Business of Sport. Can World Cup 2018 be a game changer for the business of football in Russia? July 2016

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1 July 2016 Russia Macro & Population Trends E 2025E GDP, $bln $2,010 $1,640 $2,610 Population* GDP p/capita, $ $14,056 $11,195 $17,447 GDP p/cap PPP $ $24,880 $23,896 $30,000 Source: State Statistics Service, Macro-Advisory Ltd * 2017E and 2025E includes 2.3 mln in Crimea Russian Advert Spending, , US$ mln TV $559 $461 $225 Radio $60 $47 $23 Press $303 $133 $29 Out of home $184 $121 $57 Internet $71 $181 $203 Other $13 $16 $6 BTL $287 $259 $141 Source: Russia Communication Agencies Key Macro Forecasts - Base Case 2017E 2018E 2020E Growth, real % YoY 1.4% 1.9% 3.0% Retail sales, % YoY 2.0% 3.0% 5.0% CPI - year-end, % YoY 4.0% 3.8% 3.5% Budget balance, % GDP -2.3% -1.5% 0.0% Current account, % GDP 1.9% 1.9% 4.0% Unemployment, % eop 5.5% 5.4% 5.4% RUB/US$, year-end RUB/EUR, year-end Av. Brent, US$ p/bbl $51 $58 $60 Source: Macro-Advisory estimates For full list refer to Appendix 1 & Appendix 2 Russia's National Team Ranking Ranking Place FIFA 61 Power Ranking 34 Source: FIFA Ready for the World Cup Source: RIAN.ru Tom Adshead tga@macro-advisory.com Aaron Schwartzbaum contributed to the research and preparation for this report Can World Cup 2018 be a game changer for the business of football in Russia? Football a game in which everyone gets hurt and every nation has its own style of play which seems unfair to foreigners. George Orwell, English writer Confederation Cup ran smoothly. The recently concluded Confederation Cup was effectively used to test systems and procedures which will be used during the World Cup. There are no reported problems or concerns. WC2018 is on track. Russia s stadia are either ready or will be by year end. There are perceived risks associated with, for example, hooliganism and racism, but the Russian authorities are preparing and are expected to handle any such incidents. Advertisers and sponsors have concerns. The tournament is struggling to attract sponsorship, partly because of the tainted image of FIFA and partly because of the scandals involving Russian sports. There is also a concern of a repeat of the international criticism of Russia s LGBT legislation which resulted in a wave of negative Russia coverage in the lead up to the 2014 Sochi Olympics. Football is big business in Russia. The Russian Football Premier League (RFPL) is the sixth largest in Europe in terms of revenues, despite the recent fall in income. The sport is easily the most popular in Russia, which has the largest population in Europe, in terms of attendance and TV audience. Healthy base with room for growth. The business associated with football could be much bigger. There is potential for innovations, such as Monday night live games, to boost viewing figures. Economic barriers to growth. The five privately-owned clubs in the RFPL have better sporting and economic results than the other eleven municipally-owned clubs. Weather challenge. The RPFL recently moved to a winter schedule to overlap with the European league timetable. This has reduced attendances but should be solved as stadiums are upgraded. TV revenues are low. The total TV revenues of the RFPL in 2016 are estimated at EUR40 million, which is very small, compared to many EU leagues. The main challenge and opportunity for the RFPL will be to generate content for the fast-growing internet advertising market, which had advertising revenue of US$203 million last year, compared to $142 mln five years ago. WC2018 and economic recovery. Russia had the world s fifth biggest consumer economy in 2013 and spending patterns were following the trends of developed Western economies. Now that the economy has returned to growth the hope is that the 2018 tournament may act as a catalyst for growth in the business of football, opening up opportunities in such areas as sponsorship, advertising, merchandising and other areas of sports spending. No warranties, promises, and/or representations of any kind, expressed or implied are given as to the nature, standard, accuracy, or likewise of the information provided in this material nor to the suitability or otherwise of the information to your particular circumstances. Macro-Advisory Limited does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the content contained in this note. Copyright Macro-Advisory Limited

2 Summary points This is the first of a series of reviews looking at the economic potential and opportunities for investors and businesses from Russia s sports sector. Sport is already big business in Russia but, as the economy resumes growth and lifestyles evolve towards international norms, the business of sport in Russia has very considerable potential for growth. For our clients, we provide more detailed analysis and forecasting and carry out tailored research projects to help them best position to profit from the expected expansion. The Confederation Cup tournament, held in several Russian cities in June-July, went very well and without incident. It was used to successfully test procedures, both for staging and broadcasting the games and managing the expected volume of visiting fans, to be used at the 2018 World Cup. It is expected that all facilities for the World Cup will be ready on time. The 2018 tournament has struggled to attract sponsorship deals. Partly that is because of the poor image of FIFA and partly it is because of the perception of Russia, both in terms of hooliganism and racism risk, but also generally because of the continuing controversy over the US election allegations and sanctions. Russia and Chinese sponsors and starting to fill the gap and will benefit longer term from that exposure in the domestic game. The cost of staging the tournament is estimated at US$11 billion but, for that, Russia will get a number of upgraded stadiums and improved facilities, which should help grow the appeal of the sport and the fan base, especially as the new stadiums will be more comfortable for fans in the winter months. Football is already the most popular sport, in terms of game attendances and TV audience, and while it is the sixth biggest league in Europe, it has significant potential to grow as a business compared to many other leagues in the continent. Russia s consumer economy grew to be the fifth biggest in the before the start of the slowdown from late Over the past five years, the government has accepted that the country needs a different growth model, one that is much less dependent on hydrocarbons and other extractive industries. That new model is now starting to emerge* and will be the core policy during the next presidential term. The economy is again starting to grow but, as is illustrated in the long-range macro-forecast table in Appendix 2, the next phase of growth will be slow. But it will happen, and Russia, with the largest population base in Europe, should again challenge to be a top-four consumer economy. That expected growth, i.e. as sport and football in particular, starts to replicate the business models of the large European leagues, will offer significant opportunities for businesses. Russia is quite unique in many respects but, as is seen already across many areas of the economy and in terms of lifestyle, the evolution of the country is not much different to that seen elsewhere. The key difference is that Russians go straight to the latest technology or methods. One example is in advertising where the fastest segment is in online spending. This reflects the fact that Russians are increasingly watching sports, and other programming, online and via hand-held devices as well as computers. *Macro-Advisory provides updated reviews for forecasts for the Russian economy on a monthly basis and for the other major economies of the CIS-Eurasia region on a quarterly basis. To see these reports or to ask for a trial subscription, please visit 2

