02.11.22 Review

The Fading Face of the Non-Military Economy: in September, industry was still showing signs of recovery. In October, there will be nothing left of It but a defense sector

After a summer rebound, industrial production in Russia is returning to a stagnation plateau, which is about 95% of the output in December 2021. While many sectors, including manufacturing, showed a recovery growth in September, there is no reason to hope this trend will continue. The approaching oil embargo and the withdrawal of at least half a million workers from the economy are unlikely allow it to continue balancing in a state of "unstable stagnation," as analysts have defined it. At the same time, the added effect of building up the military economy — the production of uniforms and armaments — is beginning to play an increasingly important role, according to the Rosstat data. It can smooth out the signs of an upcoming second wave of recession in October.

The Russian industry has frozen — the recovery of production volumes outlined in July has not continued. After the July spike, the output level returned to the "II quarter plateau", as follows from the assessment made by the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASTF) that is based on Rosstat data on the Russian economy and industries for September and published at the end of October. The recovery of production volumes that began in July has not been continued; the sector is experiencing "unstable stagnation", the CMASTF's analysts say.

In annual terms (i.e., by last September), the decline in Russian industry is 3.1%; in August, the figure was -0.1%. However, it can be explained by the Russian economic growth boom during the last months of 2021, when Covid was almost gone, and the recovery had begun. Although, even if the industry remains at this plateau, the gap with last year's figures will increase: the plateau was 95% of the output in December 2021, and if the industry will neither grows nor declines, then its reduction at the end of the year will be the same.

The volume of Russian industrial production, according to Rosstat and CMASTF estimates, 2019-2022, 100% = 2019

While Rosstat data provide the basis for all industrial assessments, analytical centers use different methods to remove seasonality and other random factors (for example, unreliable statistics in specific segments) from it. For example, the CMASTF does not consider Rosstat data on most "closed" positions (defense industry); the production dynamics here are linked to the state order, and therefore it blurs the trends being formed in the economy based on market factors. For example, the production of metal wares in August was 91.8% compared to the last August, and in September, it jumped to 112% compared to the previous September. In the machinery and equipment industry, the increase in August was already 108.9% compared to last August and jumped to 128.5% in September. However, all this only indicates an increase in production for the needs of the war.

The CMASTF gets a slightly different picture of the crisis dynamics by excluding classified records. The non-military industry was contracting much more rapidly, and in July, its decline reached 7% compared to December 2021, but then the gap began to narrow and reached 4.2% in September.

According to CMASTF calculations, oil production volume stabilized in September compared to August, and oil refining expansion compensated for the severe decline in oil exports. (The average daily export of Russian oil in September decreased by 260 thousand barrels to 4.8 million barrels, and the average daily export of oil products rose by 30 thousand barrels to 2.7 million barrels.)

Gas production has shifted from the recession to a slight recovery increase: in September, the rise against August was estimated at 0.8%. In the previous months, gas production was steadily declining. In September, it dropped by 12.5% below the February level, with natural gas production suffering the most (-21% against February), while the LNG production remained almost unchanged (-0.2%). The Russian government also cut pipeline gas supplies to Europe throughout the war months to cause an energy crisis while simultaneously increasing LNG exports.

The decline in construction materials output continues to grow (-2.7% by August, a cumulative decrease since February — 9.6%; the decline mainly affects finishing and auxiliary materials with a larger share of imported components). At the same time, the recovery growth in machinery and equipment production continues — 5.3% in September vs. August, after an increase of 3.6% in August compared to July. As a result, the decline was reduced by February and now stands at only 4%. The CMACP also sees signs of the beginning or strengthening of recovery growth in the production of electronic and electrical equipment as well as in railway machine-building. Non-food consumer goods output has also been increasing.

According to the Rosstat data, the economy has partially compensated for the frontal spring drop. However, let's remember that we are talking about September. Enterprise surveys also predicted a partial recovery during the summer months, but, as we wrote, there was a trend shift in the October poll data: both expectations and assessments of the current production and sales situation got markedly worse. In addition, analysts and economic agents expect the implementation of the oil embargo, and there are no precise estimates yet of how strong its impact on the economy will be. Finally, the Russian economy lost at least half a million active workers in October (those who were mobilised and those who have fled from the mobilisation), which will hardly allow it to remain at the "unstable stagnation" plateau. However, in our opinion, the effect of the almost inevitable new wave of decline will be compensated by growth in the military economy in October, primarily by the production of uniforms and armaments.