

The net level of uncertainty (0.34) rose 36 point in the past six months reaching the positive zone of the balance. The reason is that the respondents believe that the current economic and political situation is rather uncertain.

• The share of CFOs citing the high degree of uncertainty in the market increased by 19 p.p.

Risk appetite decreased insignificantly due to higher uncertainty around adoption of strategic decisions (+7 points) and reached -0.56.

Risk factors with the most negative impact on business in Russia in 2018:

• Stagnation in the Russian economy

• The weakening of the ruble

• Weaker domestic demand

• Increased competition in the market

• Decrease in cash flow

• New trade barriers/protectionism

• Geopolitical risks

• Decrease in core business revenue

• Rising barriers to entry into new markets

• Lower consumer interest in new products

• Low transparency

Priority business strategies to recover the market position in Russia in 2018:

• Ongoing cost control

• Cost cutting

• Business development through organic growth

Seventy-one percent of the surveyed companies cooperate with foreign partners. However, the share of such respondents decreased by 7 p.p. in the last six months.

• The share of companies willing to expand the geography of business ties decreased by 5 p.p.

Uncertainties, risks and development strategies in 2018

Search for employees with specific job experience is the most important and complicated part. This was indicated by two-thirds (67 percent) of the respondents.

• The respondents cited education level as the least important skill implying that there is a sufficient number of candidates in the market that have required education level but lack practical skills.

According to CFOs, the most attractive strategy that can mitigate the lack of competences in the market is personnel training (0.76).

• Other popular strategies mentioned by respondents include implementing/increasing automation (0.69) and creating appealing work environment (0.62).

HR strategies of Russian companies

Seventy-four percent of the surveyed companies have a dedicated legal department (or in-house specialists) responsible for legal matters.

Eight employees – the average number of employees in a legal department.

• The key function of the in-house legal is to verify contracts and develop contract templates (59 percent).

• 78 percent of companies with in-house legal departments handling legal matters use third-party legal services.

• Companies tend to outsource legal functions in order to achieve specific objectives that are otherwise difficult to complete due to their technical complexity (45 percent).

• Only 21 percent of the companies apply automation technologies and implement robotization in in-house legal departments.

Legal department operations

No surveyed companies have implemented blockchain yet and only 2 percent of the respondents plan to introduce this technology in the short term.

• Blockchain awareness of Russian companies is seen as low. Most respondents from the largest Russian companies are not or are only partially informed about blockchain technology principles (38 percent and 35 percent, respectively).

• According to the respondents, the most positive impact of blockchain may be seen in automation of contract relations (62 percent) and digital identification (59 percent), as well as in the departments involved in administrative activities and document exchange (58 percent).

Blockchain applicability


20

Outlook for leading companies in Russia


Financial outlook

The respondents were asked to assess financial outlook and compare it with the situation six months prior (1H 2018):

Trends:

• In 2H 2018, CFO expectations regarding financial prospects of their companies became more pessimistic. The share of pessimistic responses increased almost four-fold and reached 37 percent.

• The balance value indicator sharply fell by 33 points in the past six months, going negative (-0.06), or hitting the 1H 2016 level.

Highlights:

• Representatives of the TMT industry and the companies with RUB 5–25 billion in revenue are the most optimistic about the current situation (7 and 16 p.p. above the average, respectively).

• At the same time, the share of pessimists among manufacturing industry’s CFOs increased significantly (by 40 p.p.) and reached 50 percent.

• Representatives of companies with less than RUB 5 billion in revenue and with less than 100 employees tend to be pessimistic, too (the share of pessimists is higher than average by 13 p.p. and 18 p.p., respectively).

• Representatives of Russian companies tend to be more pessimistic than those of foreign companies with localized production in Russia (by 9 p.p.).

The index: the weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01

Optimistic

Pessimistic

No change

Balance

0.05

0.440.270.23

0.10

0.47

-0.04

37%

26%

51%

27%

36%

53%

36%

27%

30%

4%

22%

13%

9% 9%

36% 44

%

45%

51%

51%

38%

55%

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1

2018

H2

31%

37%

32%

-0.06


21

Financial performance

Trends:

• A significant part of CFOs expect both corporate revenue and operating profit to decrease in 2H 2018 (by 6 p.p. and 7 p.p., respectively).

Highlights:

• Manufacturing industry’s representatives tend to expect a growth in revenue more often than others (by 9 p.p.). On the other hand, they expect a decrease in operating profit more often than the rest (10 p.p. above the average).

• Foreign companies tend to anticipate revenue growth more often than Russian companies (by 19 p.p.).

• The companies with less than 100 employees expect revenue to decrease twice as often compared to others.

Trends:

• The companies expect operating cost growth to accelerate next year (by 8 points y-o-y), with revenue and operating profit growth slowing down (by 8 points and 13 points, respectively).

Revenue

Operating profit

Operating costs

Cost of capital

Changes in key corporate financial metrics in 2018

Changes in expected revenue and operating profit, 2015–2018

The index: the weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01

0.17 0.29

0.060.00 0.060.04

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1

0.27

0.21

0.26

0.20

0.39

0.29

0.23

0.28

0.31

0.38

0.42

0.07

0.42

0.22

0.12

0.280.270.30

0.12

0.30

2018

H2

0.06

0.15

0.34

0.30

Growth Decrease No change

Revenue Operating profit

36%

31%

23%

18% 18

%

20%

11%

33% 27

%24%

30% 24

%

2015

H2

2017

H2

2016

H2

2016

H1

2018

H1

2017

H1

2016

H2

201

5 H

2

2017

H2

2017

H1

2016

H1

2018

H1

53% 60

%

61%

60% 71

%

66%78

%

42%

60%73

%

45%

60%

11%

9% 16%

22%

11%

14%

11%

25%

13%

3% 25%

16%

2018

H2

2018

H2

17%

29%

66%

48%

17%

23%


22


Significant events and the extent of their perceived: negative impact* on company operations

Trends:

• An expected increase in the VAT rate in 2019 could be highlighted as the most negative event that will have an impact on company operations. Total level of negative impact is 80%, companies of TMT have the highest share of negative replies (8 p. p. high than average).