3 World Cup countdown Venues are on target. WC2018 is scheduled to begin on 14 June 2018 and finish on 15 July. The tournament will be held across 11 cities in European Russia in 12 stadiums Moscow, where the final is to be held (Luzhniki Stadium) has two. Three stadia that will host matches are completed, one (Saint Petersburg Arena) has been declared completed but work remains ongoing. Work on all stadia is targeted to finish for completion by the end of Important tournament for the country. Despite delays, cost overruns, and familiar allegations of corruption/misallocation, WC2018 remains a project of strategic importance for the Kremlin. The chances of stadia not being ready on time for the tournament is very low and the general level of readiness is much better than for Sochi. Visa-free travel for fans. Russia has instituted a visa-free entry regime for WC2018 ticket holders, who will be allowed to enter the country within 10 days of the beginning of the tournament and remain until ten days following the tournament s conclusion. Instead of the usual complicated and costly visa process, fans will be able to register in advance for FAN ID cards that will grant benefits for local transportation as well. The Confederations Cup 2017 was used to uncover any bugs in the system and to resolve them. Boycott fears are unfounded. Concern has been voiced in the Russia media that the 2018 World Cup may be subject to a Western boycott. Ever since the boycott of the 1980 Olympics in Moscow, this fear has been expressed ahead of almost all major tournaments held in Russia. However, realistically, based on current known events, these fears are also unfounded, especially given the current pragmatism in the attitude of the White House and many EU states towards Russia. Assuming no deterioration in Syria and Ukraine, it does not seem likely that Russia will give its opponents a reason to boycott the World Cup. Usual mixed reaction to be expected. As always, Russia s supporters will find reasons to deem the World Cup a success and its detractors will find reasons to deem it a failure. For the Russian government, it will achieve its limited goals of allowing the Putin administration to claim to have brought Russia onto another world stage, and of providing a small Keynesian boost in state investment when the economy needed it. Russian Supporters Will Find Reason to Cheer Source: Wikimedia 3

4 Investment opportunities: World Cup Two separate issues. For investors, the opportunities to participate in the World Cup and the question of positioning to benefit from the development of football as a sport and business in Russia may be considered as two separate considerations. Tournament-specific opportunities. The main opportunities here are related to sponsorship packages and advertising at venues and on TV, and other media, during the tournament and especially during high-profile games. These opportunities, which are considered in more detail later in this report, include: Stadium finishing, e.g. electronics, sound systems, safety control, etc. Concessions for food & beverages. Although most of the in-stadium facilities are provided under FIFA deals, there are opportunities in the host cities and close to fanzones. Merchandising here also the in-stadium and official FIFA merchandise is tightly controlled, as has been seen in other tournaments.but there is significant potential for other merchandising sales in the host cities. Associated leisure sectors. Over one million fans are expected to visit Russia during the tournament and hundreds of millions will watch broadcasts from Russia during the June-July 2018 competition. This offers a considerable opportunity for businesses to advertise their services in Russia. Russia is part of the Eurasia Economic Union and the dominant economy in the CIS-Eurasia region. The total population of the region is 250 million. China s enormous One Belt & One Road transport infrastructure passes through Central Asia and Russia on route to the EU. The links between Russia and China continue to grow, partly on the back of this transport integration. Some big concerns. The main concerns potential sponsors and advertisers have, and which has led to a slow pick-up in the available packages are: FIFA s tainted image after the corruption scandals exposed after the award of the last two tournaments. International companies are clearly concerned about their own reputational risk if these scandals were to worsen. Hence, for many, the prudent course is to wait. The controversy over Russia s drug-testing and the exclusion of many Russian athletes from the Brazil Olympics will also be a deterrent to many potential sponsors and advertisers. The concern is that there could be a fresh outbreak of scandal ahead of the 2018 tournament. Here also the prudent course for many is to wait. There is also the risk that Russia s legislation covering the dissemination of materials about LGBT issues to under 18-year old s may again provide the opportunity to attack Russia in the international media, just as it did ahead of the Sochi Olympics. Big international brands will be particularly sensitive to this risk and again may delay any decisions until much closer to the tournament. 4

5 Investment opportunities: Football in Russia Team sponsorship. Many companies worldwide see association with football as a key element of their brand strategy. The Russian market should be no exception, and the current weakness of the market is an opportunity to build relations at a low cost, and with little competition. The popularity of football Russia should grow to match that in other countries on a per capita basis, and this will boost the audience. Privatelyowned clubs in Russia, which are better run and less dependent on politics at a regional level, offer a safer and better opportunity for sponsors. Advertising strategy. Given that companies that work with sports are interested in media exposure, another key fact is that, going forward, much of the audience for football will be online rather than via traditional TV outlets. All consumer companies will need to review advertising strategies to focus away from traditional TV advertising as the market changes. Russian audiences have embraced new technology much faster than in most other markets so that online usage and advertising is growing faster in Russia. This is something seen in other areas, such as the very fast growth in e-commerce and in Russian consumer preferences for the very latest technologies and gadgets. Other areas: Merchandising sales Events management External catering Promotional services surrounding the highest profile events and players Stadium upgrades Internet services, especially related to live event streaming Advertising New stadium in Rostov - Ready for WC2018 but part of the RFPL Afterwards Source: RIAN.RU 5

6 World Cup 2018: Overview Total cost is a manageable US$ 11 billion. The total bill for the World Cup will be about RUB644 billion (US$ 11.3 billion). This includes federal, regional and private spending and includes the cost of building new stadia. This compares quite well with the US$15 billion that Brazil is estimated to have spent on the 2014 World Cup. Qatar had originally spoken of spending US$200 billion on the 2022 World Cup, but this would have included new airports and related infrastructure that was not directly related to the World Cup. Qatar s current estimate is that they will spend about US$8-10 billion on the World Cup directly. That said, they are going for the minimum number of stadia acceptable to FIFA, which is eight. Russia will have twelve stadia. Much less of a financial impact than Sochi. To put this in perspective, it is about 4% of Russia s annual budget spending or about 0.7% of GDP. It is much less than the US$50 billion that was estimated to have been spent on Sochi, although this included much broader tourist and other infrastructure designed to create an entire tourism and sport cluster from virtually nothing, for example the now established Formula 1 race and other major sporting events held there since the Winter Olympics. The bottom line is that the 2018 World Cup will be a more modest affair. It is also not likely to have the deleterious effects for the construction sector and the banking sector that followed from the Sochi Olympics. Stadia, Russia World Cup 2018 City Stadium Name Capacity Cost (RUB bln) Cost $ mln Moscow Luzhniki ,0 $317 Moscow Spartak ,4 $323 Saint Petersburg Zenit Arena ,8 $713 Yekaterinburg Yekaterinburg Arena ,7 $212 Nizhniy Novgorod Nizhniy Novgorod ,8 $279 Kazan Kazan Arena ,7 $428 Samara Samara Arena ,2 $303 Rostov Rostov Arena ,4 $323 Volgograd Volgograd Arena ,0 $283 Kaliningrad Kaliningrad ,8 $297 Sochi Fisht Stadium ,4 $573 Saransk Mordovia Arena ,9 $265 Source: Russian World Cup Organising Committee, Macro-Advisory estimates 179,5 $2 992 Geographic focus. For logistical reasons, the stadia are all located in the European part of Russia, with the Yekaterinburg Arena the easternmost location. Yekaterinburg pretty much marks the easternmost boundary of European Russia, as it is 25 hours by road or train and just over two hours by plane from Moscow. Apart from the two capitals of Moscow and St Petersburg, most of the locations are on the Volga corridor, which is a strategic location for Russia s tourism business. Apart from these cities, Kaliningrad is an exception, which was likely included for political reasons, as it is a depressed area that needs investment and trying to boost tourism from the EU. 6

