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Russia's Changes In Attitudes, Changes in Latitudes

The economy is growing, more than most institution's are aware

This post first appeared on Russia Insider

Last week the World Bank finally concluded that the Russian economy has indeed emerged from recession and has even demonstrated modest growth this year.

Based on their analysis, Russia's GDP in 2017 will grow by 1.7% and in 2018 by 1.8%. Experts at the World Bank stated that "The medium-term growth outlook for Russia has slightly increased after a faster than expected recovery in demand in the domestic market and higher exports."

<figcaption>UAZ Patriot</figcaption>
UAZ Patriot

Unsurprisingly both the International Monetary Fund (IMF) as well as Fitch improved their forecast for Russia's GDP growth from 1.4 to 1.8 percent in 2017, and from 1.6% to 2% respectively.

Nevertheless the projections used by Russia’s Ministry of Economic Development in drafting the budget for the next three years shows conservative growth of 2.1% in 2017, 2.1% in 2018, 2.2% in 2019 and 2.3% by 2020.

Barring any unforeseen Black Swan events or new obstacles set up from afar my personal view and on-the-ground assessment calls for slightly higher growth, even to the 3+% range.

When institutions make estimates and projections, the input data used is normally that which has been visible, quantified and analyzed to death already. In the case of Russia, it is usually limited to Oil & Gas, Military sales, Agricultural exports and the usual commodities and products that have at least a 3 to 5 year trailing tail of audited numbers.

These in most cases are publicly listed firms and the large government/private owned companies. What is harder to track and quantify, even guesstimate are the many small to midsize privately owned entrepreneurial endeavors, or those stodgy irrelevant Soviet era throwbacks that are not taken very seriously in this day and age. Well, perhaps they should be. It is a fact of life as well as business that when you are beaten into the ground so low there are only two ways to go… decompose or rise again.

One such example is the Ulyanovsk Automobile Plant that is busily starting the export of their all-wheel drive SUV "UAZ Patriot - Hunter" to Mexico. The first “Patriots” will no doubt be four wheeling on the streets of Tijuana by this New Year. The automaker is not massive by global standards, however their much improved production and QC emphasizes durability, simple reliability and ease of self-servicing.

This has attracted strong interest in several countries where infrastructure and terrain make these qualities paramount.

So far this year UAZ signed a number of contracts with distributing partners in West Africa, Southeast Asia, the Middle East and Latin America. In addition, the company has already begun supplying cars to Honduras, China, Liberia, Mali, Myanmar, Paraguay, the Philippines and Ecuador. The UAZ plant specializes in all-wheel drive passenger cars, commercial vehicles and vans.

Efforts have started in Russia's Black Earth belt and other agro-centric regions by new companies like OOO “Biotechnica” in Kursk that will receive locally grown grain and deep process the grain into a number of previously imported subset products – from DWG to textiles.

The forecast for wheat export from Russia by 2020 is 30 million tons, which is a lot of raw material to deep process. Even though Russia is now a leader in the grain market it has traditionally sold only the raw materials, but this is now changing to include processed products.

The tried and true simple milling of grain into flour, cereals, and animal feed do not result in significant profits. Deep processing, involving the extraction and further technological separation and refining of grain components has long been the world’s largest industry. A new and developing area for Russia and one that will become a strong fast-growing industry in the coming 2 – 5 years.

In addition, the advanced processing technologies enable production of products with a high value added, which are in regular demand both in Russia and abroad. This fits hand in glove with the import substitution movement and is a logical progression in the development of Russia’s agribusiness to avoid the excesses of external factors such as sanctions, artificial restrictions of the free movement of goods and capital.

Today most all products from the deeper processing of grain are imported into Russia from Norway, Germany and China. The dynamics of growth in this sector within Russia could see not only internal demand being satisfied by local production, but also competitive as export to the world’s markets as well.

While Blockchain and Crypto-currencies are all the rage and investing in potential applications are sprouting up like speculative mushrooms worldwide, recognition and acceptance by governments has been lukewarm at best. That being said, just the other day the Russian government set out its position on crypto-currencies.

Plans are afoot to issue a Crypto-Ruble, which would permit various cryptocurrencies to operate alongside the Ruble. This will not happen in 2017, but the regulatory framework has been outlined and we may very well see the Crypto-Ruble already in play as soon as 2018 at least within the Eurasian Economic Union (EAEU), and thereafter worldwide.

Russia gets it, it is cognizant of how Blockchain and Cryptocurrencies can dramatically improve efficiencies in the movement of capital, and insulate against often arbitrarily imposed outside constraints.

Growth is ongoing, the World Bank and other similar institutions see it, but the exciting and under-reported stories of what is going on in Russia from the Pacific to the Baltic may well propel economic expansion sustainably higher than the 1.6 – 2% rate popularly expected.

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