Since our last report, we have again reduced our macroeconomic forecasts for Russia. The country is in the midst of a deep economic crisis and we expect the economy in 2009 to contract by 7.8% in real terms. We see a recovery, with 2.0% growth, coming into play in 2010. Our forecast for the next five years works out at an average annual GDP growth rate of 1.3%, compared with 7.0% in the 2004-2008 period. The effect on our freight traffic forecasts comparing the two periods is therefore decidedly negative. We now expect freight carried across all modes, measured in mntkm, to achieve an annual average growth rate of 1.4% over the 2009-2013 period.

According to our latest estimates, transport and communications GDP rose by 5.9% in 2008, 0.3 percentage points (pps) faster than overall GDP, which we estimate to have increased by 5.6%. For the 2009-2013 forecast period we expect the transport and communications sector to outpace the economy as a whole, but by a narrow margin. It will achieve average annual growth of 1.5%, versus 1.3% for overall GDP. The total value of transport and communications GDP will rise to US$280.6bn in nominal terms by 2013, representing 10.9% of Russia’s GDP. The transport and communications sector employed 5.80mn people, or 9.0% of the labour force last year.

We see that figure falling to 5.66mn by 2013, while remaining constant at 9.0% as a proportion of the total labour force. Russia is a vast country with a thinly-spread infrastructure. One of the faster rates of growth will be registered by pipeline throughput (an average of 3.0% per annum), reflecting resilient Asian demand for Russian oil and gas, as well as substantial, but slower-growing European demand. Air cargo will grow at an average of 2.9% per annum. This is a sharp reduction on earlier projections.

Given the impact of the global financial crisis, we expect to see ongoing consolidation in the aviation sector. The growth in pipeline turnover will, as mentioned, be based on continuing strong demand for Russian oil and gas, despite investor concerns over various issues, including the emerging international recession, political risk, and the after-effects of gas disputes with Ukraine (in late 2005 and early 2009) and Belarus (in late 2006). On balance, we believe there will be ongoing funding for big pipeline projects to markets in both the West and the East, although foreign investors will be more cautious. In the long term, demand for road haulage will be boosted by the expansion of the motor vehicle fleet, and the sophisticated door-to-door logistics requirements of an increasingly consumer-oriented society.

However, the near-term recession and the lack of enough new highway capacity will be a severe limiting factor. We are now predicting annual average road haulage growth of 1.5%. Other modes of transport will experience comparable growth curves. Shipping cargo turnover will also reflect the reduction in world trade in 2009, and will expand at an average 2.8% a year, while inland waterways will have a slower performance (+0.9% per annum). Railway freight turnover will be hard hit by the downturn in 2009 and as a result will on average contract by 0.6% per annum over the forecast period. However, this reflects the depth of the 2009 recession and despite this, the long-term future of the rail sector is strong. Russia has 85,000km of railways, making it the second largest network in the world after the US. Rail dominates the freight transport network accounting for 42.7% of total turnover, according to the Federal State Statistics Service, and around 85% of total turnover, if pipeline traffic is not included. Rail has a competitive advantage due to the large distances between different production centres in Russia. The road network is insufficient in terms of coverage and quality of the roads, while the waterways freeze during Russia’s long winter. The major cargo types carried by rail, are coal (23% of the total) followed by oil products, (18%) and construction materials, (15%).