Future scenarios

In a situation of “tense awaiting” the main question is “What will happen next?”. ALT consultants identified two possible scenarios for the development of the current situation and analyzed what to expect in any case. 


We do not pretend to be a new Nostradamus so we are not going to forecast the probability of events.  However, obviously, the situation will change. Let us carry out a brief scenario analysis and find out how the situations can possibly evolve and how it will influence business community. 

«Getting worse» scenario

This scenario implies that the opposition in the Ukraine will continue and new more rigorous sanctions can be imposed.  It is not likely that it will lead to a significant decrease in the supply of hydrocarbon as it is unfavorable for both sides (Russian and the West) but the supply can be partly limited and a noticeable reduction of trade relations is possible. 

We are going to look into the worst-case scenario when the country’s oil and gas revenue is decreased (because of either export shrinkage or price drop). What to expect in this case?

  • Falling of the Federal budget revenue 
  • Further decline in trade turnover between Wertern Europe and Russia, refocusing of Russia towards Eastern countries
  • Further weakening of the ruble because of capital outflow
  • Decreasing of investment activity 

All these consequences will force some foreign companies to quit the Russian market because of lost competitive advantages. In this case government investments will have to be increased to compensate the drop in investment activity. Additionally, growing military potential is likely to become one of the country’s priorities. The authorities will have to change the budget rule (the budget maximum expenditure is based on the oil price) which has a lot of imperfections now. The next actions of Russian oligarchs are another interesting question. They will probably ask the government to invest in the economy as well because it is not safe to keep their assets outside the country.

The policy of import substitution will be the central idea. In the industries where there is little potential for development, Chinese companies will enter the Russian market and substitute western products. China can also provide capital, but the cost of it will keep rather high.

A sharp drop of the ruble can make inflation accelerate while GDP will decrease. The speed of economy recovery after a sharp GDP drop will depend on how effectively the budget money will be spent. Most probably, in this case Russia will iterate the scenario of the previous crisis. The technological and institutional gap between Russia and western countries will widen. However, Russian companies will have the second chance to reemerge when western competitors have to quit the country.

«Getting better» scenario

This scenario implies rather slow developments: cessation of arms in the Ukraine will lead to total peace in a few months, the oil price will keep high (around $100), and there will be no shocking events:

  • Mutual sanctions between Russia and EU & US can be cancelled, disrupted economic relationship will start to recover
  • The ruble will be stable or it can slightly strengthen against Euro and US dollar
  • Foreign investments will return to the economy… but very slowly

In this case, the economy will start to return to the “before Crimea accession to Russia” situation, but there is no point to wait for the full recovery of the relationships with western partners. It can take several years to regain the trust. Besides, Russian government does not want to be dependent on the western technology and capital. In this situation, government investments will rise especially in military industrial sector; import substitution programme will expand. Russia will strengthen its relationships with Eastern countries which can bring investments into the economy. However, the process will most probably be very sluggish because, there are no incentives for changes and therefore, no institutional reforms will take place. The GDP growth rate will most probably be below 0% in the next two years until the investment potential is accumulated all over again. 

What to expect in any case

Thus, in any case we should expect a slowdown in the economic development in the years immediately ahead. It can be either a sharp drop or a gradual decline. As the potential of “high oil price” factor is depleted at the moment, the slowdown will happen in spite of the price of oil. Besides, irrespective of the scenario to come, several trends can be expected:

  • Capital outflow and difficulties with capital raising will lead to a decline in investment activity
  • The role of the government (including state-owned companies) and state investments in the economy will be more significant: infrastructure projects, import substitution support, government procurement. The defense industry will be the main beneficiary
  • Import substitution will continue for both political and monetary reasons
  • The role of the East as a partner on the country and companies level will increase