• Total level of negative impact of sanction is 70%. Representatives of the health care and medicine sector take the most negative attitude towards this move (20 p.p. above the average).

• Seventy-five percent of the respondents from the TMT industry (twice that of the average) negatively assess the consequences of the Yarovaya Law.

26% 26% 18%

Pension reform

The trade embargo imposed

on the US/EU by Russia

Yarovaya Law (Russian anti-terrorist

legislative package)

80%

VAT rate hike

70%

Sanctions against Russia

61%

63%

75%

90%

81%

88%

75%

70%

*Total negative impact – weighted balance of respondents (-1 to 1), 1 point equals 1%.


23

Trends in demand: the 1H 2018 results and expectations till end-2018

Trends:

• According to 45 percent of the respondents, the demand for end-products of their companies did not change in 1H 2018. Forty one percent of the companies indicated that the demand increased (by 17 percent), while 14 percent stated that the demand fell (by 11 percent).

• One in two respondents does not expect significant changes in the demand performance until end-2018. Thirty seven percent of companies expect the demand to increase (by 14 percent), while 14 percent believe that demand would fall (by 13%).

• Consumer companies tend to forecast a reduction in demand twice as often, while life science and health care companies tend to anticipate the demand growth more frequently (23 p.p. above the average).

Increase in demand

No change

Decrease in demand

41%

45%

14%

37%

49%

14%-11% -13%

+17% +14%

Expected changes in demand until end-2018

Changes in demand in 1H 2018

Pricing policy: the 1H 2018 results and expectations till end-2018

Trends:

• Nearly half of the surveyed companies (57 percent) stated that they had decided to hike prices by an average of 7 percent in 1H 2018. Thirty seven percent of the respondents reported no changes in the pricing policy and only 6 percent reported price cuts in their companies (by 5 percent).

• Approximately two-thirds of the companies (61 percent) plan to hike prices (by 5 percent on average) by end-2018. Approximately one third of the companies (33 percent) will keep prices unchanged while 6 percent of the companies plan to cut prices by 1 percent.

• The prices were raised mainly by manufacturing companies (92 percent); they also more often than others (by 14 p.p.) stated their intention to increase prices again by end-2018.

Price increase

No change

Price decrease

57%

37%

6%

61%

33%

6%-5% -1%

+7% +5%

Pricing policy by end-2018

Pricing policy implemented in 1H 2018


24

Legal Department


The department is responsible for handling of legal matters in the company

The number of staff in the company’s legal department

Highlights:

• Consumer companies tend to seek third-party legal support more often (by 4 p.p.) than on average. The respondents from the TMT industry stated that they did not ask for third-party legal support.

Highlights:

• The departments with more than 20 employees can be more often found in manufacturing and high tech companies (11 and 19 p.p. above the average, respectively)

• In more than half of consumer companies (58 percent), legal departments consist of five to 10 specialists.

• The higher is the company’s revenue, the more specialists are employed in the company’s legal department. Thus, legal departments in 80 percent of companies with revenue of less than RUB 5 billion employ up to 5 specialists. At the same time, almost half of companies with revenue of more than RUB 25 (40 percent) employ over 20 in-house lawyers.

Trends:

• The majority of the surveyed companies (74 percent) have a dedicated legal department (or in-house specialists) responsible for handling legal matters. Some companies (18 percent) stated that they outsource legal matters to third-party legal consultants. Six percent of the companies assign legal matters to a dedicated employee who works in a different department.

Trends:

• According to the survey results, the number of employees in the legal department is relatively small, up to 10 people. Almost half of companies (44 percent) state that their legal department employs up to five people. In one-third of companies (31 percent), the number of employees in the legal service ranges from five to 10 people.

• The shares of companies with 11–20 and over 20 employees per department are approximately the same at 11–14 percent.

Legal department

Outsourcing (third-party legal consultants)

Dedicated employee from other division

Other

74%

18%

6%

2%

Up to 5 employees

5–10 employees

11–20 employees

Over 20 employees

44%

14%

31%

11%

Eight employees – the average number of employees in a legal department

• Legal services are most frequently outsourced by companies with relatively low earnings (up to RUB 5 billion) and with less than 100 employees (40 percent and 55 percent, respectively). A similar trend is observed among companies of the Volga Federal District (where the average is exceeded by 12 p.p.).

"Not so long ago, services to professional legal firms was not even seen as a separate business line. It is now evolving into a promising and fast-growing undertaking within Deloitte. The accumulated expertise and longstanding experience of servicing such clients enabled Deloitte to gain leadership in this segment in Russia."

Yulia Orlova

Partner, Tax & Legal


25

Matters handled by in-house legal departments

Legal service outsourcing

Highlights:

• The in-house legal services of TMT, Life Sciences, and Health Care companies tend to deal with verification of agreements and contract template development more often than other market players (16 and 21 p.p. above the average, respectively).

• Legal services of foreign companies with production localized in Russia are more often interested in resolving labor compliance matters (by 5 p.p.).

Highlights:

• Manufacturing companies tend to use third-party legal support more often (by 12 p.p.), similarly to the companies operating in the South Federal District (by 10 p.p.)

Trends:

• According to the respondents, the key function of the in-house legal is to verify contracts and develop contract templates (59 percent).

• Another important function of the in-house legal service is participation in litigations. This function was named by 23 percent of the companies.

• Fourteen percent of the respondents noted that their legal departments handle all the aforementioned matters.

Trends:

• Eight in ten companies (78 percent) where in-house legal department is responsible for legal matters use third-party legal services.

• None of the companies that have never outsourced legal services (22 percent) does not plan to do so in the future.

Verification of contracts, development of contract templates

Litigations

Labor code compliance

All of the above

59%

23%

4%

14%

Used outsourcing

Haven’t used but plan to use

Haven’t used and do not plan to use

78%

22%

• Litigations make it to the top of the agenda of legal departments in larger companies with revenue over RUB 25 billion and more than 1,000 employees (18 and 16 p.p. above the average, respectively).


