Russia Infrastructure Report Q2 2016 - New Market Research Report

International sanctions that are weakening the economy, coupled with low oil prices, underline our bearish outlook over the Russian construction sector. We currently forecast Russia's construction industry to by 1.8 % in real terms in 2016 - a mild improvement compared to the deep 6.6% contraction of 2015 - as a result of low base effects and the adjustment of the economy to the new oil price environment.

Latest Updates And Structural Trends

Russia's actions in Ukraine have resulted in international sanctions, some of which target loans from the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). These sanctions will continue to have a significant impact on the Russian government's capacity to fund infrastructure projects.

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Middle Eastern and Chinese construction companies will increase their market share in Russia's competitive landscape as a result of Western sanctions imposed after the country's actions surrounding the Ukraine crisis. Shifting the balance away from European firms will diversify Russia's options for funding and project delivery.

Our Country Risk team maintains a bearish outlook over the Russian economy and forecasts a continued recession of -0.7% GDP real growth in 2016 before returning to only modest growth from 2017 onwards. Russia's annexation of Crimea and perceived belligerence towards Ukraine, in addition to falling oil prices, have triggered significant rouble volatility and massive private net capital outflows. The flight of capital, which could have otherwise been deployed to productive investment domestically, has worsened the investment outlook.

We maintain our view that political risk will continue to curtail construction industry growth as corruption is endemic and public policy remains opaque, convoluted and subject to frequent change.

Risk/Reward Index

The crisis with Ukraine, sanctions against Russia and falling oil prices have considerably affected the country's macroeconomic picture and our outlook for construction industry growth in particular. Since then, Russia has dropped from 6th to 15th place out of 18 countries in our RRI for the Central and Eastern European (CEE) region.

Russia's Industry Rewards score is now 40.0, below the regional average of 47.1. This is explained by the downward revision of our forecasts for construction industry value.

In terms of risks, we continue to highlight multiple threats to investors in Russia, from political and forex, to legal and regulatory factors, which make it more difficult for projects to attract the private capital required for their implementation.

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