7 Existing infrastructure should be able to cope. Russian airlines carry about 4.5 million passengers on internal routes and about 3 million on international routes a month. Russia s trains carry about eight million passengers per month on inter-city routes. The Russian organizing committee is expecting one million visitors to the World Cup, so the transport infrastructure should be able to handle the extra load. This is particularly so given that Russian transport system is running below capacity given the slow recovery from the recent recession. Russia should be ready on time. No major sporting event, especially in an emerging market, can be held without reports in the Western media that the stadia will not be ready on time. Russia has done its best to avoid this by using stadia which have already been built, but the table above shows that there will still be construction underway in 2018 which will provide fodder for these stories. They are all scheduled to be finished by the end of 2017, and probably this is what will be reported to Putin, but in any case, we see no risks that the venues will not be ready by next year. Host Cities, 2018 World Cup Source: FIFA 7

8 Expected World Cup TV audience in Russia Domestic TV audience for the World Cup. The TV audience for the games can be divided into two groups, that for the Russian team s games, and that for the other games, which are likely to be far less popular. In 2014, the peak match audience was 15 million for a key qualifying game including Russia. The average viewing figure was 4.4 million for the live matches. An increase in interest is reasonably expected because of the tournament being held in Russia. In Brazil, for instance, viewing during the 2014 finals in Brazil was 5% higher than for the 2010 World Cup in South Africa. It is worth nothing that although the Champions League final normally averages an audience of about 6 million, it drew 19 million the year (2008) it was held in Moscow. Russia Matches Will Garner a Large TV Audience Source: Dreamstime.com Historical highs. More recently, the Europe Champions League final got about 10% of the audience for its late Saturday evening time slot, so a reasonable estimate is that the audience was a maximum of four million for that event. Russia s World Cup record was for its game against Japan in 2002, which drew 45 million viewers. The country s record football audience was 61 million for its game against Holland in the Euro 2008 semi-final. The fact that audiences were much lower during the games in Brazil is likely because they were played late at night Moscow time, whereas the 2002 and 2008 games were held at much more convenient times. Estimated audiences. It is estimated that 40 million viewers will watch the Russia games, with an average of 15 million for the non-russian games. They will be on at prime time and this should help to boost numbers. No doubt there will be increased interest towards the final, and the audience for this is likely to be nearer 30 million. We think it is very unlikely that Russia will make it out of the group stages, so there will only be three games with the higher viewing levels. 8

9 TV Rights Arguing over price. Russian TV networks have yet to come to an agreement with FIFA for broadcasting rights for WC2018. They have baulked at high prices for rights, though talks remain ongoing. There were reports that FIFA originally asked for US$120 million for the rights to WC2018. Given that in 2007, Globo paid FIFA US$340 for the rights to the 2010 and 2014 World Cups, which included an extra US$40 million to be paid if the 2014 tournament were held in Brazil, this seems like a bargain. Russian market is smaller. Then again, Globo was able to secure US$600 million in sponsorship from multinational companies for advertising. The total Russian TV advertising market was about US$225 million in Russia in 2016, so the sums involved seem to be much smaller. Russia had offered US$30 million, closer to the US$32 million that it paid for the 2014 rights. FIFA and Match TV, a popular sports channel in Russia, have come to terms, and the indication from the Russian side is that the sum is closer to their offer, in that they feel that they will be able to break even on the deal. Sponsorship Little interest from regional sponsors thus far... FIFA s current partners (the highest level of support) include Adidas, Coca-Cola, Chinese multinational conglomerate Wanda, Gazprom, Hyundai-Kia, and Visa. World Cup sponsors (the second highest level of support) include Budweiser, McDonald s, and the recently-joined Chinese Hisense. To date, only one regional supporter (the lower level of support) has been announced: Alfa Bank.... but Kremlin arm-twisting should improve that. FIFA has struggled to secure sponsors for WC2018, with fewer signed-on partners at present than was the case in the run-up to WC2014. Nineteen regional supporter slots remain open (out of 20), with another three to five World Cup Sponsor slots. Institutional issues with FIFA (namely corruption) led to a few partners failing to renew their contracts, including Castrol, Continental, and Johnson & Johnson. They followed Sony and Emirates Airlines. Inevitably, there will be some arm-twisting by the Kremlin to sign up some more Russian sponsors, but there are many other calls on these sources of funding, including other Kremlin projects. Gazprom is a Major Football Sponsor Source: Alamy.com 9

10 Russian national football team Struggling. Russia s national football team has struggled in major competitions (World and European cups), having failed to qualify for four tournaments since the 1994 World Cup. Apart from Euro 2008, when the team reached the semi-finals, Russian national teams have failed to advance past the group phases. Home advantage did not help in the Confederation Cup. In general, Russia has not performed particularly successfully in major tournaments. The national team has fallen in global rankings in recent years, and is now outside the top 20. Though home-field advantage may prove useful in 2018, prior performance is not particularly confidence-inspiring. Home advantage did not help Russia progress to the knock-out stages of the recently held Confederation Cup. Russian Team Performance, International Competitions Event Year Result World Cup 1994 Group Euro 1996 Group World Cup 1998 DNQ Euro 2000 DNQ World Cup 2002 Group Euro 2004 Group Europa League 2005 CSKA World Cup 2006 DNQ Euro 2008 Semi-final Europa League 2008 Zenit World Cup 2010 DNQ Euro 2012 Group World Cup 2014 Group Euro 2016 Group Source: FIFA, UEFA Questions, but no answers. There is no clear consensus as to why the national team has not been more successful. There is a broad cycle that reflects Russia s economic fortunes which is likely linked to the availability of financing. At the same time, Russia has been able to pay healthy salaries to respected international coaches like Guus Hiddink and Fabio Capello, so it is not simply because of a lack of financing. We were unable to find any suggestion that any of Russia s foreign coaches complained about too much interference or not enough support from the Russian Football Union or the Russian Premier League. Foreign players are not an issue. Russia was able to qualify for the World Cup even during the most chaotic post-soviet period, when it was suffering from a loss of some of the better players from the former Soviet Union and money was scarce. Russia s mix of domestic and imported players in its home league does not seem to either discourage domestic players or feather-bed them against competition with the world s best. There is a policy to limit the number of foreign players, but there are still sufficient world-class players playing in the Russian leagues to ensure that domestic players feel enough competition. There is nothing stopping Russian players from going abroad to hone their skills in more prestigious and demanding leagues, although there has been less demand for Russian players in recent years. 10