26


Matters outsourced by the survey participants

Highlights:

• The shortage/lack of internal resources is more often cited by manufacturing and TMT companies (compared to other industries) as a reason for using third-party legal support (11 p.p. and 6 p.p., respectively).

• Foreign companies with production localized in Russia outsource legal services more often than Russian companies (by 18 p.p.) due to their technical complexity, while Russian companies

Trends:

• Most often (45 percent), companies tend to outsource legal functions in order to achieve specific objectives that are otherwise difficult to complete due to their technical complexity.

• Another important reason for using legal services of third-party providers is the shortage/lack of internal resources (27 percent).

• Budget optimization is not the most important reason for contracting third-party legal service providers, as mere six percent of the respondents cited this reason as important.

Technical complexity

Lack/absence of domestic resources

High labor intensity

Budget optimization

45%

27%

10%

6%

Process automation and robotization in in-house legal service

Highlights:

• Foreign companies with localized production in Russia and companies with revenue of more than RUB 25 billion use special automation and robotics technologies in in-house legal operations most often (8 and 9 p.p., respectively). At the same time, manufacturing companies use these technologies less frequently (by 12 p.p. below the average).

• The respondents from consumer companies indicate that they have already started to develop such solutions more often (7 p.p. above the average).

• Manufacturing companies, as well as those from North West and South Federal districts cite plans to develop such technology more often than other respondents (8 p.p., 7 p.p., and 11 p.p. above the average).

Trends:

• The survey showed that only 21 percent of the companies apply technology to automate and implement robotization in in-house legal departments. Fifty percent of the companies do not apply and do not plan to apply such technologies.

• One-third of the companies plan to start working in this area or have already started developing the necessary solutions (19 percent and 10 percent of the companies, respectively).

Currently applied

Not applied but being developed

Not applied, plan to develop

Not applied, no plans

21%

50% 10%

19%

outsource legal services in order to optimize their budgets (by 11 p.p.).

• Budget optimization is of higher importance for companies from the Central and Ural Federal districts (8 and 5 p.p., respectively). The main reason for respondents from the South and North-West Federal districts to outsource legal services more often than others (by 10 p.p.) is the technical complexity of providing legal services.


27

HR strategies

Analysis of the key competences of employees

Certain work experience

Problem solving

Special technical expertise

General skills (communication skills, time management)

Labor ethics

Certain education level

67%

53%

38%

33%

22%

18%

Highlights:

• Problem solving is the most sought after skill for consumer companies (22 p.p. above the average).

• Respondents from the TMT industry look for employees with certain work experience and with good general and time management skills (63 percent each).

• Respondents from the manufacturing industry look for employees with special technical skills (64 percent).

Strategies to address the lack of required competences in the labor market

• In contrast to other companies, the strategy of implementing/increasing automation appears more attractive to manufacturing companies (by 20 p.p.).

Trends:

• According to CFOs, the most viable strategy is the training of the existing personnel (0.76).

• Similarly attractive for the respondents are strategies aimed at implementing/increasing automation (0.69) and creating an appealing work environment (0.62).

Training of existing personnel

Implementation/increase of automation levels

Appealing work environment

Use of part-time resources (remote specialists, interns)

Outsourcing

Extended remuneration system

Hiring remote employeesHiring specialists from various segments of labor market (young/aged, military retirees)Lowering requirements for reviewed candidates

Use of foreign labor force

0.76

0.69

0.62

0.51

0.48

0.44

0.31

0.25

0.24

0.16

of the respondents. Problem solving was cited as the next skill by importance. It was indicated by 53 percent of CFOs.

• The respondents cited the education level as the least important skill implying that there is a sufficient number of employees with required education level in the market that lack practical skills.

Trends:

We asked our respondents about competences that are the most sought and considered the most ‘difficult’ from a standpoint of HR search in their companies.

• A search for employees with specific job experience is both the most important and complicated part. This was indicated by two-thirds (67 percent)

Highlights:

• According to TMT companies, the problem can be solved by hiring part-time employees or outsourcing some tasks (50 percent and 63 percent, respectively).


28

Insights into CFO social media personality profiles


Methodology

CFO: Average profile on Facebook

CFO Top 10 interests (ranked from 0 to 1)

Interests

Finance 0.35

Business 0.16

Services 0.08

News 0.06

Real estate 0.06

Career 0.05

Books 0.04

Education 0.03

Health 0.02

Food 0.02

Top 5 groups/pages popular with CFOs

Subscribers Percentage of subscribers to groups/pages

NES (New Economic School) 38

FinExecutive 29

SKOLKOVO - Moscow School of Management 27

Deloitte CIS 18

Association of Banks of Russia 18

Our social media profile analysis relies on data from public groups on Facebook.

After filtering public groups to only include those with at least 1,000 likes and those aimed at Russian users, we have searched for “CFO” and “Chief Financial Officer” to narrow down the list to the following: “Finansoviy Director” (Financial Officer Magazine), CFO-Russia and CFO-Cafe.

Due to limitations on Facebook where data downloads are only allowed for public pages, we captured data from 400 profiles owned by users who have specified their current or previous job positions as a CFO, a Chief Financial Officer or a Financial Director.

Our methodology is based on automated data analytics. We have used semantic and psychometric analysis.

Gender

39 years 42 years

Average age

63% 37%

Moscow

St. Petersburg8%59%

7% Yekaterinburg

Geography


29

CFO personality profile based on open data from Facebook

Personality traits based on the Big Five model

Personality profile based on the MBTI model (ranked from 0 to 1)

Based on the Big Five model, we have identified that CFO social media profiles and general user profiles have some significant differences, with CFOs having higher scores for conscientiousness (+16 points) and emotional volatility (+22 points) above the average.

INTP CriticCritics can think many steps ahead, down to the smallest detail. Their personality is defined by broad mindedness and intellectual keenness for things that seem interesting, with the result that their behaviour and ideas are known for unpredictability. Critics work hard. While they are prudent, diligent, meticulous and thrifty, empathy is not their strong point; they are not quite good at emotional thinking when it comes to other people; they can be impolite and can easily set other people against themselves.

