Engines of the Russian economy

In any state with high GDP there are companies well-known abroad. Their activity spreads beyond the national borders, and sometimes the brand cost exceeds fixed assets value. These corporations rule the roost of the world economy, being the largest investors and employers, and source of innovations at a global scale. They supply goods and services being an integral part of the modern house-keeping. Toyota, Samsung, Siemens, Apple, Michelin, Exxon Mobil – rather everybody know profile and country of these holdings’ origin.

Russia is no exception: the Russian companies are on the international markets and their brands are well-known. Mainly it is about companies of the fuel and energy complex (FEC). One school of thought holds that opportunities for formation of high level added value are limited due to the raw materials base of the country’s economy. However the Russian economy has natural competitive advantages, because industry and agriculture are rarely existed without HC-hydrocarbon, as well as city-living will be quite difficult without them. Despite of active search of new sources of energy by foreign researchers and investment in alternative energetics, Gazprom and other companies leading in FEC still play the key role at this market.

The largest companies of Russia in term of annual turnover

According to the analyses of the largest companies of Russia in term of turnover (Top-100), excluding FEC enterprises accumulating 58,4% of total annual turnover for 2015, quite high share falls for companies engaged in trade (14,1%), metallurgy (6,2%), transport (5,6%), electric power (4,1%), chemistry and petro-chemistry (3,6%), communications (3,6%), etc.

These figures are self-explanatory: currently the national economy is quite diversified (see picture 1).

Distribution of total revenue of Top-100 companies of Russia by sectors, % according to the results of 2015Picture 1. Distribution of total revenue of Top-100 companies of Russia by sectors, % according to the results of 2015

The table of leaders according to the results of 2015 and compared to 2014 has not been significantly changed: seven of ten from Top-10 companies are included in FEC, wherein Gazprom leaved its long-time competitor, Rosneft Oil Company, behind and took the lead. Turnover of gas corporation amounted to 4 334,3 bln RUB that is equivalent to USD 70,7 bln at the mid-year ruble-dollar rate. For example Wal-Mart, American retail corporation, leading in the world by annual revenue, has an annual turnover of USD 482,1 bln.

Retailers Tander (Magnit chain) and Trading House Perekrestok have demonstrated the largest increase in revenue (see table 1).

Table 1. The largest companies of Russia by annual turnover
Company Annual turnover for 2015,Bln RUB. Increase (decrease) in turnover to 2014, % Sector
1 PJSC Gazprom 4 334,3 8,6 FEC
2 PJSC Oil Company Rosneft 3 831,1 -10,9 FEC
3 PJSC Russian Railways 1 510,8 7,8 Transport
5 JSC TANDER (Magnit) 1 032,0 24,3 Trade
10 LLC LUKOIL-West Siberia 695,8 11,0 FEC

The largest companies of Russia by net profit

Net profit is another indicator speaking about engines of the Russian economy.

FEC is also leading by this indicator: 71% of total net profit of Top-100 companies is accumulated in this sector (see picture 2). The second place is taken by the ferrous and nonferrous metallurgy (8,9%) and then follows the chemistry and petro-chemistry (4,8%).

Besides traditional industries, Top-100 contains IT-company Yandex, providing services in Russia, CIS, Turkey and France.

Distribution of total net profit of Top-100 companies of Russia by sectors, % according to the results of 2015Picture 2. Distribution of total net profit of Top-100 companies of Russia by sectors, % according to the results of 2015.

Mining and Metallurgical Company "Norilsk Nickel", world's No. 1 in nickel production, grew 2015 net profit by 329% (almost in 4 times).

Following the results of 2015, the largest net profit was recorded for Surgutneftegaz (751,4 bln RUB), that exceeds Gazprom’s results (403,5 bln RUB) almost in two times (see table 2).