11 Is it the weather? One argument that has been advanced for Russia s weakness is that the cold climate in Russia stops the best young players from spending enough time outside to hone their skills. However, this has not stopped Sweden or indeed Iceland from building competitive football teams. In any case, the long-term issue is economic in that this issue can be resolved by building sufficient sports facilities for young players. At a higher level, better stadia have become weather-proof throughout the year, allowing Russia to operate on the same timetable as European countries. It does not seem likely that football will migrate south in Russia, as the largest clubs will always be in the largest population centers, Moscow and St Petersburg. What does Russian football need? The bottom line is that a period of economic stability, like the early 2000s, is likely to allow Russian clubs to reward good players and bring in strong players to play alongside them, can help to boost Russia s elite footballers. The World Cup in 2018 should help to attract more young players to the game, although this cannot be expected to have an effect longer than two or three years. Again, the issue is that if there is more money in the game, then this will broaden the reach of the professional game in Russia, and the main driver of this should overall economic performance, which should pick up in the next few years. Moscow s Luzhniki Stadium will host the WC2018 Final on 15 July, 2018 Source: Telegraph.co.uk 11

12 Risks Usual Russia concerns. WC2018 does face geopolitical and regulatory risk, though calls for the tournament to be stripped from Russia following events and Ukraine and a doping scandal have failed to yield any material threat to the tournament being held. Some of the more paranoid Russian nationalists who claimed that events in Ukraine were stirred up in order to spoil the Sochi Olympics in 2014 have warned of similar possible events to spoil the 2018 World Cup, but it is hard to find any basis for either of these two allegations. Relations between Russia and the US have their own dynamic whose drivers are on a larger scale than sporting tournaments. Relations with the EU have evolved into greater pragmatism, e.g. Germany and Russia are planning a second direct gas pipeline (Nord Stream 2), and many EU states are eager to resume trade and investment deals with Russia. Nothing exceptional. As a result, the main geopolitical risks to the 2018 World Cup are the same as the general geopolitical risks that Russia faces at the moment: Ukraine Syria NATO WC2018 is important. There is nothing World Cup-specific about any of these, and there could be developments at any moment that might change international attitudes towards Russia. Russia will aim to control its own actions in any of these three areas so as to minimize any threat to the World Cup, as it will not want to reduce the prestige benefits from this event or indeed to waste the considerable expense that has already been laid out. Other risks include: Terrorism. Recent events in several European states show that IS and its supporters remain very active in planning and executing attacks in major cities. Russia is as much of a target for the terrorists as Western Europe because of its active involvement in anti-is military engagements in Syria. The biggest unknown unknown at this point is whether there will be an attack nearer to the World Cup, and whether this could lead to a disruption. It should be pointed out that similar fears were very widely expressed ahead of the Sochi games but Russian security forces prevented any attacks. Corruption scandal. The report covering the corruption scandals with FIFA has been published. But while it has again placed the issue across the sports pages worldwide there is nothing new, i.e. not already having been well discussed previously. Hence, it should not place the Russia tournament at risk. Of course, there is always the risk of some fresh news or scandals and this concern is mentioned as one reason why sponsors have been reluctant to commit too early. The recent leak of the Garcia report explicitly cleared Russia of wrongdoing in the decision to award the 2018 World Cup to Russia. Hooliganism. Russian football hooliganism tends to be exaggerated in the media it is rare for there to be the sort of match-day clashes that were seen in Europe during the seventies and eighties. Such clashes between rival fans were commonplace in the 1990s and early noughties but the police have been very effective in stamping it out. There is a hooligan subculture, which models itself explicitly on British gangs, and for that reason the worst fights tend to occur when Russia and England play. This subculture does have links to nationalist groups and therefore racism is a corollary issue. 12

13 National pride will not be served by hooliganism in If a distorted sense of national pride meant that key officials did not do enough to prevent Russian hooligans from travelling to the 2016 European Championship in France, then the motivation will be quite different at the 2018 World Cup. There will be a clear order that any sort of fighting will not be tolerated, and the police will be aggressive in clamping down on any unrest. The Russian police have had plenty of experience in clamping down on public order offenses and they will be out in force in The same machinery that stops unauthorized political opposition demonstrations will be deployed against the hooligans. Heavy-handed policing? This factor brings up a risk that has not been widely mentioned, which is that the police may be over-zealous in clamping down on over-enthusiastic fans. There were no such problems in Sochi nor indeed when two English clubs, Manchester United and Chelsea, competed for the European Championship trophy in Moscow in May Again, the police will have instructions not to damage Russia s public image. A good example was the soft-handling of fans at the 2008 European Champions League Final between two rival English Clubs, Manchester United and Chelsea, in Moscow. It had been widely feared there would be rival fan clashes or heavy-handed policing. But the tournament passed off very peacefully Champions League Final in Moscow was very Peaceful Source: Andy Hooper Worker rights abuses. There have been reliable reports that alleged the use of North Korean forced labor in the construction of the Saint Petersburg Arena. The reality is that it is not too hard to find reports of poorly treated immigrant labor in Russia, and the only surprise, in this case, is that the workers were from North Korea rather than Uzbekistan. This may pose a reputational risk for sponsors, but this should be lowered going forward as most of the construction work has already been done. The Russian authorities are aware of the need to improve Russia s image in this respect, and will publicly deal with any reported abuses. Racism. Issues regarding racism may be raised, as was the case with Euro2012. Racism has been a fairly prolific issue for Russian football, with CSKA being mandated by UEFA to play several Champions League matches behind closed doors and a US$220,000 fine in There have been numerous incidents with the abuse of black players in Russia. The biggest risk will come if Russia is playing an African team when some sort of incident either inside or outside the stadium is possible. But, it has been very clearly stated by the police authorities that they will be very vigilant to such threats and will act quickly to stamp it out. 13

