Grinding to a halt
A Soviet legacy of misallocated investment, the ‘resources curse’ of overdependence on oil and gas income and US sanctions all mean the Russian economy has become a quagmire. The 2014-15 commodity-price crash only made matters worse, triggering a recession in oil-revenue dependent Russia.
Although oil production and prices have since risen, the economy remains anaemic. GDP only grew by a paltry 1.4% each year on average from 2016-18. Output growth then slowed sharply in the first quarter of this year, reflecting poor domestic demand and weak investment performance.
Moonshot: Russia's giant leap
Putin is set on breathing life into the faltering economy and wants to achieve GDP growth of 4% a year by the end of his term in 2024. At the heart of his agenda are the 12 National Projects which will invest $396bn in the country over this period – the equivalent of 4% of GDP – using a mixture of public and private funds. While the headline figure is disputable, we believe these projects still have the potential to help modernise Russia’s economy.
A recent IMF paper highlights the trajectories of South Korea, Hong Kong, Singapore and Taiwan – the so-called ‘Asian miracles’. These countries did not face Russia’s unique challenges, but Singapore’s rise from swamp to skyscrapers and South Korea’s recovery from a brutal war were also improbable stories.
We think that Russia may follow the Asian miracles’ ‘moonshot’ approach to development. This is when the ‘leading hand of the state’ pushes the economy into new industries and domestic firms provide the necessary technology themselves. Encouragingly, several of the National Projects show flickers of ‘moonshot’ thinking, including $25.2bn set aside to support digitisation.
Ecommerce: primed for take off
During a recent trip to Russia, our team gained valuable insights into the ecommerce sector. The industry only accounts for 4-5% of all retail sales, compared to more than 20% in China. Nonetheless, we think it is well placed to take advantage of the National Project’s investment in digitisation.
In the past, Russia’s ecommerce sector has lagged behind those of other emerging markets. The country’s size and geographically dispersed population mean that cost-effective distribution is a challenge. But the market is ripe for development: more than four-fifths of Russians have mobile phones and internet data is cheap.
If logistical hurdles can be overcome – and we think there is appetite from ecommerce firms to do so – the market could take off.
Remedying a logistical nightmare
Both Mail.Ru and Yandex have told us that they think lockers and pick-up points are good solutions to last-mile delivery issues in Russia. These drop-off locations can be scaled quickly and cheaply and are gaining popularity – even offline retail firms are using lockers to maximise the value of floor space.
Firms are also securing investment by forming strategic partnerships with lenders or foreign competitors. One such partnership is between Mail.Ru and Sberbank. Mail.Ru will contribute its Delivery Club and Citymobil apps to the food-delivery and ride-hailing partnership, along with roughly $100m in funding. In return, Sberbank will invest $600m. This collaboration will help both firms expand their user bases into less-penetrated regions. Mail.Ru has also partnered with AliExpress, a subsidiary of Chinese firm Alibaba. The joint venture has $382m to spend and will also enable expansion beyond St Petersburg and Moscow.
While an investment in digitalisation may help spur innovation and help diversify the economy, the National Projects initiative may not be enough. Decades of underinvestment have taken their toll and Russia is far behind developed countries in measures of economic complexity.
Expanding Russia’s technology frontier is a vital step towards rebalancing and modernising the economy. Comprehensive reform is needed to create a competitive economy that can deliver this. Although the National Projects are an encouraging step forward and will support our investments in the country, it is far from certain that the much-feted spending program will land Russia its moonshot moment.