BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Russia's overall CBBER is 65.3. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. Russia's CBBER is third out of the countries we monitor in Central and Eastern Europe. Within the CBBER the most important aspect is the banking market structure element of the limits of potential returns, which accounts for 42% of the overall CBBER. Russia's rating for this element is 74.4, the highest in the region by a significant margin. It is significantly higher than the country element of the limits of potential returns (48.2). Russia has a sophisticated commercial banking sector, with relatively large total assets and expectations of very strong growth in total assets and client loans in 2007-1012. Nevertheless, the CBBER shows that Russia's banking sector is being considerably held back by country factors, including high corporate taxation, inefficient financial infrastructure and GDP volatility.

The economy is expected to remain robust through the long-term with real GDP growth above 5.0% until 2012. As seen in trends developing in H107, we believe investments and private consumption will increasingly be the major factors driving growth, with the construction, manufacturing and retail trade sectors likely to outperform. Real GDP expanded by 7.8% year-on-year (y-o-y) in Q207, up from the 7.0% in Q206. Combined with the robust 7.9% y-o-y increase in Q107, this figure is in line with our fullyear 2007 real GDP growth estimate of 7.3%, reinforcing our view that strong capital investments and historically high energy prices will push the economy to its second fastest annual growth out-turn this decade. As a result of the strong H107 figures, the government raised its GDP growth estimates and concurs with our 7.3% expectation, with its – and our – 2008 forecast now at 6.5%. We forecast the economy will begin slowing in 2008, alongside a gradual long-term decline in global energy prices, but diversification beyond the oil and gas sectors will ensure GDP growth stays above 5.0% through to 2012.

We noticed a shift in the major economic growth factors in H107. Capital investments, especially in the manufacturing sector are taking an increasingly important role in the economy, with gross fixed capital formation growth in Q207 hitting 22.9% y-o-y, translating into a record gross capital formation ratio of 21.0% of total GDP. With capital funnelled into fixed investments, the manufacturing sector has shown a marked upswing in 2007, with the sector expanding by 11.8% y-o-y in Q107 and 6.2% in Q207 as measured by production-based GDP volume. The construction sector too has benefited from increased investments, with construction volumes expanding above 20% y-o-y throughout H107, well above the 1.1% y-o-y and 10.1% growth levels in Q106 and Q206, respectively.