13.01.23 Review

The Favourable Crisis Climate: businesses have improved their assessments of trade conditions, but express little hope for drastic improvements in the future

The Bank of Russia’s business climate indicator, which is calculated using the largest survey of businesses in the country, grew in December compared with figures from the previous month. The country’s economic players appear to have finally recovered from the shock of mobilisation, and the value of the indicator is at its highest level since the start of the war, although it is far from pre-war levels. In November, the indicator demonstrated positive improvement in short-term economic expectations, while in December, growth occurred mostly as a result of improved assessments regarding the current business climate, although expectations for the future deteriorated somewhat. This situation paints a contradictory picture, as business profits have dropped significantly, yet the downward spiral that many economists had predicted at the start of the war has failed to materialise. The government has made significant investments into the economy, and the fall in budget revenues has not yet trickled down to economic players. However, these issues have mounted pressure on businesses’ expectations.

According to the central bank’s survey of more than 14 thousand companies conducted between 1-19 December, Russian enterprises have finally recovered from the shock of the first wave of mobilisation. Following October’s economic landslide, by the end of year, the consolidated value of the Bank of Russia’s business climate indicator had risen to its highest level since the beginning of the war (2.4). To compare, in January 2022 the value of the indicator was 5.3, in February — 5.7 and in March it stood at -9.

Bank of Russia Business Climate Indicator, 2022

In December, there was a noticeable recovery in production activity in almost every industry. In the industrial sector the business climate indicator had returned to almost pre-war levels, and in other sectors, including mining, water supply and processing, it had surpassed the 2021 average ‘due to a noticeable recovery in demand according to manufacturers of capital goods.’ The worst dynamics, as a result of ‘limited consumer demand’, were seen in wholesale and retail trade. This means that the Russian economy has continued to experience pressure due to low consumer demand. In autumn, citizens continued to save on food and consumer goods (Re: Russia previously reported on this phenomena here). The most pessimistic expectations pertain to retail, services and construction, the survey demonstrates.

A noticeable increase in sales is expected in the automotive industry. In the absence of supplies from European, Korean and Japanese brands, sellers are switching to their Chinese and Russian counterparts. According to the Association of European Businesses, compared to November, sales of new cars were up by 38.1% in December, mostly due to AvtoVAZ and UAZ products. According to Moscow Vice Mayor Maxim Liksuto, most cars sold under the Moskvich brand (of Chinese origin) will fall on the carsharing market, the corporate segment and government officials.

Representatives of all sectors of the economy noted December’s spike in demand. The strongest increase in demand was reported in the energy sector (although consumption had been falling over the last several months). The weakest dynamics were seen in construction and in retail trade. Over the next three months, significant growth is only expected to occur in the agricultural sector and the production of capital goods. The most pessimistic expectations once again concern retail, services and construction.

Expectations regarding prices continued to deteriorate for the fourth month in a row. Analysts from the Bank of Russia note that production and logistics costs spiked at the end of the year. The surveyed participants complained about the rising cost of fuel and utilities, as well as an increase in prices for materials and various other components. Credit conditions, according to the majority of survey participants, continued to deteriorate. The biggest difficulty faced by car dealers and wholesalers was raising loans. The conditions have relaxed somewhat for manufacturing, agriculture and transportation businesses, as these sectors enjoy extensive governmental support measures, the central bank noted in its commentary.

At the same time, the growth of the central bank’s index was mostly due to improved estimates regarding current business conditions (-3.3 vs. -6.3 in November), while expectations deteriorated slightly (8.4 vs. 8.6 in November) — for the second time this year. Following February’s sharp drop, the index’s recovery growth was propped up by the growth of expectations, rather than by assessments of current conditions. These assessments also fell (by a margin) in September as a result of the mobilisation, then rose in October and November.

Interestingly, the improvement in the well-being of businesses (which was reflected in the growth of the central bank’s index) occurred during a noticeable drop in profits for economic players. Rosstat recorded an 8.1% year-on-year decline in net financial results in the last ten months. If we exclude certain sectors that managed to grow as a result of governmental support (for example, in construction, the net financial result turned out to be 2.4 times higher and in rail transportation it was 2 times higher) or other factors (tourism and catering added 56%), the result will be even worse. As they lose profits, businesses also reduce investments into development. This, most likely, leads to restrained expectations. ‘More than 50% of investment financing comes from the companies' own funds,’ admits First Deputy Prime Minister Andrey Belousov. ‘If profits lag, they take investments with them. Therefore, this is also a problem that has not yet been solved.’

One way or another, the anticipated end-of-year collapse did not happen, and this was largely due to government interventions into the economy. A sharp reduction in budget revenues has not yet reached the economic players, although it may have already affected their restrained level of expectations.

The values of the business climate indicator are made up of the difference between answers such as ‘the situation has improved’ and ‘the situation has worsened’. The composite indicator is formed from two things — an assessment of the current business climate and an assessment of the expected business climate. Business executives are asked how they assess changes in demand and production output at the time of the survey and over a three-month period. Separately, the central bank calculates composite indexes regarding demand and output. The survey covers approximately 14 thousand businesses across all major sectors of economic activity. Indicators for previous periods are based on complete data that takes into account questionnaires received after the preparation of operational information.