07.03.23 Review

Optimistic Stagnation: despite optimism from business managers and the government, Russian industrial production fell at the beginning of 2023


The economic situation in Russia continues to be contradictory as market indicators demonstrate optimism among the country’s entrepreneurs, with the PMI index rising to 53.6 points. At the same time, industrial output slowed in January following a period of shaky growth in the last few months of 2022. The range of industries that increased their production output significantly declined in January, with just 13 industrial sectors showing positive dynamics. In December, 24 out of 39 sectors demonstrated some growth. Despite the ongoing optimism expressed by both the government and entrepreneurs, the war-induced crisis continues, and its overall profile remains L-shaped (a sharp decline followed by a period of stabilisation). Having reached its nadir in April 2022 (–6% compared to December 2021’s pre-war peak), industrial output was able to regain some lost ground by June (–4.5% compared to the peak). In January 2023, industrial output hovered around this same level, despite some attempts at growth. However, this stabilisation masks significant structural changes: Russia’s production is being supported by factors such as import substitution and an increase in state defence orders. As a result, improvements in the statistical performance of industry has obscured the loss in consumer welfare.
In February, the PMI manufacturing business index hit a record high of 53.6 points, which is not only the highest level since the Russian full-scale invasion of Ukraine, but also since February 2017. Published in early March, the index reflects the mood among business managers in February. In January, the value of this index was also high, at 52.6 points. According to Rosstat, January’s 0.6% decline in industrial production from December’s figures practically cancelled out the growth that the federal service had observed in the last two months of 2022 (Re:Russia’s comments on the structural features of this growth can be found here). HSE experts, led by Vladimir Bessonov, estimated a similar decline of 0.5% in the intensity of industrial production in January following an increase of 0.9% in December. The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) also reported a decline, although their data indicated a more gradual slide of 0.1% following a 1.1% increase between November and December.

Industrial production according to Rosstat, CMASF and HSE estimates, 100 = monthly average for 2019

The food production industry continued to experience positive growth in January, as indicated by CMASF, with an increase of 10% compared to the previous month after a growth of 1.5% in December. According to CMASF, this year-on-year growth of 4.4% has surpassed the level of recovery. This means that food production has now surpassed production rates from a year ago. The decline in consumption, as observed in retail trade dynamics, can be attributed to partial import substitution, where there has been a reduction in demand for domestic food products. While the increase in domestic food production may have positive effects on economic statistics, it may not always benefit consumers (see the Re: Russia economic report ‘Worse than the crisis’ for further information). In situations where there is a lack of high-quality products, either imported or produced with imported equipment, consumers may be compelled to purchase lower-quality alternatives, which may further fuel the growth of domestic food production.

Furthermore, CMASF reports ongoing growth in several industrial sectors, including electrical equipment production (+4.3% in January following December's +7.8%), the automotive industry (+6.2% following a robust 21.8% increase), and building material production (+2.1% by December). In contrast, production of oil and gas remained at levels recorded in December, but coal production declined by 5.1% in January after a 2.0% increase in December. Additionally, there was a drop in output in metallurgy, chemical products, machinery, and equipment (–9.7% compared to December).

HSE experts have pointed out a noticeable decline in the range of industries that have increased their output compared to the previous month. In December, 24 out of 39 types of economic activity experienced an increase in the intensity of their output, whereas in January, only 13 sectors saw a growth in production. The pharmaceutical industry (+29.3% after half a year of continuous decline), housing and communal services enterprises (+1.4%), mining, not included in other groups (+11%), as well as repair and installation of machinery and equipment (+5.5%) accounted for more than 60% of this increase in output intensity.

Approximately 60% of the gross reduction in intensity was accounted for by the production of crude oil (–0.8%), the production of finished metal products (–7.3% after four months of steady growth), the production of vehicles (–11.7%), coal mining (–5.6% after three months of growth) and metallurgical production (–1.9%).

January’s data substantiates the assessment made by HSE experts last year regarding the state of the Russian economy., They distinguished an L-shaped crisis scenario, in which a sharp decline is observed with no subsequent period of recovery. The maximum decline in output was observed in April 2022, when production stood at just 94% of December 2021’s values (or the pre-war peak). By June, however, this figure had improved to 96.5% and continued to fluctuate around this level.

The ‘Bessonov index’, which measures the output levels of products and services, is an economic indicator that closely reflects the level of GDP. It is quicker to calculate and easily accessible, with a detailed analysis across all key types of economic activity. It is calculated using Rosstat’s data on the volume of output, but excludes seasonal components and some minor random fluctuations.