Abstract
The capital shortage impacting emerging markets will be acutely felt in Russia
and a systemic crisis has
thus far only been avoided through proactive
government intervention facilitated by a large stockpile in
foreign
currency reserves. That said, the crisis risks will remain through the medium
term. Indeed, the
potential for the economy' s external and fiscal
dynamics, as well as banking system stability, to unwind at
an accelerated
pace will only increase as official foreign exchange reserve stocks fall
further in 2009. Not
only under such a scenario do we countenance a
protracted and deep recession but also the risks of credit
events even
among the country' s largest quasi-sovereigns.
BMI ' s core scenario for
Russia is decidedly bleak with an economic contraction of -4.0% for the
fullyear.
It is important to stress that even with this well
below-consensus forecast, we continue to highlight
downside risks. With
Urals oil set to average just under US$43 per barrel (/bbl) over the course of
the
year, the country' s external and fiscal dynamics are set to worsen
considerably. The current account,
which posted large surpluses since 1999
is forecast to fall into deficit by 2010, while the federal budget is
expected to flip from a 4.0% of GDP surplus to a 6.8% shortfall. Even more
worrying is the stability of
the banking system, which is likely to
deteriorate further as deposit outflows, combined with a steady
increase
in non-performing loans, hammer credit growth and further deteriorate
liquidity conditions.
While it is already clear that Russia is headed for
a recession, these factors suggest to us that the risks of a
systemic
crisis are concurrently rising. Importantly, the only reason why the Russian
banking system and
corporate sector have not already faced a widespread
default scenario akin to 1998 is because of the
government' s liberal
injections of capital into the markets, thereby effectively taking on the
short-term
debt refinancing obligations of large swathes of the private
sector. This has been facilitated by a
substantial stockpile of foreign
exchange reserve capital which peaked at US$758bn in July 2008, not
coincidentally in the same month that oil prices hit their record high.
In
Central and Eastern Europe (CEE), we profile 22 multi-national insurance
companies. In alphabetical
order, these are AEGON, AIG, Allianz, Aviva,
AXA, Cardif, ERGO, Eureko, Fortis, Generali,
GRAWE, Groupama, HDI-Gerling,
HSBC Insurance, ING, MetLife, Prudential Financial, QBE,
RSA, UNIQA,
Vienna Insurance Group and Zurich Financial Services. We also discuss the
regional
presence of Belgium' s KBC and Austria' s Erste Bank through a
number of insurance subsidiaries and
explain the importance, for each of
the various countries, of purely domestic firms.
We estimate that, over
the course of 2008, total premiums in Russia rose by 26% to RUB939.0bn.
Nonlife
premiums rose by 26% to RUB920.5bn, while life premiums rose by
39% to RUB18.5bn.
Between now and the end of the forecast period, we
estimate that annual non-life premiums will grow by
RUB905.9bn, while
annual life premiums should increase by RUB47.9bn.
Growth in non-life
premiums should be driven by the general growth in nominal GDP plus a rise in
nonlife
penetration from the current estimated level of 1.9% to 2.5%.
Growth in life premiums should be driven by the change in the overall
population and a rise in life density
from an estimated US$6.34 to
US$15.00 per capita.
BMI' s Insurance Business Environment Rating (IBER)
for Russia is 58.3.
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