01.11.23 Review

Disrupted Seasonality: Russian industry is stuck between stagnation and growth, but the worst is yet to come

According to data from the Russian Federal State Statistics Service (Rosstat), the Russian industrial sector continued to stagnate in September, with growth having come to a stop back in July. More optimistic assessments suggest that it has become 'stuck' somewhere between stagnation and growth. Discrepancies in the data are attributed to different methods of seasonal adjustment, but the pandemic and war have so significantly distorted the natural fluctuations in demand and output that no method of correction appears entirely reliable at the moment. Nevertheless, various industrial sectors exhibited multidirectional dynamics in September. According to the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), the decline in oil production slowed in September, while gas production rose sharply due to liquefied natural gas (LNG). Manufacturing, especially enterprises connected to the military-industrial complex, continue to increase their production. However, a significant negative contribution to the overall picture is made by the decrease in metallurgical output, and manufacturing of petroleum products, rubber, and plastics. Thus, we can see that the worsening economic situation and the sharp rise in the key interest rate have not yet fully impacted industry, but the first signs are already evident. Moreover, a growing number of economists believe that the Russian economy could face a new recession in the coming year.

Russian industry continued to stagnate in September, with production growth having halted as early as June, according to seasonally adjusted data from Rosstat. Compared to August, production in September increased by a fraction of a percentage point, but in previous months, it had been declining. A more positive assessment, in line with predictions made last month, comes from the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), an organisation closely aligned with the Russian government. Its experts only noted a 'slight delay' in August, and according to their analysis, there was even an acceleration of growth in September.

The discrepancies between Rosstat's estimates and those of CMASF are explained by the use of different seasonal adjustment algorithms. However, they stipulate that none of the algorithms can be considered entirely reliable today. The pandemic and then the war have proven to be external factors that have significantly influenced the natural seasonal dynamics of demand and production, so the picture of the last three years is not indicative. Economists from CMASF summarise that Russian industry is 'somewhere between growth and stagnation'.

Nevertheless, analysts at the Higher School of Economics (HSE), using their own algorithms for seasonality, also recorded growth in September after an intensive decline in July and August. According to their calculations, industry is still falling short of pre-war production levels.

Industrial production volume according to Rosstat, CMASF, and HSE estimates, 2020-2023, 100 = monthly average for 2020

Industrial dynamics are significantly influenced by the situation in the extractive industries. According to Rosstat, there has been a slight decline in these industries over the last four months. At the same time, Rosstat no longer publishes data on oil and gas production, which is now classified, only acknowledging a decrease in the extraction of metallic ores. Experts from the CMASF, who presumably have access to classified statistics, provide data on oil and gas, while cautiously describing it as a 'qualitative assessment of the trends'. According to this 'trend assessment', the decline in oil production in September came to a halt, and gas production surged sharply, with a 5.7% increase compared to the previous month. This growth was driven by a significant increase in LNG production, which rose by 18.5%. However, it is important not to be misled by these impressive figures; the Russian gas industry, which has played a significant role in the country’s economy for decades, is in a state of collapse, and the rapid growth in LNG production is likely related to the preparation of consumers for the winter season and in no way compensates for the overall decline in production.

The index of manufacturing production grew by 1.5%, following a 0.4% growth the previous month. The CMASF highlights that the most significant growth was seen in investment goods, with a 4.1% increase compared to a 1.1% decline in August. Food production saw a resurgence with an increase of 1.0%, and growth continued in chemical manufacturing (+0.8%) and pharmaceutical production (+3.2%, compared to an average of +0.8% in the third quarter).

However, in general, the dynamics across industries have once again become multidirectional. A significant negative impact is observed in the decline of output in metallurgy, petroleum product manufacturing, rubber, and plastics, as can be seen from Rosstat’s primary data. Automobile manufacturers are also facing challenges, with a decline of 0.4% in September compared to an average of +2.7% in the third quarter. On a more positive note, the production of finished metal products (+6.4% after seasonal adjustment by CMASF; +4.6% on average for the quarter) and machinery and equipment manufacturing (+4.7%), which includes military production, are helping to maintain some stability.

The results from business surveys also present a mixed picture. S&P Global's survey of companies, which Re:Russia has previously discussed, recorded impressive dynamics for September, with the index rising to 54.5 points from 52.7 in August, reaching its highest level since 2017. The business climate indicator, calculated by the Central Bank's experts, was buoyed by the optimistic expectations of companies, while the index of assessments of the current situation declined. One of the main reasons for this was a shortage of both skilled and technical workers. Among other pressing issues, companies highlighted rising logistics costs, increased production expenses due to the weakening ruble, and delays in the supply of raw materials and components. Finally, Rosstat's business confidence index showed a notable decrease in the extraction of minerals and a stagnation in manufacturing.

As we have previously reported, the deteriorating economic situation and the sharp increase in the key interest rate (the Central Bank raised it once again this week to 15%) will have a more pronounced impact on industry in late autumn. In the meantime, the momentum of heightened demand is supporting production and compensating for the instability in export-oriented industries. However, an early indicator, such as the dynamics of railway transport, is worth noting. In October, the volume of freight loading decreased by 3.4% compared to last August and was significantly below the typical August figures seen in 2019-2021. This is a strong signal regarding the future trajectory of the industrial sector. 'We do not see anything wrong with this’ the authors of the MMI Telegram have written. ‘On the contrary, we consider a soft recession very useful in the current situation of overheating caused by imprudent budget spending'. Indeed, analysts at Bloomberg Economics estimate a 70% likelihood of a recession for the Russian economy in 2024.