ISTP ExpertExperts like comfort while staying focused on practical outcome. Avoiding discomfort is what they are particularly good at. Experts are resourceful, logical and objective. Even though they tend to hide their emotions, they can hold a grudge for a long time, which can result in an outburst. They can be unpredictable and inconsistent. However, this is only so in the eyes of others. Experts will always rationalise their behaviour to themselves.

ISTJ InspectorInspector is passionate about logical and rational thinking. With a practical and, often, business-like mindset, Inspector is keen on classifying and analysing things to put them where they belong. Down to earth, realistic, strong-willed, harsh, demanding, in-control and keen on order and discipline – these are the key personality traits of Inspector. At the same time, intuition is the weakest spot, with a lack of holistic view of things and poor ability to see opportunities and what comes next. Wary and suspicious. Rather impassive, with a lack of care for feelings and interests of others. Suppresses own emotions.

* The average score is based on the personality analysis of 70,000 social media profiles selected at random.

INTP

ISTP

ISTJ

INFJ

ESTJ

INFP

ENFP

ENTJ

ENFJ

INTJ

ISFJ

ISFP

0.26

0.22

0.21

0.09

0.07

0.04

0.03

0.03

0.02

0.01

0.01

0.01

0.59

0.35

0.51

0.29

0.46

Ope

nnes

s to

ex

peri

ence

Emot

iona

l vol

atili

ty

Cons

cien

tious

ness

Extr

aver

sion

Agr

eeab

lene

ss

0.49

0.40

0.65

0.510.

62

CFOs

Average*

Also you can find the full report by following the link “CFO Survey of the Leading Companies in Russia”

https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/research-center/en_opros-finansovyh-direktorov-vedushchih-kompanij-v-rossii.pdf


30


31

Russian manufacturing sector in 2018

Russian manufacturing sector: current state and outlook In 2018, perception of the sector’s current state improved, though outlook expectations became more moderate.

Current state

Anticipated changes

Perception of the manufacturingsector as a whole shows improvement for the second consecutive year (+6 percentage points YoY).

Individual perception of manufacturing companies remains optimistic with positive sentiment exceeding negative ones by 62 percentage point.

Expectations regarding the manufacturing sector’s outlook are generally positive though somewhat subdued when compared to the previous year (-15 percentage points).

The respondents’ optimism regarding their own company decreased by 14 percentage points.

+14% +62%

+11% +30%

+8% +65%

+26% +44%


32

Positive perception of the sector’s current situation led to optimistic financial and operational forecasts.

Russian manufacturing sector: current state and outlook

Trend Highlights

In 2018, our respondents more often cited concerns about the lack of support and funding from the government (+10 percentage points), as well as corruption (+6 pp). This signified a growth in the sector’s expectations regarding government initiatives that could improve the current situation in the market.

Key development concerns in 2018

Trend Highlights

Financial performance forecasts Operational performance forecasts

• Fifty-nine percent of the manufacturing companies surveyed anticipate an increase in revenue and 52 percent expect an increase in operating profit.

• Only 12 and 16 percent of the companies, expect revenue and operating profit to drop, respectively

• Thirty-six percent of the companies plan to increase their capital expenditure over the next 12 months by an average of 20 percent.

• Forty-one percent expect an increase in production and 47 percent – an increase in sales.

• No changes are expected for the current levels of leftover stock.

• Ten percent of the companies surveyed anticipate a decrease in their overdue trade receivables.


Dependence on imports

• The share of imported materials and supplies averages 30 percent

• The share of imported machinery and equipment averages 44 percent

Key import markets for materials and supplies:

• EU – 9 percent

• EEU – 9 percent

Key import markets machinery and equipment:

• EU – 18 percent

• EEU – 8 percent

Top 5 development concerns in 2018

• Regulatory gaps

• Corruption

• Low purchasing power of the population

• Lack of government support and funding

• Geopolitical risks

Currency risks

Preferences regarding changes in the RUB/USD and RUB/EUR exchange rates*:

• Forty-three percent of the companies are interested in a stronger Russian ruble

• Twenty-three percent would welcome a depreciation

• Thirty-six percent would like to see no change, with 19 percent preferring a steady exchange rate in general rather than specific ruble values.

*against the average level for January-May 2018 (RUB/USD=58.8/1, RUB/EUR=71.1/1)

Automotive companies have the highest preference for a stronger ruble (+28 percent), while metals and metal product companies and industrial equipment manufacturers are the least interested in it (+4 and +6 percent, respectively).


33

Stable regulatory and economic policies and lower administrative barriers are generally seen as top growth drivers for the Russian manufacturing sector as a whole. Improved business processes, including professional training for the staff, are a number one driver for manufacturing companies themselves.

This year companies also give more priority to the availability of a qualified talent as a market and business driver (+12 pp and +9 pp, respectively).

Trend Highlights

Despite the overall improvement in the perceptions of the sector’s present position, a significant share of the respondents (43 percent) still holds negative views.

Russian manufacturing sector: current state and outlook

Trend Highlights

An improvement in sentiment was recorded in the chemical industry over the past year, with the share of pessimists falling by 27 percentage points to 35 percent.

Representatives of the metals and metal products industry are more optimistic, with the share of pessimists declining, putting it 10 percentage points below the average.

Starting from 2017, the situation in the automotive industry stabilized, but many respondents doubt that the nascent growth would be sustainable. The high share of pessimistic opinions (64 percent) reflects these expectations.

The most negative sentiment was displayed by companies with a domestic focus and smaller companies with revenue of less than RUB 10 billion and less than 1,000 employees. The share of pessimists in these groups was 61 to 72 percent.

Top 5 market drivers in 2018 Top 5 business drivers in 2018

Transparent and stable regulatory, tax and economic policies

Lower administrative barriers

Lower geopolitical risks

Government support

Available fundraising options

Higher domestic demand

Lower production costs

Higher production and technology capacities

Extended product line

Professional training


34

The following strategies have been prioritized by manufacturers for the second year in a row:

• Expansion into new markets (77 percent)

• Launching new products (76 percent)

• Higher production and technology capacities (72 percent)

This shows that the Russian manufacturing sector sustains positive trends that we saw a year ago.

