Can Russia shake its dependence on energy exports?

Can Russia shake its dependence on energy exports?

Russia boasts an abundance of energy reserves, which make up a significant proportion of the country’s total commodity exports. Along with metals and other precious commodities, oil and gas exports are key contributors to the growth of the Russian economy. While energy exports generated rapid economic growth before the recession, Russia paid dearly for this dependence during the global economic downturn.

When energy prices were high, Russia saw a massive influx of foreign credit and increased consumer spending. Prior to the recession, foreign investors poured nearly $500 billion into large state firms and private companies, overheating the economy. Once oil prices dropped, energy exports and consumer demand collapsed, subjecting Russia to a sharp economic decline. Gross domestic product shrank by 7.9 percent in 2009 after having posted growth of 8.1 percent in 2007 and 5.6 percent in 2008.

The downturn in the economy affected all key Russian business sectors. General industrial production, mining, and primary metal production all showed significant double-digit declines in 2009. Automotive sales fell by nearly 60 percent in the same year, as consumption dwindled in consequence of increasing unemployment rates. Closely associated with industrial production and transportation, demand for lubricants dropped by 28 percent in 2009 compared to 2008 figures.

Immediate action taken by the government to alleviate the impact of the recession was a U.S. $200 billion rescue plan, aimed at increasing liquidity in the financial sector. A further $20 billion was infused in the economy in the form of tax cuts and subsidies to consumers and industries. Positive response has come from some industries. For example, the “cash for clunkers” program helped increase sales in the automotive industry.

Going forward, these events indicate, that Russia needs to diversify its economy and find new drivers of economic growth. The government seems to be taking steps in this direction. The Russian government is soliciting investments to create and grow new industry clusters such as information technology, communications, biomedicine, and nuclear energy. The government is also seeking to grow investments to develop innovative and green technologies, improve energy efficiencies in its old industries, and improve its infrastructure. To facilitate these investments, Russia has reduced the number of industries which are “strategic” and hence off-limits for foreign investors. Russia is also considering eliminating capital gains tax on long term direct investment in these preferred industries and offering tax breaks for companies investing in innovative and green technologies.

Penetration of high performance lubricants will be driven by how effectively the “economic diversification” mantra is implemented. Investments in infrastructure improvements will drive growth in many lubricant end-use industries such as construction, mining, machinery, and metal fabrication. The Russian manufacturing sector is characterized by old, obsolete, energy inefficient, and polluting equipment. Most state industries are ripe for modernization. In a new business environment, and with new government ideology, there would be a growing trend for replacing old equipment. This trend would create demand for lubricants in various capital goods industries. This trend would also help improve the quality of lubricants consumed. Synthetic and semi-synthetic industrial lubricants so far, represent niche markets in Russia that local producers struggle to penetrate. But, with accelerated equipment modernization, demand for synthetics can increase.

The Russian lubricants market seems to be showing a moderately strong recovery and is projected to achieve pre-recession level consumption by around 2014. The recent moves by the Russian government to re-orient their economy raises interesting prospects for the growth of high performance lubricants in the industrial sector. Local suppliers are rapidly expanding their product range, improving quality, and supporting their product performance claims with international quality certifications and OEM approvals. Their major task is now to continue improving their product development and technical services efforts, and more importantly changing customer perceptions about their quality.

For more information about the lubricant market in Russia, see Kline’s Opportunities in Lubricants 2011: Russia Market Analysis.

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