23.06.23 Review

Sky-high Optimism with Uncertain Prospects: Russian business climate index remains at decade-high levels for no particular reason

The recovery of the Russian economy continues. In June, the business climate index, calculated by the Central Bank based on a large-scale survey of businesses, rose again after a slight decline in May. But the most surprising thing is the growth of the current business conditions index of more than 3 points, from 3.1 to 6.4. This is the highest value of the index since August 2008. The components of the index are also at ten to fifteen-year highs. At the same time, short-term business expectations have decreased slightly, particularly in the trade sector. This may be attributed to stagnating demand from households, which the Central Bank sees as the main driver of Russian economic growth in 2023. The volatility of demand is increasing against the backdrop of expected budget spending cuts, which the government acknowledged in recent weeks.

In June, the composite value of the business climate index, calculated by the Central Bank based on a large-scale survey of enterprises, rose to 8.8 points. This is up from May when the value was 8.4 but lower than in April when it reached a multi-year record of 9.5. Prior to this, the index had been rising for six months. Elvira Nabiullina, the Governor of the Central Bank, commented on the results of the survey: 'Thanks to the fact that the private sector is flexible and efficient... business climate indicators are near decade-high levels, and economic activity is recovering very quickly: we already have companies that are working three shifts, many sectors are actively hiring new employees, and there is often a shortage of skilled workers.'

The composite index value was boosted by inexplicably high assessments of current business conditions, reaching 6.4 points compared to 3.1 the previous month. This is the highest value of the index since August 2008. Notably, over the past ten years — from January 2012 to January 2022 — the average value of the index was -4.4 points. Even in April 2021, when the economy sharply accelerated as the country recovered from the pandemic, its value exceeded 4 points only once. In 2022, it was predictably negative (-6.1). It entered positive territory for the first time following the March enterprise survey, jumping by 3 points. The values of the business climate index are relative, capturing the dynamics compared to the previous period. Even so, the euphoria of Russian businesses seems almost inexplicable.

The most noticeable increases were in the trade sector (especially in automotive retail, one of the most depressed sectors of the Russian economy) and in industrial production. At the same time, short-term expectations deteriorated slightly for the second consecutive month. Retailers and consumer goods manufacturers demonstrated a more noticeable decrease in optimism, according to analysts at the Central Bank. This could be associated with stagnating demand from households, which the Central Bank sees as the main driver of Russian economic growth in 2023, alongside budgetary injections. Re: Russia has previously described how private demand accelerated in the first quarter, but according to calculations by the MMI Telegram channel based on Sberindex data, growth halted in April and May. Nevertheless, business expectations still remain at their highest level since March 2022.

Central Bank Business Climate Indicator, 2022-2023

Estimates for production output in June reached a fifteen-year high, driven by strong dynamics in industrial production, logistics, trade, and services. However, among the main industrial sectors, the agricultural sector remains in decline. The production expectations of businesses decreased slightly compared to May. The most noticeable decline in optimism was observed among consumer goods manufacturers. Analysts at the Central Bank attribute this to difficulties in the supply of imported equipment, components, and raw materials, as most companies have yet to overcome these challenges, according to Rosstat data.

Current demand ratings in June also reached their highest levels in fifteen years. Representatives from the manufacturing industries, particularly producers of investment goods such as finished metal products, transportation vehicles and equipment, electrical equipment, computers, electronics, optics etc. had the most positive outlook. Additionally, demand in the automotive retail sector was significantly higher in June. The Central Bank analysts associate this with increased interest from buyers in used foreign cars and new Chinese vehicles, in anticipation of rising prices as the ruble weakens.

The rise in business costs accelerated in June, with the most noticeable increases occurring in the industrial sector. Central Bank analysts attribute this to rising logistics expenses, the increased costs of materials and raw materials, as well as higher labour costs. In the context of a labour shortage, wages have had to be raised for both skilled and unskilled workers. Conversely, prices for goods and services have slowed down, with the most noticeable decrease seen in the extraction of minerals and wholesale trade. This aligns with recent Federal Tax Service data which indicates that business profits have actually shrunk. Nevertheless, the optimism among the entrepreneurs surveyed continues to grow.

Commenting on the results of the May business survey, Kirill Tremasov, Director of the Monetary Policy Department at the Central Bank, suggested that 'the momentum has weakened, but growth continues.' The June data confirms this. Elvira Nabiullina believes that 'our economy is now very close to returning to the level of economic activity it had at the end of 2021.' However, if the government begins to reduce spending in line with the rate of declining budget revenues (a need which was acknowledged by government officials at the St. Petersburg International Economic Forum), the momentum could weaken too significantly.

The Central Bank's business climate index represents the modified difference between responses indicating 'improvement' and 'deterioration' of the business environment. The composite index is formed from two components: the assessment of the current business climate and the assessment of the expected business climate. Corporate leaders are asked once a month to evaluate changes in demand and production volume at the time of the survey and over the next three months. The Central Bank separately calculates composite indices for demand and production volume. The survey covers approximately 14,000 enterprises across all key economic sectors. Historical data is reflected based on complete information received after the collection of real-time data.