Priority business strategies in 2018

Trend Highlights


Priority export markets

• EEU (the balance is +40 percent)

• EU (the balance is +30 percent)

Non-priority export markets

• North America (the balance is +6 percent)

Top 5 business strategies for 2018

• Expansion into new markets

• Launching new products

• Higher production and technology capacities

• Organic growth

• Import substitution

Leadership strategies*

• New production facilities and higher production and technology capacities

• Increase of exports

• Talent investment

• Foreign partnerships

• External funding

*Priority strategies for the companies expecting higher revenue and a stronger market position.


35

Manufacturing companies use hidden optimization strategies to retain their staff. These strategies include a shorter working week or unpaid leaves and were used by 22 percent of the companies in 2017.

Other development plans for 2018

Trend Highlights

Customer strategies

• In late 2017, B2B and B2G segments accounted for 54 and 24 percent of the manufacturing sector’s customer portfolio, respectively.

• Overall, 1H 2018 saw a revision of customer portfolios and a focus shift towards the B2B segment, (largely due to a decrease in the share of government contracts).

• On average, 5 percent of the companies managed to reduce their share of customers with adverse financial situation.

HR strategies

In 2017, 46 percent of the manufacturing companies in Russia optimized their staff costs:

• Thirty-six percent used staff cuts

• Nineteen percent used salary cuts

• Fourteen percent introduced a shorter working week

• Fourteen percent made use of unpaid leaves

Twenty-five percent of the manufacturing companies plan to optimize their staff costs in 2H 2018.

Overall, staff increases are expected only for production staff and will average 3 percent.

Similarly, our respondents do not anticipate significant changes to the average salary. The most significant increase will occur for top managers and production staff (4 and 3 percent on average, respectively).

Supplier strategies

• Supplier network expansion and supplier mix adjustment without changing their total number remain the most popular strategies in 2018 (44 and 35 percent, respectively).


36

Over the past year, manufacturing companies have adjusted their plans regarding state investment. The share of the companies planning to raise government funds decreased by one third from 57 to 39 percent.

Sources of capital

Trend Highlights


Sixty-nine percent of the respondents plan to raise funds externally.

These plans generally include several sources of capital:

• Private domestic investment – 61 percent

• Foreign investment – 41 percent

• Government investment – 39 percent.

Top-priority sources of capital:

• Internal sources

• Strategic partnerships

• Russian bank loans

• Government funding

Sixty-one percent of the respondents had experience raising foreign investment.

Half of them (52 percent) reported their positive non-financial impact on the company’s business.

Sixty-one percent of the companies surveyed mentioned the importance of loan refinancing for their business.

The net balance for loan refinancing is 2 percentage points down from the previous year.


37

The net balance for regulatory efficiency is 1.6 on a scale of 0 to 3, with a slight decrease over the previous year (-0.1).

This indicates the average level of satisfaction with the government’s efforts.

The sector’s growing innovation and new technology focus is evidenced by an increase in innovation and technology costs (from 8.5 percent of revenue in 2016 to 10 percent in 2018-2019).

Regulatory efficiency

Innovation and digitalization

Trend

Trend

Highlights

Highlights

During the year, the importance of investment in higher education increased significantly (+9 percentage points), which indicates a rise in business concerns about management training.

Top 3 government support options

• Tax and other financial incentives

• Government contracts

• Investment in physical infrastructure

Our respondents most positively assess the government’s support for innovation, occupational health and safety policies and protection of intellectual property (15, 14 and 13 percent, respectively).

The most negative sentiments were recorded for the energy policies (-22 percent) and industry taxes (-15 percent).

Process automation and digitalization will be priorities for manufacturing businesses in the foreseeable future.

• In particular, 55 and 52 percent of the companies, plan to automate a selected business process/business process chain, respectively,

• Smart production (46 percent)

• Internet of Things (machine-to-machine communication) (45 percent)

Top 3 innovative activities in 2018-2019

• Purchase of advanced equipment and machinery (60 percent)

• Advanced technology and innovation training for staff (54 percent)

• R&D (47 percent)

Innovation costs accounted for 9.5 percent of revenue on average in 2017 and will increase to 10 percent in 2018-2019.

Also you can find the full report by following the link “Overview of manufacturing sector in Russia”

https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/manufacturing/russian-munufacturing-market-review-2018-en.pdf


38


39

Overview of the Steel and Iron Ore Market

Key findings

According to the World Steel Association, global steel production and consumption growth continued in 2017, albeit not as rapidly as before:

• Steel output grew by 3.8 percent to 1,690 million tonnes;

• Steel consumption grew by 5.1 percent to 1,693 million tonnes.

Over the first seven months of 2018, global steel output reached 1,036 million tonnes, up 5.2 percent from the same period in 2017.

However, steel production is expected to slow down in 2H 2018. The EIU forecasts global steel production to increase by 4.3 percent in 2018. Next year, interest rate hikes will prevent inventories from growing and will dampen steel demand. Hence, in 2019, steel output is forecast to grow by a mere 0.5 percent.

In 2017, global steel consumption increased mainly due to the stable economic growth worldwide. However, according to the EIU, the robust start of 2018 is likely to be followed by moderate performance in 2H 2018 due to slower industrial growth in China, particularly in the construction sector. Overall, the global steel consumption growth is set to slow down to 2.8 percent in 2018. In 2019, interest rate hikes, lending restrictions in China and cyclical slowdown in the automotive industry in the developed markets is likely to negatively affect the global demand for steel. In 2019, steel consumption is likely to grow at a slower rate, to reach 1.3 percent year-on-year.

