24.10.22 Review

Frontal Reversal: Russian business climate is back to the crisis, Central Bank of Russia monitoring shows

After recovering from the first sanctions shock and a summer optimism period, the Russian economy has reversed downward again, according to the Central Bank of Russia's October business climate monitoring data. Both current assessments and business expectations have sharply deteriorated, returning to May levels. The most dramatic negative changes are observed in demand and estimates of credit terms. Businesses are gloomy about the future — the level of expectations is comparable to the situation during the second wave of the pandemic in the autumn of 2020. Factors limiting production include a shortage of qualified employees, which has particularly worsened after the September military draft. However, the main question is whether the deterioration is a consequence of mobilisation or the beginning of the second structural crisis wave caused by sanctions, which economists predicted back in the spring.

The Russian economy has run out of good news. Russian business is back in depression: the Central Bank's of Russia business climate indicator has again gone into a negative zone, losing all of its summer improvement in one month and returning to its May figures. The survey conducted in the first two weeks of October showed that companies' expectations and assessments of the current situation have significantly deteriorated. 

CB business climate indicator, 2022

Every fourth participant in the Central Bank's business monitoring noted the current decline in production volumes follows from the survey results. Almost all sectors of the economy have markedly reduced business expectations to the levels of autumn 2020 — the period of COVID-19's second wave. Every fifth company expects a decrease in production in the next three months. For many companies, the lack of qualified staff, which worsened in October, is a significant limiting factor — and we can surely blame it on mobilisation and the following outflow of workers.

The decrease in consumer demand, observed by businesses (estimates of the current demand dropped from -4.4 to -7.2), hit construction (the assessments declined from -4.1 to -12.2 points), trade (reduced from -10.5 to -16) and manufacturing industry (from 1.9 to -3) the hardest. Agriculture, which for a very long time and despite everything had remained optimistic, for the first time since June 2020 sharply dropped from 5.2 points to -1.9. According to the Central Bank, the reason for this is the rising costs, export restrictions, and the same low domestic demand. The index of demand and production in the transport industry fell to its lowest values in 2022 (from -8.9 to -10).

The price expectations of enterprises have worsened. Managers named higher prices for fuel, spare parts, and components as the main cost-raising factors. Along with the higher expenses, the growth of selling prices in most industries continued to slow down due to demand constraints, which worsened businesses' position.

The enterprises' assessments of lending terms have noticeably worsened (-7.5 in October, after -0.8 in September). This is "mainly due to the increase of non-price requirements for borrowers amid rising uncertainty in the economy," the Central Bank of Russia analysts write. In other words, banks are reluctant to satisfy loan applications, expecting a worsening situation at enterprises. Several factors create the uncertainty: the lack of knowledge of how the energy embargo will work and the likelihood of a new force majeure, such as recent mobilisation. The deterioration of the situation in construction, extraction of minerals, and services is especially noticeable.

Such a sudden reversal from summer optimism looks unexpected. Analysts tend to blame mobilisation for this decline, which is how the popular economic Telegram channel MMI commented on the monitoring data. However, the deterioration of assessments looks so frontal and, one might say, systemic that it brings to mind the second autumn wave of the sanctions-related crisis predicted by many economists back in spring. While enterprises saw signs of macroeconomic normalization in spring and summer after the March shock, the accumulating structural constraints had brought them back to crisis reality by autumn. It will be possible to tell if this interpretation is correct later when it becomes clear how persistent and profound the new negative trend is.

The values of the business climate indicator are the modified difference between the answers "the situation has improved" and "the situation has worsened". The composite indicator is formed from two components — an assessment of the current and expected business climate. Business executives are asked how they assess changes in demand and production at the time of the survey and in three months perspective. The Central Bank of Russia calculates composite indices of demand and production volume separately. The survey covers about 14 thousand enterprises of all vital economic activities.