14 BUDGET ($ MIL) Business of Sport Club football in Russia Football is the dominant sport. Although it might seem that there is competition from ice hockey, in which Russia is much more successful in international tournaments, in fact in terms of participation and viewing figures football is the dominant sport in the country. The current weakness of its national team and its club teams is in part due to the recent economic weakness and partly due to the legacy of the break-up of the Soviet Union. The Soviet Union was an international footballing leader, but many of its best players and clubs were from Ukraine, the Baltics, and Georgia, which became independent. There was no funding to rebuild during the nineties. Russia did quite a bit better during the economic recovery, but this success has been elusive in the post-2008 and post-2014 crises. Premier league. The domestic league is the Russian Premier league (RFPL), which features sixteen teams and a relegation/promotion system. The chart below shows the teams in the season, ranked by finishing order, with their budgets and average home attendance. The teams marked in green qualify for European tournaments and those in red will be relegated. From 2018, Russia will have six teams in European tournaments. Russian Premier League, By 2017 Final Position, Budget And Attendance HOME ATTENDANCE Budget (EUR) Attendance (RHS) Source: Russian Premier League European participation. Perennial title contenders include two Moscow clubs (Spartak and CSKA), as well as Saint Petersburg s Zenit. FC Rostov, which has been compared to Leicester City for its above-weight run last year, as well as Krasnodar Kuban, have been successful in recent years as well. These teams are the most regular participants in Europe, which helps their budget. Best teams are not municipally owned. One notable feature is that the successful teams are generally either privately or corporately owned. The lower teams are mostly municipally funded and managed. The only club in the top five which is not privately owned is Terek (now Akhmat), which is formally owned by the Chechen Republic, but is closely identified with the Chechen President Ramzan Kadyrov, who recently renamed the club after his father. 14

15 Russian Premier League Owners Club Owner Spartak Leonid Fedun CSKA Yevgenii Giner Zenit Gazprom Krasnodar Sergei Galitskii Terek Chechen republic Rostov Rostov region Ufa Bashkortostan republic Lokomotiv Russian Railways Rubin Tatarstan republic Akmar Perm region Ural Sverdlovsk region Anzhi Suleiman Kerimov Orenburg Orenburg region Arsenal Tula region Krilya Sovetov Samara region Tomsk Tomsk region Source: Russian State Statistics Committee Funding issue for municipal teams. The problem for the regionally-funded clubs is that their regions revenues have fallen sharply in recent years. Regional budgets are primarily made up of income tax and profits tax, with shortfalls from borrowing and transfers from the federal budget. These have been under pressure since the sharp devaluation in , and this has limited the amount of money available for relative luxuries like football teams. There have been reports of players wages being delayed for several months. Multi-billion Dollar VTB Arena, One of Russia's New Multi-purpose, All-Weather Stadiums Source: Skyscraper.com 15

16 Financially healthy, on average Russian football is generally healthy. The table below shows that the growth rate of the revenues of the average Russian club is the third fastest in Europe. This data is from a survey of football finance carried out by UEFA and released in early It does not include data for the season. Russia is the sixth largest league in Europe in terms of revenue and attendance, and is holding up well, despite the country s recent economic crisis. European Clubs Revenue Performance, Last Six Years Average 6 yr growth rate 6 yr increase Average 6 yr club growth England 82% ,2 Turkey 73% ,2 Russia 71% ,3 Sweden 67% 67 4,2 Switzerland 63% 81 8,2 Germany 56% ,1 Poland 52% 37 2,3 Belgium 50% 79 6,6 Spain 37% ,4 France 36% ,6 Ukraine 27% 18 2,7 Italy 25% Netherlands 3% 12 0,7 Portugal 2% 45 0,4 Source: UEFA Attendance also healthy. Russia also fares quite well in terms of attendance growth, rising by 8% in the season. Russia s average league attendance was 2.7 million, the sixth largest in Europe, just behind Poland and Portugal. European Football Average League Attendance, Increase Increase, % Total, Sweden % Spain % Israel % Azerbaijan % Poland % Scotland % Portugal % Netherlands % Russia % Turkey % Serbia % England % Source: UEFA 16

17 Weak revenue base. One main weakness of Russian clubs is that they are unusually dependent on outside funding. In particular, they lack strong revenues from local TV, something reviewed below in the section on the advertising market. In addition, the recent poor showing of clubs in Europe means that relatively few have access to money from participation in European competitions. Gate receipts are also low, as prices are lower in Russia because of lower income levels relative to other European countries. This means that clubs are dependent on their owners for support. This is not always forthcoming when the owner is a regional government. Club Revenue Breakdown, Selected European Countries Netherlands Turkey Russia France Italy 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Domestic Broadcasting UEFA (Prize Money) Gate Receipts Sponsorship and Commercial Other Source: UEFA Too much other income? The other notable factor about this graph is the high proportion of revenues that come from other, which implies a certain opacity about financing, which again stems from the unusual fact of the average Russian club being so dependent on municipal financing. This puts the clubs at risk of breaching UEFA s Financial Fair Play (FFP) rules, which mandate that clubs spend within their market means. In particular, only certain types of income can be included as revenue to meet UEFA s definition of financial breakeven. One Russian club (Rubin) has been fined under the FFP rules, and they were almost certainly a factor in Anzhi s decision not to spend aggressively to bring in players to develop the club. 17

18 Club finances Russian football on average - not doing too badly. In terms of comparable leagues by financial measures, Turkey and France are the Russian Premier League s two closest analogues. The takeaway here is that although the Russian leagues do not enjoy the riches of England or Spain, there is decent money in Russia, especially given the recent weakness of the economy. In particular, as the economy recovers, there should be more money from advertising. Top Ten European Football Leagues, Aggregate Revenue And Average Revenue Per Club ,5 4 3,5 3 2,5 2 1,5 1 0,5 0 Average Club Revenue ( mil) Aggregate Revenue ( bil) (RHS) Source: UEFA Lack of TV revenue. This is discussed in the segment on the Russian advertising industry (below). It is a problem that there is a lot less money in Russian TV than in other countries. In fact, the other countries are dwarfed by the money paid to the English league. In England, the league gets EUR2.1 billion against the EUR39 million that the Russian league gets. These sort of revenues help explain the difficulty that Russian broadcasters had in justifying the US$120 million that FIFA was reported to have asked for the broadcasting rights to the 2018 World Cup. Granted, there is going to be more interest in a major competition, but probably not three times as much. In addition, Russian clubs lack of success in Europe means that there is also not much money from UEFA, which is reported as a separate item by UEFA. This item may improve in the season when there will be six Russian teams in European competitions. US$29 million TV deal. The current broadcasting agreement in place with Match-TV, the main sports channel in Russia, is worth some US$29 million and split evenly between clubs. According to Sergei Pryadkin, the newly appointed head of the Russian Premier League, this deal is smaller than its predecessor (with NTV+). To note as well, Match TV has had dismal performance in terms of viewership as of recently. From September , overall viewership fell by 26%. This is due in part to growing internet viewership, but others have tied this to a failing state-backed development model. More generally, sports channels have seen rapid declines in viewership. 18