The current trade policy also creates risks for the forecasts. In the event that the US trade tariffs are alleviated by numerous exceptions, the forecast should be modified in accordance with new conditions. Alternatively, should the EU trade tariffs be tightened in early 2019, EU production and prices are likely to go up as a result, which may affect global prices. Also, China’s policy (reduction of statutory working days at coal mines in 2016 and shutdown of induction furnaces in 2017) has had a significant impact on global prices in the past two years. More changes should not be ruled out in China’s policy in the steel industry in 2018–2019.

In 2017, Russia was ranked as the fifth largest steel producer globally. In 2017, Russia’s steel production slightly increased to 71.3 million tonnes (up 1 percent year-on-year). In January–June 2018, Russian companies produced 35.9 million tonnes and increased the output by 1.3 percent year-on-year.

Based on 1H 2018 results, NLMK was the top Russian steel producer in output terms (8.6 million tonnes).

In 1H 2018, the year-on-year growth rate of Russian exports of basic steel products in monetary terms amounted to 7 percent for rolled products and 106 percent for tube products.

In 1H 2018, Russian imports of rolled products increased in monetary terms by 2 percent year-on-year, while imports of tube products fell by 10 percent year-on year.


40


Production output trendsIn 2017, Russia ranked fifth among global steel producers. In 2017, Russia’s steel production slightly increased to 71.3 million tonnes (up 1 percent year-on-year).

In January–June 2018, Russian companies produced 35.9 million tonnes of steel posting a 1.3 percent growth. July was not the best month for Russian steel producers. Overall, according to the WSA, Russia’s steel production increased by a mere 0.8 percent year on year, reaching 6.2 million tonnes.

Metal products shipped (RUB billion)

Source: Rosstat, the Russian Economic Development Ministry

According to the Russian Economic Development Ministry, in July, the GDP grew 1.8 percent year on year (1.1 percent in June, 1.8 percent in 2Q 2018). In total, the GDP rose 1.7 percent year on year in January–July 2018. After the temporary negative drivers ran out of steam, the industry recovered and became the main contributor to faster GDP month on month growth in July. In July 2018, the industrial production growth accelerated to 3.9 percent year on year (from 2.2 percent in June) upon the improved performance in the resource and manufacturing industries.

Metals and mining was a key contributor to faster growth in the manufacturing industry (from 2.2 percent year on year in June to 4.6 percent in July), as it normalized after a significant slowdown in June. Other manufacturing industries posted positive performance too.

In the past two months, the year-on-year performance in the manufacturing industry was affected by the calendar factor. In June 2018, there was one working day more and in July 2018, there was one working day less than in the respective months in 2017. Adjusted for working days, the manufacturing industry’s performance was more moderate (growth to 3.9 percent year on year in July from 3.0 percent in June). The median growth in the manufacturing industry (smoothing the impact of ‘local’ factors) was 3.0 percent year on year in July, and 3.2 percent in June.

2018

2017

Jan

MayFeb

Jun

Mar Ju

l

Apr

357

395409

356389

427406

422

478477

419

496480515

Steel production output in volume terms, 2017–2018

Jan–

17

May

–17

Sep–

17

Jan–

18

May

–18

Feb–

17

Jun–

17

Oct

–17

Feb–

18

Jun–

18

Mar

–17

Jul–

17

Nov

–17

Mar

–18

Jul–

18

Apr

–17

Aug–

17

Dec

–17

Apr

–18

-3 -2 0

-14

-22

5

-577

-25

11

34 0

-3

2 0

5,4615,710

5,929

5,473

5,9726,096

6,195

5,9306,0865,933

5,9345,981

6,066

6,1106,336

6,096

5,740

6,217 6,170

Steel production (million tonnes) Growth rate (%, y-o-y)


41

In 1H 2018, EVRAZ, NLMK, Severstal, MMK, Metalloinvest, and Mechel produced in total 32.5 million tonnes of steel, which accounted for 91 percent of the Russian steel output at the time. Top Russian metal makers demonstrated margins varying from 26 percent to 36 percent, all up on the previous year except for MMK whose EBITDA margin was down 1 percent.

EVRAZ NTMK increases the geography of railway wheel shipments to EuropeEVRAZ NTMK launched railway wheel shipments to Slovakia. In 2018, the company will ship around 1,000 wheels for freight cars to ŽOS Trnava railcar repair company. ŽOS Trnava is a new client for EVRAZ. The company is one of the top five largest railcar repair workshops in Europe, together with ÖBB TS Werk Knittelfeld (Austria), Kolowag (Bulgaria), FWN (Germany) and SZ-Vit (Slovenia), who had become EVRAZ partners earlier. “Deliveries to railcar repair companies are an important area of our wheel sales, as historically, this market segment accounts for over 70 percent of demand,” stated Ilya Shirokobrod, EVRAZ Vice President of Sales and Logistics. “In addition, expanding sales to Europe strengthens EVRAZ’s position in this priority market.”

In 1H 2018, Severstal supplied over 2.7 million tonnes of steel products to Russian construction companiesIn 1H 2018, Severstal, a leading global integrated steel and iron ore producer, shipped 2.717 million tonnes of steel products, which is 7 percent above the 1H 2018 level.

Severstal’s steel products are used to erect the largest infrastructure facilities in Russia. In particular, Severstal shipped around 40 thousand tonnes of various steel products for the construction of all 12 stadiums in preparation for the 2018 FIFA World Cup.

NLMK Group to open a service center in South Africa.NLMK South Africa will supply abrasion-resistant (NLMK Quard) and high-strength (NLMK Quend) thick plates produced at the Belgian NLMK Clabecq. NLMK South Africa will also make parts of these steel products as per customers’ requirements.

Key clients of the new service center will include mining, machine-building, construction and other companies, not only in South Africa, but also in Namibia, Botswana, Zimbabwe, Mozambique, Angola, Zambia, etc.

