Chris Weafer: Only investment will sustain Russia's economic growth above 3%
Published on 24 June 2015 by Editorial
Last month, the 21st Russian Pharmaceutical Forum in Saint Petersburg was presented with a keynote that looked at maсro-economic indicators in the Russian Federation as well as prospective outcomes for the Russia's pharmaceutical sector in the post-crisis era. Delivering the keynote was Chris Weafer, a founding partner of the Macro-Advisory consultancy firm, which provides companies and investors with economic, political and industry analysis for Russia and the broader Eurasian region.
During the conference, we caught up with Chris for a follow-up conversation to his keynote speech, during which he shared with us his views on the state of the Russian economy, projections on changes surrounding import substitution, the potential for international R&D operations in the country as well as his prognosis for the Russia's national healthcare system as a whole.
Christopher J. Weafer (Chris) has worked in Russia for seventeen years. Most recently he was voted the best Russia investment strategist for 2013 by investors in separate polls carried out by Thomson Reuters Extel and Institutional Investor magazine. He has regularly placed in the top three of these respective polls over the past dozen years.
Before leaving to co-found Macro Advisory Ltd in late 2013, Chris held the position of Chief Strategist at Sberbank-CIB, Russia's largest bank and one of the biggest banks in Europe. Prior to that he served for four years as Chief Strategist with Uralsib Financial Corporation and for five years with Alfa Bank, two of Russia's largest privately owned financial groups. His first role in Russia was as Head of Research with Troika Dialog, a privately owned investment bank, from June 1998. He held that position for over four years. Prior to Russia, Chris had worked in Bangkok, Abu Dhabi and Dublin.
Chris is the author of a wide variety of published articles about Russia, Central Asia and the trend in macro oil. He is also widely quoted in the international financial press and appears regularly on BBC, CNN International, CNBC and Bloomberg on these and related subjects.
Looking at Russia’s economic climate, many businesses are wondering if the economy could find itself in an even worse situation than it currently is. What are you projections for the next 1-3 years?
The performance of the economy since the start of this year has been much better than had been expected. For the 1st quarter the economy declined by 1.9% over the same quarter of 2014 and that is a very good result given the headwinds buffeting the country. But while the economy is not now facing the feared major collapse, it is in recession and some industries, such as construction and consumer sectors, are experiencing worsening conditions.
The economy is expected to slow further over the medium term and we forecast a full year decline of 3.5%. What happens to sanctions, i.e. when they may start to ease in the financial sectors in particular, and especially where the oil price trades, will have a direct impact on the performance of the economy over the next few years. We assume that the geo-political backdrop will slowly start to improve and oil will not face another major collapse. But, even with this benign backdrop, we expect only a small pick-up in the economy in 2016 and 2017, somewhere between 0.5% and 1.5%.
There will not be a V shaped quick recovery in the economy, even with more favorable oil price and geo-political trends. The economy had started to slow from mid-2012 because the trickle down oil wealth was no longer capable of sustaining strong growth. The economy now needs a big investment led boost in order to sustain growth above 3%. Attracting that investment, both from Russian and foreign investors, will be a slow process and will require greater government efforts to improve the business climate.
It has been declared that import substitution will become one of Russia’s priorities for the next couple of years. Do you think that MNCs, which currently supply over 70% of all prescribed drugs in Russia, have a reason to be fearful?
Import substitution, or localization, has now emerged as the government’s most important industrial strategy. The sanctions against Russia and the rapid devaluation of the ruble in the last quarter of 2014 have given greater impetus to the country’s efforts to become more self-sufficient in basic industries, such as in agriculture, food and pharmaceuticals.
This is not just a reaction to last year’s events, albeit the crisis has certainly helped create more of a focus on the need to cut reliance on imports. The President has been talking about this strategy as desirable for many years. But today he is talking about it as a necessity and we do, therefore, expect to see more serious efforts and specific actions emerge later this year and in the coming years.
I do not see any danger that imports of drugs will be blocked or that the MNC’s position will be threatened with, e.g. efforts to build Russian companies to effectively displace the MNCs business in Russia. It has long been accepted by the government that Russian industry cannot replace the expertise and efficiency of MNCs in Russia. Instead we have seen greater efforts to create JV’s in important industries and also to encourage and help MNCs establish production and R&D facilities inside the country.
That is basically what the import substitution strategy is all about; to persuade an international company to manufacture products inside Russia’s borders rather than to bring them in from other locations. Initially the focus will be on creating incentives but it cannot be ruled out that later there may be some barriers to imports, albeit not if there is a risk creating shortages of important products.
Assessing where Russia currently stands with regards to R&D. In your understanding, will the market opportunities remain sufficient for the top international players to consider establishing world-class R&D operations in the region?
Historically there has always been a great reluctance by international companies to locate important R&D facilities inside Russia. Partly because there is a fear that technologies and processes may be stolen or replicated by local competitors and legal protection may be weak. There is also a concern over the availability of skilled staff to work in such facilities. Russia has always had a strong science-focused education system, especially in the universities and technical institutes, but over the past two decades there has been a very big decline in the number of graduates and in the quality of the training. Many of Russia’s skilled scientists and engineers have emigrated or have been attracted to other employment with better pay.
To create word class R&D facilities will not be just a matter of financial incentives. It is part of the process required across the whole economy to rebuild the third level education and training programmes and to improve the business and investment climate. Only then may we see a greater willingness by MNCs to locate R&D in Russia.
An alternative is, however, now available with the creation of the Eurasian Economic Union (EEU). A large multi-national company could choose to set up its R&D and production facility in, for example Armenia which has been focusing very effectively on building a technology industry, and then under internal EEU trade rules, supply the Russian market from there.
Do you think there is political will to ensure that healthcare (including effective drugs provision) is recognized as one of the key priorities? Do you believe we will see the emergence of a sufficiently financed national healthcare system in the next five years?
Improving and expanding all aspects of the healthcare industry is, along with improving the agriculture and food sectors, a declared top priority for the government. We have heard this clearly stated many times over the past five or six years by the president as well as by senior ministers.
There have also been some specific actions taken to help boost investment into all areas of the industry and not only are there no restrictions on private sector investment, but this route is now being more actively promoted.
Improvements will continue but, realistically, on a slow path. The recent economic crisis and the need to devote more financial and administrative resources to the whole import substitution programme, as well as in such areas as the expensive defense procurement programme, means that no one area may advance very quickly in isolation. I believe that Russia will have a much more efficient and well funded national healthcare system but perhaps more likely in ten years rather than in five.