Russia: Economy Why Companies Fear a Bleak Investment Landscape in Russia
The economic and political situation will continue to have a significant effect on the consumption and production of machine tools, moulds and dies in Russia.
Russia has historically represented a steady if modest source of demand for machine tool, die and mould making equipment, particularly small in comparison to the other three BRIC countries (Brazil, India and China) which have experienced rapid economic expansion in the last decade. And with the political and economic uncertainty currently gripping the east European countries looking set to continue throughout 2015 and 2016, it may take some time before its markets return to growth.
Economic situation set to worsen
Russia’s annexation of Crimea in the first quarter of 2014 and the subsequent conflict in east Ukraine embroiled the former communist country in a political crisis which has precipitated a sharp loss of market confidence that continues to undermine the whole economy. The situation has been exacerbated by a sharp fall in global oil prices from $100 per barrel in June 2014 to $60 per barrel in December of the same year. This, together with economic sanctions imposed on Russia by western nations, has adversely affected government revenue and caused significant depreciation for the ruble as investors rushed to sell off their Russian assets leading to further consequences for Russian imports and exports.
Russia had already seen its gross domestic product (GDP) growth slowing to an estimated 1.3% in 2013, down from 3.4% the previous year. The World Bank also predicted a negative growth outlook for Russia in 2015-2016 with the economy expected to contract by 3.8% in 2015 and 0.3% in 2016 respectively whilst financial analysts expect the country to remain in deep recession throughout this year. Investment is projected to contract for the second year in a row as the Russian government delays some of its large infrastructure projects whilst private investors are also expected to cut back on investment programs due to difficulties in securing financial capital. The fallout is likely to have a pervasive effect on mould, die and machine tool making companies both within Russia and in other countries which rely on the country as a leading export market.
Imported machine tools dominate
The depreciation in the value of the ruble may mean that the small volume of machine tool, die and mould making equipment produced in Russia itself may look like better value for international buyers when set against imports from other countries. But equally the cost of credit purchases due to high interest rates means Russian buyers may struggle to obtain investment capital whilst the need to refinance existing debt repayments is also limiting the spend on new equipment.