19 European Football Leagues Broadcast TV Revenue Aggregate ( mil) Club Average ( mil) Source: UEFA TV sport audience Sport audiences declining. The only sports broadcast in the top 10 programs watched in 2015 was the Hockey World Cup semifinal between Russia and Canada which got about 36% of the audience. The total TV audience is about 43 million in Russia in the major cities. The Champions League final got only 9.3% of audience in its late-night Saturday slot, and 2.3% of the audience for the last week of May It was number 42 in the top 100 programs for the last week of May. Declining interest in the Russian Premier League. The graph below shows the average TV audience for broadcasts of the Russian Football Premier League (RFPL) in recent years. This includes all media outlets, including re-broadcasts via the internet. The decline is quite sharp. What is notable is that the audience fell sharply after the RFPL shifted to a winter schedule to match the UEFA schedule, having previously mainly played in the summer. It is expected there would have been a larger audience during the winter months. The problem is likely to be greater competition from the English and Spanish leagues all available on satellite TV channels as well as the UEFA competitions. TV Audience For Russian Football Premier League, ,1 7,1 7,7 7,3 7,1 5 3,4 3,8 4 3,3 3,1 2, Source: championat.com 19

20 Attendance history confirms climate influence. The Russian Premier League s switch to a European calendar in 2011 (matches had been held in the summer beforehand) did not immediately lead to a sharp fall in total attendance, but did eventually have an effect in This confirms the view that Russian football will always suffer from its inhospitable climate. Even as stadia are improved to make it easier to watch football in deep winter, there will always be the issue of getting people out of the house in sub-zero temperatures. Recent recovery. Attendances continued to deteriorate in the season after 2013, which was likely driven by economic factors, as household incomes fell by 15% or more because of the sharp devaluation in late 2014 and early Since then, they have recovered as the economy has stabilized from the shock of lower oil and sanctions. An increase is expected in both the and the seasons in response to greater interest following the Confederation Cup and the World Cup. This should also be helped by the expected economic recovery (see Macro Forecast table in Appendix 1). Russian Premier Football League, Total Attendance, , Million Attendees ,55 5,35 5,53 5,97 5,68 6,30 6,19 5,91 5,80 6,27 6,23 5,50 4,86 5,30 5, Source: worldfootball.net Not only football audiences in decline. Hockey has faced the same negative attendance and broadcasting trends as football in recent years. In 2016, Channel One (Perviy Kanal) cancelled the broadcast of a European Hockey Tournament match because it could not afford to lose advertising revenue due to low viewership. KHL attendance (as of December 2016) had nearly fallen to levels. In addition, TV audiences are generally in decline because of competition from other forms of entertainment such as gaming. 20

21 Potential for change Not much hope of change. The new head of the RFPL, Sergei Pryadkin, appears more reform-minded than Vitaly Mutko, his predecessor. However, the fact that Mutko was promoted to Sports Minister means that he will likely remain influential. This could restrict Pryadkin s ability to enact meaningful reform. He recently proposed reducing the size of the Russian Premier League to 14 teams, while noting that in the future, Russia ought to be able to support a 20-club top-flight league. Mutko is against the proposal, which would likely hurt provincial teams, and has said that after the 2018 World Cup there will be 18 teams in the RFPL. Possible reduction in broadcasts. Pryadkin has also called for a reduction in the number of free-to-air broadcasts of RFPL games, which should in principle boost revenues from TV broadcasts. He also wants to move games to Monday evenings, which he thinks will boost TV audiences, as it did in the UK, which in turn was following American Football s example. Threats to financing. In December 2015, President Vladimir Putin called on state companies to reduce their sponsorship of football teams. This is within the context of the need to cut spending by state companies, given the current economic weakness. This, together with a lack of financing at a regional government level, is likely to put further pressure on the budgets of all Russian football teams. Domestic TV and advertising space Russian Advertising Spending, , US$ million USD figures TV 559,0 358,1 365,1 445,9 461,2 490,4 414,7 223,5 225,2 Radio 60,4 33,4 33,9 40,2 47,0 51,8 43,9 23,2 22,5 Press 303,0 132,3 125,2 137,5 132,7 116,2 85,6 38,1 29,4 Out of home 184,3 86,0 97,9 116,7 121,4 127,8 105,4 52,3 57,2 Internet 70,8 60,2 88,3 142,3 181,3 225,1 219,6 158,6 203,1 Other 12,9 8,2 10,2 14,0 15,8 17,9 13,2 6,9 6,1 BTL 286,5 162,2 181,5 231,4 258,9 284,5 254,3 144,4 141,1 Source: Association of Communication Agencies of Russia TV advertising in cyclical trough, secular decline. TV advertising spending hit a ten-year low in 2016, which reflects the depression in consumer spending. This is expected to recover in 2017, in line with the economy, given that the recession is over. However, the recovery in advertising spending will be slow, as the consumer sector is one of the slowest to recover. In addition, there is a global trend towards a greater spending of advertising budgets on the internet, and content providers like the RFPL will need to take this into account as they draw up their strategies in the coming years. Only big sporting events are popular. Data compiled by Mediascope suggests that sports, writ large, are popular among Russia s television audience. Of the most popular broadcasts since 2008 in terms of ratings and viewership percentages, nearly a third were sports events and over 20% football. However, in terms of weekly broadcasts, the domestic league receives little attention. Over April 2017, the highest ranked football broadcast was only the 98th most popular broadcast. Domestic football broadcasts frequently fail to make the top 100. According to Nielsen, the Ice Hockey World Championship won 35.5% of Russia s audience, again indicating that there is interest in sports broadcasts among Russians. 21

22 TV advertising is a quasi-monopoly. Another issue that could restrict the growth of revenues from TV advertising is the fact that Russia s ad space is dominated by the National Advertising Alliance (NRA). The NRA was founded in 2016 as an amalgamation of Vi (formerly Video International) and Gazprom Media s advertisement sales department. The NRA controls 95% of TV advertising in Russia. NRA announced a 15% increase in prices for TV advertisement, a segment that saw a 10% contraction in Russian Retail Spending (LHS) and GDP Growth (RHS) YOY % Change Source: TradingEconomics 22