Source: company data

Financial performance of the top Russian steelmakers

Revenue, USD million EBITDA, USD million EBITDA margin (%)

1H 2018 1H 2017 1H 2018 1H 2017 1H 2018 1H 2017

EVRAZ 6,343 5,106 1,906 1,152 30% 23%

NLMK 5,906 4,700 1,727 1,221 29% 26%

Severstal 4,432 3,698 1,580 1,207 36% 33%

MMK 4,161 3,586 1,210 907 29% 25%

Metalloinvest 3,779 3,032 1,491 1,061 39% 35%

Mechel 2,639 2,574 696 694 26% 27%

Steel output by the top steelmakers, 2017/2016 (thousand tonnes)

1H2018

1H2017

2,4

96

NLMK Metalloinvest EVRAZ Mechel Severstal MMK

5,6

95

6,0

94 8,2

34

2,3

73

6,9

90

2,2

17

6,3

04

6,1

76 8

,594

6,8

32

2,0

51


42


Consumption trends

Key steel consuming industries show stable performance compared to more robust 2017 results. The automotive industry’s potential is restrained by low new car sales (seasonally adjusted), which remained at around 150 thousand cars per month in the past several months, while the year on year growth slowed to 10.8 and 10.6 percent in June and July, respectively (compared to 21.1 percent year on year in January–May).

Crude oil consumption since 2014 (million tonnes)

Steel product consumption since 2011 (million tonnes)

2014

2015

2016

2017

44.7

44.4

49.4

43.4

2011

2015

2012

2016

2013

2017

2014

42.838.6

43.1

41.539.8

43.3 40.6

The construction industry remains volatile this year too. However, construction works continue to stagnate at levels reached in mid–2017. Investment-grade automotive products and construction material output showed solid growth again (18.3 percent and 7.6 percent year on year, respectively). However, both figures were below the June levels in seasonally adjusted terms despite the stable growth in the preceding months.

Starting from April, fixed investments were negatively affected by business sentiment due to high financial market volatility. As a result, the PMI index fell to 48.1 in July 2018.

The demand for steel products may grow after the programmes are announced to implement the presidential decrees dated last May. Those programmes are expected to result in new major investments in the infrastructure including construction of highways, railroads, airports, strategic bridges, as well as city and housing renovation.

Russian Purchasing Managers Index (PMI) in 2017

Jan–

17

May

–17

Sep–

17

Jan–

18

May

–18

Feb–

17

Jun–

17

Oct

–17

Feb–

18

Jun–

18

Mar

–17

Jul–

17

Nov

–17

Mar

–18

Jul–

18

Apr

–17

Aug–

17

Dec

–17

Apr

–18

52.5

50.351.1

50.2

49.550.8

51.6

52.0

49.8

54.7

52.4 51.9 52.151.3

52.4 52.751.5

50.648.1


43

Map of Russia’s key steel production and processing plants

Source: Company data

Steel production12.9 million tonnes


Steel production252 thousand tonnes







4

3

3

14

3

67

5

2

9

8 6

5

7

1

2

6 9

8

5

6

3

3

4

2

4

1

1

12

101

45

2

2

7

45

3 Steel production

Iron ore production and processing

Coal production and processing

Metal ware production

NLMKIron ore production and processing1. AO Stoylensky GOK

Steel production2. Novolipetsk Steel

Electrical steel production3. VIZ-Stal

Flat products4. NLMK Ural 6. NLMK Kaluga

Metal products5. NLMK Metalware

EVRAZIron ore production and processing1. EVRAZ KGOK4. Evrazruda

Steel production2. EVRAZ NTMK3. EVRAZ ZSMK

Coking coal production and processing5. Yuzhkuzbassugol 6. Raspadskaya7. Mezhegeyugol

SeverstalIron ore production and processing 1. OAO Karelsky Okatysh 2. Olenegorsky GOK 10. Yakovlevsky GOK

Coking coal production and processing3. OAO Vorkutaugol

Steel production4. Cherepovets Steel Mill

Metal products5. Izhora Pipe Mill 6. ZAO Severstal – Long Product Mill Balakovo7. Severstal-Metiz (Cherepovets)8. Severstal-Metiz (Orel)9. Severstal-Metiz (Volgograd)

MechelCoal production, processing and sale1. PAO Yuzhny Kuzbass

Iron ore production and processing2. AO KhK Yakutugol 3. Elgaugol

Coking coal production and processing4. PAO Korshunovsky GOK

Steel and metal products5. PAO ChMK (Chelyabinsk Metallurgical Plant)7. PAO Izhstal

Metal products6. AO BMK8. PAO Uralskaya Kuznitsa9. Vyartsilya Metal Products Plant

ММКMetal products 1. ZAO Lysvensky metallurgical plant 2. OAO MMK-Metiz 3. OOO Intercos-IV

Coal production and processing 4. OOO MMK Coal

Steel production5. AO Magnitogorsk Iron and Steel Works

MetalloinvestIron ore production and processing1. Lebedinsky GOK2. Mikhailovsky GOK

Steel and metal products3. OEMK 4. AO Ural Steel

Also you can find the full report by following the link “Overview of the Steel and Iron Ore Market”

https://www2.deloitte.com/content/dam/Deloitte/ru/Documents/energy-resources/overview-of-the-steel-and-iron-market-en.pdf


44

Top 5 M&As*Target company Industry Bidder

companySeller company Deal value

(USD, mln)**Additional information

Ammoni JSC Chemicals Management Company of Russian Direct Investment Fund JSC, Indorama Corporation, Yadran-oil JSC

Tatammoniy LLC, Venture Fund of the Republic of Tatarstan Vnesheconombank

800 Investors expect that the deal will allow them to expand their chemical industry presence in Russia and Ammoni will boost its performance and market value.

Novorossiysk Commercial Sea Port PJSC (25.05% stake)

Consumer business: transport

AK Transneft OJSC

Summa Group LLC 750 With this acquisition, Transneft will have over 50 percent of votes in the management body and will have the right to elect over 50 percent of members of the collective management body of Novorossiysk Commercial Sea Port. Transneft will hold a 60.66 percent stake in the company.

Yakovlevsky GOK JSC

Energy and resources: mining industry

Severstal PJSC Metall-group LLC 118 Severstal expects to increase the output of Yakovlevsky GOK five times to 5 million tonnes of iron ore by 2023 after investing USA 374 million. The headcount will double to 2,500.