Table 2. The most profitable companies of Russia
Company Net profit in 2015, bln RUB Increase (decrease) in net profit to 2014 г., % Sector
2 PJSC GAZPROM 403,5 113,5 FEC
3 PJSC Oil Company Lukoil 302,3 -18,7 FEC
4 PJSC Oil Company Rosneft 239,4 -52,2 FEC
6 PJSC MMC NORILSK NICKEL 146,2 329,3 Mettalurgy
8 LLC LUKOIL-West Siberia 97,0 15,6 FEC
9 JSC TATNEFT named after V.D. Shashin 85,0 3,6 FEC
10 PJSC NOVATEK 84,1 101,4 FEC

Except key figures of activity, the most expensive companies of Russia by total assets worth and current market capitalization should be mentioned.

The largest companies of Russia by assets worth

Gazprom is on the top of the rating of the most expensive companies by total assets worth: in 2015 they were assessed in almost 13 tln RUB. The second place is for Oil Company Rosneft (9,4 tln RUB) and Russian Railways are the third (5,1 tln RUB). The sum of assets of Top-10 companies will exceed 42 tln and be a half of the Russian GDP.

The state controls the majority of companies in the list, and plans of Rosneft privatization for tinkering with the budget seem to be reasonable – the company is a sweet spot in the governmental property. The opponents of the accommodating approach speak about undesirability of these measures. Background of the nearest Eastern European countries where the sale of the most expensive assets in the governmental property took place, lead to disappearance of some real economy segments or their complete degradation.

Table 3. The most expensive companies of Russia by the assets volume
Company Assets volume in 2015, bln RUB Increase (decrease) in assets to 2014, % Sector
1 PJSC Gazprom 12 981,2 6,0 FEC
2 PJSC Oil Company Rosneft 9 449,9 21,3 FEC
3 PJSC Russian Railways 5 057,1 4,3 Transport
5 JSC ROSNEFTGAZ 2 834,8 25,6 FEC
6 PJSC Oil Company Lukoil 2 023,2 15,2 FEC
7 SUE MOSCOW METRO 1 601,9 10,6 Transport
8 JSC ATOMENERGOPROM 1 473,8 3,6 Electric power
9 PJSC ROSENERGOATOM CONCERN 1 470,7 8,5 Electric power
10 PJSC GAZPROM NEFT 1 400,5 19,5 FEC

The largest companies of Russia by market capitalization

Currently, following the results of stock exchange trading, Oil Company Rosneft is first by the market capitalization: in November 2016 its capitalization approached to 3,7 tln RUB.

On November 28 Sberbank, being the third, for several hours was the most expensive company that indicates volatility of trades.

Comparing the assets volume and market capitalization, it is reasonable to conclude that the Russian business is highly underestimated. Assets of Oil Company Rosneft’s exceed the market capitalization in 2,6 times. Enormous potential for assets market growth is obvious, while now it is under the pressure of external fundamental grounds (statements of politics and opinion of financial institutions, volatility in oil market) and doesn’t indicate the real cost of enterprises.

Table 4. The most expensive companies of Russia by market capitalization
Company Current market capitalization, bln RUB Share in total capitalization of all PJSC in Russia, % Sector
1 PJSC Oil Company Rosneft 3 682,3 10,9 FEC
2 PJSC GAZPROM 3 539,0 10,5 FEC
3 PJSC SBERBANK of Russia 3 350,9 9,9 Banks
4 PJSC Oil Company Lukoil 2 700,5 8,0 FEC
5 PJSC NOVATEK 2 208,9 6,5 FEC
6 PJSC MMC NORILSK NICKEL 1 660,0 4,9 Metallurgy
8 PJSC MAGNIT 991,7 2,9 Trade
10 PJSC BANK VTB 891,0 2,6 Banks

Though complicated economic conditions, the Russia companies have potential for growth. Currently about 4,6 mln companies operates in the country. Domestic economy is quite diversified. There are industries where the losses after the dissolution of the Soviet Union are observed - first of all, it is about engineering industry and machine tool industry. Conversely, companies of next generation have appeared for the relative short time range: IT, mobile operators, trade chains, even nowadays are approaching to FEC and metallurgy corporations by financial indicators.