23 Appendix 1: Russia Macroeconomic Trends Key Indicators E 2018E 2019E GDP, nominal, US$ bln $1,219 $1,478 $1,950 $2,010 $2,000 $1,850 $1,360 $1,347 $1,641 $1,600 $1,622 Growth, real, % YoY -7.8% 4.5% 4.3% 3.4% 1.3% 0.7% -2.8% -0.2% 1.4% 1.9% 2.4% Industrial production, real, % YoY -9.3% 8.2% 5.0% 3.4% 0.4% 1.7% -3.2% 1.1% 2.0% 3.0% 4.0% Agricultural output, % chg YoY 14.3% -3.6% 3.1% 1.2% 3.5% 4.8% 1.0% 3.0% 3.2% Private consumption, real, % YoY -4.8% 5.1% 6.4% 7.9% 4.7% 1.0% -6.5% 1.5% 3.0% 2.5% 3.5% Gross fixed investment, real, % YoY -14.4% 5.8% 10.2% 6.0% -0.3% -1.5% -10.0% -1.0% 2.0% 3.5% 4.0% Retail sales, % YoY -5.5% 4.4% 7.2% 5.9% 3.9% 2.5% -10.0% -5.2% 2.0% 3.0% 4.0% Budget balance, % of GDP -5.9% -4.0% 0.8% 0.0% -0.5% -0.5% -2.4% -3.5% -2.3% -1.5% -1.1% CPI - year-end, % YoY 8.8% 8.8% 6.1% 6.6% 6.5% 11.4% 12.9% 5.4% 4.0% 3.8% 3.6% CPI - average, % YoY 11.7% 6.9% 8.6% 5.1% 6.8% 7.8% 15.6% 7.2% 4.1% 4.0% 3.8% PPI - year-end, % YoY 13.9% 16.7% 12.0% 5.1% 3.7% 5.9% 11.0% 7.5% 6.0% 5.0% 5.0% PPI - average, % YoY -7.2% 14.9% 17.3% 6.8% 3.5% 5.5% 7.0% 6.5% 7.5% 6.0% 5.0% Commercial Bank Rates Lending, average, % 15.3% 10.8% 8.5% 9.1% 9.5% 11.3% 16.0% 13.0% 10.0% 8.5% 7.5% Deposit, average, % 8.6% 6.0% 4.4% 5.5% 5.0% 5.2% 9.0% 6.0% 5.5% 5.0% 4.0% Social Indicators Real disposable income, % YoY 1.9% 4.3% 4.5% 7.3% 4.8% -1.0% -6.5% -5.9% 1.0% 2.0% 3.0% Real wage growth, % YoY -2.7% 4.4% 4.1% 8.6% 5.5% 1.3% -9.5% 0.0% 1.0% 2.0% 3.0% Nominal monthly wages (RUB p/m) 18,800р. 21,100р. 23,500р. 26,700р. 30,000р. 32,600р. 36,000р. 37,000р. 38,110р. 40,016р. 42,416р. Unemployment, % eop 8.4% 7.5% 6.6% 5.7% 5.6% 5.3% 5.6% 5.3% 5.5% 5.4% 5.3% GDP per capita, US$'000* $8,639 $10,475 $13,830 $14,205 $14,035 $12,890 $9,510 $9,417 $11,476 $11,189 $11,342 Trade & flow indicators Trade balance, US$ bln $111.6 $151.7 $198.2 $193.3 $177.0 $186.0 $135.0 $90.0 $105.0 $110.0 $120.0 Current account, US$ bln $48.6 $70.3 $98.8 $74.5 $33.0 $57.0 $65.8 $22.1 $28.3 $29.5 $32.5 Current account, % of GDP 4.0% 4.8% 5.1% 3.7% 1.6% 3.0% 5.3% 1.7% 1.9% 1.9% 2.0% FDI, gross US$ bln $36.5 $43.5 $52.9 $51.0 $69.0 $23.0 $5.0 $25.0 $20.0 $25.0 $35.0 Capital inflow/outflow, US$ bln -$56.9 -$33.6 -$80.5 -$56.8 -$62.7 -$ $90.0 -$15.0 -$10.0 -$15.0 -$15.0 Debt & Reserves Foreign public debt, US$ bln $44.3 $46.6 $49.3 $70.0 $76.0 $52.0 $42.0 $45.0 $46.0 $50.0 $52.0 Foreign private debt, US$ bln $425.4 $442.1 $492.6 $567.8 $655.0 $545.0 $470.0 $450.0 $440.0 $460.0 $480.0 Foreign public debt, % of GDP 3.6% 3.2% 2.5% 3.5% 3.8% 2.8% 3.2% 3.5% 3.1% 3.2% 3.2% Total foreign debt, % of GDP 38.5% 33.1% 27.8% 31.7% 36.6% 32.3% 38.9% 38.1% 32.6% 32.8% 32.7% FX reserves (ex gold), US$ bln $417 $444 $454 $487 $475 $340 $320 $320 $350 $370 $400 RUB/US$, year-end RUB/US$, average RUB/EUR, year-end RUB/EUR, average Average Urals, US$ p/bbl $61 $78 $109 $110 $108 $100 $54 $45 $51 $58 $65 Source: Federal Statistics Service, Central Bank of Russia, Macro-Advisory estimates * Excludes the Crimean population and GDP contribution 23

