Russia and Ukraine – Investing during the crisis?
The global economic crisis has hit Russia and Ukraine particularly hard. This downturn is not merely down to the global financial crisis, but also because of their structural and efficiency problems, and because their economies had overheated in recent years. In Ukraine, political stability is also affecting the economy. The fallout from this is also affecting Austrian companies, which have invested EUR 51 billion in the two countries. In the medium to long term, however, the economic prospects for both markets are good. Roland Berger Strategy Consultants is advising international investors to adjust to the changing conditions and get ready for the coming upturn now.
"Austria has committed EUR 51 billion to these countries, EUR 41 billion of this in bank loans and 10 billion in direct investment," explained Dr. Uwe Kumm, Roland Berger's Managing Partner for the CIS, on a Business Breakfast in Vienna.
Both economics face the same problem: focus on raw materials. Oil, gas, minerals and metals account for 82% of all Russia's exports and 44% of Ukraine's. Most higher added value products are imported. Furthermore, the infrastructures in both countries have been severely neglected. One third of all roads are not entirely usable, and the rail network is outdated. Investment is required urgently, but the economic crisis means the resources available are severely limited. The problem will get worse. And the crisis also means they will fall further behind Western companies in terms of efficiency and innovation. Russian steel companies are only around 40% as productive as Western ones, Ukrainian companies even less so.
While things are tight at present, the medium to long-term prospects for both countries are good. In Russia, the government is taking sound action. And setting up government holding companies in strategically important industries may be one way of stabilizing the situation in the short term. Business will need to be more independent in the long term, though. So the country has adopted a stability program worth EUR 55 billion and put around EUR 150 million into supporting the currency. These economic actions represent 6% of Russia's GDP, making them bigger, relatively speaking, than the US government's crisis package or those of the EU member states.
Upturn expected relatively soon
Although the downturn is hitting just about all industries in Russia at present, the country still offers interesting opportunities for international investors. The roadmap for after the crisis is already being drawn up. Businesses need to try to safeguard their existing market positions now and get ready for the coming upswing at the same time. In the medium term, this upturn will be powered mainly by rising oil prices. Protecting the Russian banking system will also contribute massively towards stabilizing the situation. The banks haven't prepared themselves enough for significant credit defaults as yet. Foreign players in the market should act fast and above all manage their risks better. A pragmatic approach has proved to be the best here: first, analyze your credit portfolio and cluster it, then draw up cluster-specific plans of action, while at the same time restructuring where needed. Ultimately, taking action fast and reviewing it regularly will give a decisive competitive advantage.
Forecasts for the Russian construction sector are also fundamentally positive. While construction is expected to fall by 2% p.a. on average by 2012, an increase in civil engineering will make up for this to some extent. But ambitious government plans have fallen through in the past, though; and this doesn't allow for current budget cuts yet either. Food retailers have come through the crisis relatively unscathed to date. Russian products in particular are amongst those benefiting from the crisis. So it's particularly important for international companies to tailor their products to the Russian market. The Russian car industry has potential too: the market may have collapsed, down 40-50%, but is very likely to recover fast by 2011. Local manufacturers in particular are benefiting from devaluing the ruble and rising import customs duties.
The upturn in Ukraine will be delayed
The situation in Ukraine is more difficult: GDP will shrink by 6-10% in 2009. After that, the Ukrainian economy will stagnate, or grow slowly at best. This is further exacerbated by the fact that the country is dependent on international aid loans. Like Russia, Ukraine needs to act to minimize the risks in the banking sector, as most institutions' positions will continue to deteriorate. Ukraine's steel industry also urgently needs investments to keep working. Construction has virtually collapsed with Ukraine's banks halting credit to building contractors and consumers in the second half of 2008. Investment in infrastructure is trailing badly.
One Ukrainian industry that did do well in 2008 was agriculture. After years of poor returns, it notched up a record year. New investment means it is also set to grow further, in processing in particular. Ukraine could also be an attractive tourist destination, although it lacks the necessary infrastructure and hotel capacity. If the country can stabilize itself politically, it too would be an attractive growth market for foreign investors.
"Austria has committed EUR 51 billion to these countries, EUR 41 billion of this in bank loans and 10 billion in direct investment," explained Dr. Uwe Kumm, Roland Berger's Managing Partner for the CIS, on a Business Breakfast in Vienna.
Both economics face the same problem: focus on raw materials. Oil, gas, minerals and metals account for 82% of all Russia's exports and 44% of Ukraine's. Most higher added value products are imported. Furthermore, the infrastructures in both countries have been severely neglected. One third of all roads are not entirely usable, and the rail network is outdated. Investment is required urgently, but the economic crisis means the resources available are severely limited. The problem will get worse. And the crisis also means they will fall further behind Western companies in terms of efficiency and innovation. Russian steel companies are only around 40% as productive as Western ones, Ukrainian companies even less so.
While things are tight at present, the medium to long-term prospects for both countries are good. In Russia, the government is taking sound action. And setting up government holding companies in strategically important industries may be one way of stabilizing the situation in the short term. Business will need to be more independent in the long term, though. So the country has adopted a stability program worth EUR 55 billion and put around EUR 150 million into supporting the currency. These economic actions represent 6% of Russia's GDP, making them bigger, relatively speaking, than the US government's crisis package or those of the EU member states.
Upturn expected relatively soon
Although the downturn is hitting just about all industries in Russia at present, the country still offers interesting opportunities for international investors. The roadmap for after the crisis is already being drawn up. Businesses need to try to safeguard their existing market positions now and get ready for the coming upswing at the same time. In the medium term, this upturn will be powered mainly by rising oil prices. Protecting the Russian banking system will also contribute massively towards stabilizing the situation. The banks haven't prepared themselves enough for significant credit defaults as yet. Foreign players in the market should act fast and above all manage their risks better. A pragmatic approach has proved to be the best here: first, analyze your credit portfolio and cluster it, then draw up cluster-specific plans of action, while at the same time restructuring where needed. Ultimately, taking action fast and reviewing it regularly will give a decisive competitive advantage.
Forecasts for the Russian construction sector are also fundamentally positive. While construction is expected to fall by 2% p.a. on average by 2012, an increase in civil engineering will make up for this to some extent. But ambitious government plans have fallen through in the past, though; and this doesn't allow for current budget cuts yet either. Food retailers have come through the crisis relatively unscathed to date. Russian products in particular are amongst those benefiting from the crisis. So it's particularly important for international companies to tailor their products to the Russian market. The Russian car industry has potential too: the market may have collapsed, down 40-50%, but is very likely to recover fast by 2011. Local manufacturers in particular are benefiting from devaluing the ruble and rising import customs duties.
The upturn in Ukraine will be delayed
The situation in Ukraine is more difficult: GDP will shrink by 6-10% in 2009. After that, the Ukrainian economy will stagnate, or grow slowly at best. This is further exacerbated by the fact that the country is dependent on international aid loans. Like Russia, Ukraine needs to act to minimize the risks in the banking sector, as most institutions' positions will continue to deteriorate. Ukraine's steel industry also urgently needs investments to keep working. Construction has virtually collapsed with Ukraine's banks halting credit to building contractors and consumers in the second half of 2008. Investment in infrastructure is trailing badly.
One Ukrainian industry that did do well in 2008 was agriculture. After years of poor returns, it notched up a record year. New investment means it is also set to grow further, in processing in particular. Ukraine could also be an attractive tourist destination, although it lacks the necessary infrastructure and hotel capacity. If the country can stabilize itself politically, it too would be an attractive growth market for foreign investors.
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