Tow for automotive industry

When the sector being in crises for four years will begin to recover?

Optimistic forecasts have failed: the year of 2016 is worse for the Russian automotive industry than expected. In general, the demand on new light vehicles has been decreasing for already four years. Therefore the manufacturers have to raise prices, reduce the presented production range and review output plans.

High prices make the demand recovery difficult. New cars in the Russian market have got up by 7% this year, and a sharp turnabout in prices could take place in 2017. Despite of quite stable rouble rate, the expected rise in price will be above the inflation rate and reach from 4% to 7% according to the different estimates. Growing prices may be caused by two reasons, and low rouble rate is the key one. Even increase in prices sizable for consumers for the past two years (the average price of a new vehicle in Russia has increased approximately by 40% since 2014) didn’t overcome the rates of national currency devaluation which is still incompletely reflected in current prices. The cars will also be more expensive due to expenditures on the implementation of ERA-GLONASS security system which is planned to be commissioned at the beginning of the forthcoming year. First of all, increase in prices, followed by the implementation of the system, will have an impact on public sector in which even very slight changes are considerable for consumers.

State support is vital. According to the state support programs (funding of discounts on new cars at utilization of the old ones or trade-in, soft auto lending and leasing), about 50 bln RUB were totally appropriated from the budget for the market recovery in 2016. As a result, these measures provided almost a half of cumulative sales. Although it didn’t allow to fully compensate the increase in prices on new cars, it is obvious that the situation in the industry would be much more worse without the state support. At the same time, the current supporting programs are petered out and needed to be renewed. The Government has already told about plans on changing their format in order to allow previously disregarded consumers to get the support. This is about special benefits for social workers, programs like “First car”, “OSAGO as a gift” etc. Some programs, such as utilization and trade-in as main expectants, will be annulled. The President of Russia, Vladimir Putin, gave pledge to support the automotive industry in 2017 and the funding will be granted again.

Long-term strategy. Last month the Ministry of industry and trade submitted the strategy of the automotive industry development for approval of the Government. It is suggested to keep the sector potential up to 2018 using all state support tools for creating the necessary level of the enterprises load. In 2018 – 2020 the output of automotive components, investment in research and, and significant increase in export will be accentuated. Before 2025 the competitive environment with export volume of 30 – 50% should be formed, and there will be an opportunity to mold a strategy of technologies rapid development. After reviewing the document, Arkady Dvorkovich, Deputy Prime Minister, qualified it as live and incomplete due to the absence of comprehensive market analyses, specific measures of the sector development, forecast of increase in output and sale. As a result, the presented edition was declared unsatisfactory and sent under development. However it can be stated that foundation of long-term development of the domestic automotive sector has begun.

On the way to recovery. Despite of continuing disruption, the market was able to overcome the shock. According to the analysts, the dynamics of light vehicles sale in Russia may increase due to the number of favorable macroeconomic factors. The experts note the annual inflation slowdown and increase in actual wages, which should promote rise in sales. The stable rouble and further reduction of the Central Bank key rate, due to which auto loans will be more affordable, can be additional support. Speaking about forecasts, the experts are extremely careful with assessments. However there are those who tend to believe in the sector’s recovery, when some market participants expect the continuous slowdown. A number of analysts forecast positive trends in 2017 and the current year will be final in the four-years falling cycle. In spite of the fact that the mass improvement of the situation should not be expected, positive trends and increase in market volumes by about 5% can be counted on. The important role in the market recovery may be played by increase in export of cars assembled in Russia, including foreign branded. According to forecasts, 60 th cars will be exported in the current year, and the market potential allows this figure to be increased to 110 th in 2017. The particular role in the market development belongs to the state support, which should become more targeted, reasoned and focused on specific buying groups.