Economic development in Russia

As for gross domestic product (GDP) development, the post-Soviet Russia has wit-nessed changes in this millennium: The first decade was one of fast growth followed by a depression coinciding with the global economic downturn. Thereafter, the economy has regained a slower growth pace.

The Russian GDP grew rapidly during the first decade of the 21^st century. This growth is contributed to unusually high total factor productivity growth, while capital stock and labor grew by only 1% per year (International Monetary Fund 2012, p. 6). (International Monetary Fund 2012, p. 3-6) TFP is a variable which accounts for changes in total out-put not caused by inout-puts (Encyclopaedia Britannica 2013b). Thus the growth is fueled by advances in technology, for example.

The Ministry of Defence of Finland (2012, p. 71) attributes most of the growth during the 2000s to the increase in oil prices and availability of production capacity that has been idle since the 1990s. Luo (2002, p. 356) specifies this capacity to be converted from military industrial facilities that Russia inherited from the USSR. The dependency between the growth of the Russian economy and oil price is not merely a common as-sumption, but it seems to be so also in the light of statistics. During the 1990s, there was a clear correlation between these two: a 10% permanent increase or decrease in the price of oil was associated with a 2.2% growth or fall (respectively) in the level of Russian GDP. A similar effect also applies to the real exchange rate of the ruble. (Rautava 2002) After almost a decade of rapid growth, Russia’s GDP fell by 8% in 2009. Thereafter, the GDP has returned to a growth track. The economic growth is expected to remain slow at least during 2013 as a result of insecurity in the global economy and trade, which affects the heavily oil and gas dependent Russian economy. (Ministry for Foreign Affairs of Finland 2012)

The base rate of forecasts for GDP growth in the upcoming years is 3-4%, which may be less if the global situation worsens. Private spending and the growing middle class are expected to increase domestic demand thus supporting economic growth. (Ministry for Foreign Affairs of Finland 2012) This slow growth is due to the absence of the phe-nomena that made growth possible: oil investments will wither, oil price will stay steady and there is little idle capacity to be harnessed. (Ministry of Defence of Finland 2012, p. 71) GDP development and forecasts for Russia and other key markets for Company X, the United States and the Euro zone, are compared in figure 2.5.

Figure 2.5. Real GDP development in Russia, the United States and the Euro Zone.

2011 and 2012 are based on actual developments, 2013 and 2014 are IMF forecasts.

(International Monetary Fund 2013)

As is with GDP development in figure 2.5., the construction industry is growing in Rus-sia at a pace above global average – and substantially better than Western Europe. This growth is due to increased private investment in commercial, industrial, infrastructural and residential construction projects, but it also owes to various international events or-ganized in Russia such as the Winter Olympic Games 2014 in Sochi and the Fifa World Cup 2018. Other than these events, some key opportunities in the industry include the Moscow expansion, Skolkovo innovation center and the plans to invest in the hospitali-ty, retail and residential sectors. (UK Trade & Investment)

A key component of the Russian construction market is renovation and upgrading to western standards. Most Russian residential buildings were constructed during the Sovi-et era, and after the fall of the SoviSovi-et Union, they were either privatized or moved over to municipal ownership. Moscow and Saint Petersburg have been able to keep up with construction modernization and new building, but in most parts of Russia the majority of buildings, apartment buildings in particular, are in a deteriorated state. This offers enormous potential to construction companies, and obviously residential buildings forms a large part of the new build market their percentage being 90 % of all new con-struction. (Rinne 2007, pp. 11-12) The residential building sector, however, is rather irrelevant to Company X, as it does not target the residential buildings with its suspend-ed ceiling systems.

Globally, the majority of Company X’s revenue comes from renovation, and its sales are not dictated directly by volatility in the new-build construction industry. In Russia, the situation is different, however, as new-build construction is booming and there is constant demand for construction materials. Annual construction cycles with nearly all construction happening during the summer do not affect Company X as much as

“nor--1%

mal” construction industry, because suspended ceiling systems can be added or altered year round, and thus their demand is quite level.

A major change that will affect the Russian economy and market is Russia’s member-ship in the WTO. Russia was officially accepted as a member state in December of 2011 and joined the WTO in August of 2012, which has had a great impact on liberalization of import tariffs. (International Trade Centre 2012, pp. 24-25) This will make the im-porting of products easier for foreign companies, but it cuts the state budget and is to some extent harmful for in-country production plans like Company X’s: high import tariffs were an important reason to pursue in-country production for many companies, and lowering them will lessen a company’s competitive advantage in relation to com-petitors importing their products. However, the import tariffs vary between different industries and products. On average, they will be lowered only by 3%, and their effect is mitigated also by long transition periods (Kosonen et al. 2012, p. 53).