SIA International Ltd. JSC

Consumer business Magnit PJSC Marathon Group LLC

87 The acquisition is part of Magnit’s strategy to develop such business areas as cosmetics, household chemicals and medicines with respect to storage and logistics infrastructure.

VIST Group JSC Technology and telecommunications

JSC Pharm-standard

JSC Rosnano 46 The transaction will help the company to continue the geographical development of its network and extend the variety of nuclear medical services. JSC Pharmstandard will hold 100% interest in LLC PET-Technology.

(Russian companies)

* Mergers and acquisitions

** Public information about the transaction value

Source: Merger Market


45

Global windTop news: Russia and Asia

Top news: Russia and Europe

26 November 2018A new Hyundai engine plant to open in Saint Petersburg Hyundai Motor Manufacturing Rus plans to build a new engine plant in St. Petersburg. The company seeks to investment RUB 27 billion into the project. The plant is expected to produce 150,000 engines of 1.6L displacement per year instead of delivering them from China. Construction is to start in early 2019.

30 October 2018Japanese manufacturers to build an innovative tape-wound core plant in the Primorye regionTokyo Rope is planning to build a plant to produce innovative tape-wound cores used in electric power transmission line cables in the Russian Far East for this project. The production will be based on proprietary technology. The total amount of planned investment is RUB 7.8 billion.

30 November 2018Mercedes-Benz plant to open in the Moscow Region in April 2019The Mercedes-Benz plant is under construction at the Esipovo Industrial Park in the Moscow Region. The project envisages EUR 300 million in total investment.When completed, plant production is set to reach 25,000-30,000 cars a year; the project is also expected to create more than 1,000 jobs.

12 November 2018Enel Russia to invest EUR 273 million in a wind park in the Murmansk RegionEnel Russia and the Murmansk Region government have signed a cooperation agreement to support the construction of a 201 MW wind park.

16 October 2018Huawei and Skolkovo Foundation to build a new innovation campus During the Open Innovations Moscow International Forum, Huawei and the Skolkovo Foundation agreed to establish an innovation campus. Among its priority areas will be algorithm development for wireless 5G systems and IoT, wire and wireless communication systems, AI based media information processing, and search for new machine learning methods (in cases of insufficient learning samples).

10 October 2018LibraAM Limited to invest RUB 23.9 billion into bus production at the Alabuga special economic zoneLibraAM Limited, a Hong Kong company, intends to implement a three-stage investment project. The first stage provides for bus assembly plant construction (RUB 1.5 billion). The new plant will be able to equip buses with either natural gas fuel engines or electric and hybrid engines. The second stage envisages construction of NGV stations and service stations (RUB 11.9 billion). Client fleets are expected to be renewed during the third stage (RUB 10.5 billion).LibraAM plans to produce 3,500 buses per year and create about 1,200 jobs.

15 October 2018Novartis invested USD 150 million in its pharmaceutical manufacturing facility in St. Petersburg Novartis Neva launched the first production line for a full-cycle medicinal product Galvus, designed to treat type 2 diabetes mellitus. Localization of this drug is part of Pharma 2020 strategy. Currently, three drugs are localized, and about 18-20 products will be localized in four years.

10 October 2018Volkswagen Group may invest another EUR 500 million in Russia Volkswagen Group may double the capacity of its engine manufacturing facility in Russia. For that to happen, Volkswagen needs to sign a special investment contract to retain access to state support. The German concern has already invested EUR 1.85 billion in projects in Russia.

Source: InvestinRussia.com, Kommersant


46

Useful stickers

THE 2019 FORTUNE CRYSTAL BALLBusiness forecasts for 2019 from Fortune magazine.

TOP EMERGING MARKETS BY BLOOMBERGRussia ranked 2nd after Malaysia in the updated list of Top 20 emerging markets.

BLOOMBERG: THE PESSIMIST'S GUIDE TO 2019 Bloomberg describes various "pessimistic" world development scenarios for the next 10 years.

OUTRAGEOUS PREDICTIONS 2019 Saxo Group's team has formulated 10 “outrageous predictions” for the year ahead.

DOING BUSINESS 2019Russia ranked 31st (4 notches up compared to the previous year).

TOP DIVIDEND PAYERS IN 2017In 2017, total dividend payouts by Russian companies to shareholders exceeded RUB 5.3 trillion, a 7 percent increase compared to 2016.

(in Russian)

GLOBAL WEALTH REPORT 2018In 2018, aggregate global wealth rose by USD 14 trillion (4.6%) to a combined total of USD 317 trillion.

FORBES’S LIST OF LARGEST FOREIGN COMPANIES IN RUSSIA Top 50 companies owned by foreigners by more than 50 percent.

(in Russian)

https://www.bloomberg.com/graphics/pessimists-guide-to-2019/

http://fortune.com/2018/12/03/predictions-2019-future-business/

https://www.home.saxo/en-gb/insights/news-and-research/thought-leadership/outrageous-predictions

https://www.bloomberg.com/news/articles/2018-11-27/turkey-sinks-to-last-on-emerging-market-scorecard-malaysia-tops

http://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf

https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html

https://www.rbc.ru/economics/12/11/2018/5be760789a7947357191e59e?utm_source=fb_rbc&fbclid=IwAR2ECNNcZnkIUc0AM2drudZs3d7k_UlqCaFqkbyiA47fY0Q-F64259hARsE

http://www.forbes.ru/rating/369567-zarubezhnyy-kapital-reyting-krupneyshih-inostrannyh-kompaniy-2018?fbclid=IwAR1NBCpwU_s7YwOndalNUqrAQ2U84umo_ufLnhxFboIKqtoBiNUASn49O5o

Joe [email protected]

Lora NakoryakovaResearch Centre [email protected]

Dmitriy KasatkinSenior Research [email protected]

Mikhail GordeevSenior Research [email protected]

Vladimir SokolovSenior Research [email protected]

Yulia AfanasyevaAnalyst [email protected]

Victoria PigalkinaAnalyst [email protected]

Contacts

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