24 Appendix 2: Russia Macro Forecasts to 2025 Key Indicators GDP, RUB bln, nominal E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 84,320р. 90,222р. 95,185р. 100,801р. 107,050р. 114,008р. 121,761р. 129,554р. 138,622р. 148,187р. 158,857р. GDP, nominal, US$ bln $1,360 $1,347 $1,641 $1,600 $1,622 $1,652 $1,715 $1,851 $2,009 $2,212 $2,444 Growth, real, % YoY -2.8% -0.2% 1.4% 1.9% 2.4% 2.6% 3.0% 3.0% 3.5% 3.5% 4.0% Industrial production, real, % YoY -3.2% 1.1% 2.0% 3.0% 4.0% 5.0% 4.0% 3.5% 4.0% 3.5% 3.0% Private consumption, real, % YoY -6.5% 1.5% 3.0% 2.5% 3.5% 5.0% 5.0% 6.0% 5.5% 5.0% 5.0% Gross fixed investment, real, % YoY -10.0% -1.0% 2.0% 3.5% 4.0% 6.0% 7.0% 7.5% 8.0% 6.0% 5.0% Agriculture output, % change YoY 3.5% 4.8% 1.0% 3.0% 3.2% 4.5% 4.0% 3.5% 3.3% 3.0% 3.0% Retail sales, % YoY -10.0% -5.2% 2.0% 3.0% 4.0% 5.0% 5.5% 6.0% 7.0% 6.5% 6.0% Budget balance, % of GDP -2.4% -3.5% -2.3% -1.5% -1.1% -0.5% 0.0% 0.0% -0.5% -0.5% -0.5% CPI - year-end, % YoY 12.9% 5.4% 4.0% 3.8% 3.6% 4.0% 3.5% 3.3% 3.8% 3.0% 3.4% CPI - average, % YoY 15.6% 7.2% 4.1% 4.0% 3.8% 3.9% 3.8% 3.4% 3.5% 3.4% 3.2% PPI - year-end, % YoY 11.0% 7.5% 6.0% 5.0% 5.0% 5.2% 5.4% 5.0% 4.8% 4.8% 5.0% PPI - average, % YoY 7.0% 6.5% 7.5% 6.0% 5.0% 5.1% 5.3% 5.2% 4.9% 4.8% 4.9% Commercial Bank Rates Lending, average, % 16.0% 13.0% 10.0% 8.5% 7.5% 6.5% 6.0% 5.5% 5.5% 5.0% 5.0% Deposit, average, % 9.0% 6.0% 5.5% 5.0% 4.0% 4.0% 4.0% 3.5% 3.5% 3.0% 3.0% Social Indicators Real disposable income, % YoY -6.5% -5.9% 1.0% 2.0% 3.0% 3.0% 3.5% 4.0% 3.5% 3.0% 2.5% Real wage growth, % YoY -9.5% 0.0% 1.0% 2.0% 3.0% 2.0% 2.5% 2.0% 2.5% 2.0% 2.5% Nominal monthly wages (RUB p/m 36,000р. 37,000р. 38,110р. 40,016р. 42,416р. 44,071р. 45,745р. 47,301р. 48,956р. 50,621р. 52,241р. Unemployment, % EOP 5.6% 5.3% 5.5% 5.4% 5.3% 5.0% 4.8% 4.8% 4.7% 4.6% 4.4% GDP per capita, US$'000* $9,510 $9,417 $11,476 $11,189 $11,342 $11,595 $12,035 $12,988 $14,198 $15,631 $17,272 Trade & flow indicators Trade balance, US$ bln $135 $90 $105 $110 $120 $160 $165 $155 $150 $160 $160 Current account, US$ bln $66 $22 $28 $30 $33 $75.0 $75.0 $65.0 $65.0 $70.0 $65.0 Current account % of GDP 5.3% 1.7% 1.9% 1.9% 2.0% 4.5% 4.4% 3.5% 3.2% 3.2% 2.7% FDI, US$ bln $5.0 $25.0 $20.0 $25.0 $35.0 $50.0 $60.0 $66.0 $70.0 $75.0 $80.0 FDI, % of GDP 0.4% 1.9% 1.2% 1.6% 2.2% 3.0% 3.5% 3.6% 3.5% 3.4% 3.3% Capital inflow/outflow, US$ bln -$90.0 -$15.0 -$10.0 -$15.0 -$15.0 -$25.0 $0.0 -$10.0 $0.0 -$20.0 $0.0 Debt & Reserves Foreign public debt, US$ bln $42.0 $45.0 $46.0 $50.0 $52.0 $65 $75 $80 $85 $90 $95 Foreign public debt, % of GDP 3.2% 3.5% 3.1% 3.2% 3.2% 3.9% 4.4% 4.3% 4.2% 4.1% 3.9% Foreign private debt, US$ bln $470.0 $450.0 $440.0 $460.0 $480.0 $550 $650 $750 $850 $950 $1,100 Total foreign debt, % of GDP 38% 37% 30% 32% 33% 37% 42% 45% 47% 47% 49% Forex reserves (ex gold), US$ bln $320 $320 $350 $370 $400 $500 $580 $660 $720 $800 $850 Currencies RUB/US$, year-end RUB/US$, average RUB/EUR, year-end RUB/EUR, average Average Urals, US$ p/bbl $54 $45 $51 $58 $65 $68 $65 $60 $55 $50 $45 Source: Federal Statistics Service, Central Bank of Russia, Macro-Advisory estimates Note: Excludes the Crimea population and GDP contribution 24

25 Appendix 3: Improving Demographic Trends Russia has recovered from the disaster of the 1990s. Despite the widely held view of the 1990s that Russia was a dying nation, the country today possesses demography that is broadly similar to that of most other European countries. While the 1990s, which saw a simultaneous decrease in births and increase in deaths, were a genuine disaster, to relatively little fanfare the past decade has seen significant improvement across a broad range of indicators. The improvements that have occurred since 2006 include large increases in fertility and even more substantial decreases in mortality. Additionally, unlike many other countries in Eastern Europe, Russia has demonstrated a proven ability to attract migrants, cumulatively adding several million residents of other post-soviet states to bolster its labor force and its population growth. Population to grow, slowly. As with all countries, there is a significant degree of uncertainty about future demographic prospects, and a wide range of possible outcomes. However, the most likely current forecasts suggest that, over the next fifteen years, Russia will experience a modest level of population growth while at the same time seeing a modest decline in the size of its labor force. If this scenario comes to pass demography will, on a net basis, be a slight drag on economic activity; however, it will certainly not be any kind of a crisis. Workforce to decline until early 2020s. One inescapable problem is the decline in the workforce. This is the result of a low birthrate in the late 1980s and 1990s. The decline will only level out in the early 2020s. In anticipation of this, businesses are hoarding labor, which is one reason for the low levels of unemployment despite the recent severe recession. Russia's Improving Demographics 1999 Current** 2030E Total population, millions* Urban based, % of total 73.8% 74.1% 75.0% Rural bases, % of total 26.2% 25.9% 25.0% Workforce, millions *** Retirement age, men, years Retirement age, women, years Life expectancy, men, years Life expectancy, women, years Total Reproduction Rate (TPR) Source: Federal Statistics Service, Centre for Strategic Initiatives, Macro-Advisory estimates * all numbers exclude Crimea, which currently has a population of 2.3 million ** either end-2015 or 2016 average-to-date *** the 2030E range is explained on page 12 Migration to the rescue? Russia is today a net recipient of migration. This is mainly younger workers from the former Soviet Union. However, there is also a net positive migration inflow from outside the former Soviet Union. Although there were small outflows in , early 2016 data suggests that Russia is again a net recipient of migrants. 25

26 Regional differences. The extent to which Russia s population has rebounded differs dramatically on a regionby-region basis. Some cities such as Moscow and Saint Petersburg are now more populous than they have ever been. Other areas, such as Nizhny Novgorod or the Far Eastern Federal District, continue to experience uninterrupted population decline. These regional disparities are likely to grow in significance in the coming years. Population Density (Per Sq. Kilometer) as of January 2014 Source: Wikimedia Concentration in European Russia is increasing. Russia s population is both heavily urbanized and heavily concentrated west of the Ural Mountains. Large sections of Eastern Siberia are not only essentially uninhabited but have actually been consistently losing what little population they have. Over the past decade, The Far Eastern Federal district lost more than 5% of its population (the cumulative loss since 1992 is an even more dramatic 20%). Russia s population, then, is not merely heavily concentrated in the European parts of the country, it is becoming substantially more concentrated. Russia's Age Distribution * Below 15 years 17.0% Between 15 and % Between 26 and % Between 51 and % Over 65 years 20.3% Source: Federal Statistics Service * of the total population as at end-2015 Trend likely to continue. While the government has announced various initiatives (including, most recently, a promise of free land) to try to encourage migration to the Far Eastern territories, the decades-long history of depopulation seems almost certain to continue. The region was intensively settled only with the use of enormous subsidies from the Soviet central planning authorities, subsidies which are unlikely to be affordable in current circumstances. 26