Page 12 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 1.5: Individual Russian client wealth, 2006 (US$)
No of HNW individuals
56 87
240
960
2,957
US$500m+ US$100-500m US$35-100m
US$20-35m
US$25-20m
Totals 190bn
Total assets
US$90bn
US$19bn US$22bn
US$29bn
US$30bn
US$
UHNW
Aspiring HNW
4,300
Source: Finans Magazine 2005, Scorpio Partnership, Citigroup Own Estimates
One worry from rising incomes is that the rich are getting richer faster than the poor are getting less poor. The gap between Russia's richest 10% and the poorest 10% has widened to a multiple of seven, according to a study at the end of 2006. Experience shows that a difference between the top and bottom-tier salaries of more than 10 times tends to cause social instability. The proportion of ‘well-off and rich’ Russians with incomes higher than RUB20,500 per month went up last year from 8.5% to 9.2%, according to the Living Standards' research and Citibank.
In general, the wealth of the country is starting to trickle down as more and more Russian businesses start to flourish. In the 1990s wealth distribution was simple: a huge block of the population on starvation wages and a small block of super-wealthy oligarchs. However, following five years of strong growth, the shape of wealth distribution has been transformed into the more traditional pyramid shape. This remains a pyramid with very steep sides, but thanks to the emerging middle class the gradient has been falling steadily (see Figures 1.4 and 1.5).
The key question is whether consumer spending has built up enough momentum not only to prevent another financial crisis if oil prices collapse, but to fuel Russia's ongoing growth.
Construction
After natural resources and consumer spending, construction is the biggest contributor to economic growth and has been expanding fast in the last two years, being the fastest growing sector in 2006. Construction accounted for 15% of the economy in 2006, according to Rosstat and grew by a robust 14% over the year.
According to preliminary data, the real estate boom in Moscow, where apartment prices were up over 70% in 2006, seems to have reached its peak. However, real estate prices (especially residential) in the regions are still growing and will continue to do so for at least another year.
Financial services
Banks are the fourth largest contributor to growth, accounting for 10% of the economy. However, the financial sector is growing very fast and total assets of the banking system expanded by 37% in 2006 (see ‘Russian bank sector fundamentals’, Chapter 2).
Investment
Low investment is the Achilles heel of the otherwise sparkling Russian economy. Russia's fixed investment totalled RUB4.5trn (US$173bn) in 2006, or about 19% of GDP, according to Rosstat.
However, the World Bank view is that emerging markets need to maintain fixed investment levels of over 20% if they are to sustain economic growth. Peter Westin, chief economist at MDM Bank, said in a paper last year that as Russia emerges from the simple ‘catch-up’ stage of recovery, where most growth comes from filling empty seats on production lines, the country is starting on a new phase of growth where investment is key. At the end of 2006, levels of investment in Russia could either follow the experience of Latin America, where initial fast growth stalls and leads to
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