16.01 Review

The Boom Has Reached Prices: The dramatic increase in investment in 2023 reflects higher prices for machinery and equipment rather than an increase in the volume of investment goods in physical terms

The unexpectedly high growth in investment by Russian companies in 2023, estimated to be around 10%, largely reflects the higher prices for machinery and equipment compared to inflation in the economy as a whole. In other words, businesses spent substantially more on reproducing necessary investment goods than in the previous year, while their production capacities did not increase in physical terms. This is according to the Central Bank's research based on a large-scale survey of enterprises. Problems with the cost and availability of imported investment equipment are also among the top constraints for investment (noted by 40-50% of enterprises). In other words, Russian import substitution is highly import-dependent. In 2024, investment activity may weaken: a significant part of investments in 2023 was associated with the completion of projects started in the previous year, when the ruble was stronger, and the growth of costs for their completion will restrain investment activity this year.

In 2003, amid war and sanctions, as previously reported by Re:Russia, statistics recorded an investment boom in Russia. In the first nine months of 2023, investments in fixed capital increased by 10% in real terms compared to the same period last year, with average annual growth rates of this indicator at 1.4% over the last 10 years. Although an analysis of the investment structure showed that the investment boom of 2023 was not so much a driver of the growth of the economy as of its structural adjustment — replacing falling imports, expanding the military-industrial sector and creating a parallel transport and logistics infrastructure, as well as shifting the focus from certain industries to others (often less profitable ones) — the result in itself still appeared impressive. 

However, a survey conducted by the analysts of the Central Bank of more than 500 Russian companies from various industries indicates that this growth is largely related to the increased cost of investment goods due to sanctions and the weakening of the ruble, rather than an increase in the physical volume of goods. According to the survey, in general, investments in 2023 were expected to increase in 27% of companies, but 43% of companies reported an increase in investments for the purchase of new machinery, equipment, vehicles, as well as for the repair and modernisation of existing ones. Investments remained at the previous year's level for 35% of companies, while 20% reduced their investments. Moreover, just under half of those who reported an increase in investments in machinery and equipment attributed this growth to the increased cost of purchases, and accordingly, slightly more than half reported that they increased the quantity of purchased machinery and equipment. Thus, in physical terms, essential for potential production growth, purchases increased for approximately 20% of companies in the sample. This is not bad, but by no means corresponds to the standards of an investment boom.

The figure of a 10% increase in investments in real terms implies an adjustment of nominal investment growth (about 3.4 trillion rubles, according to Rosstat) for inflation, i.e. the overall price increase in the economy. However, inflation is non-linear, and, for example, ruble devaluation will, on average, produce a smaller price increase in the economy than the actual rise of the price of imports. The Central Bank survey indicates that inflation (price growth) in machinery and equipment was significantly higher than the average for the economy, and, accordingly, the growth of investment in physical terms was lower than in inflation-adjusted monetary terms. In other words, the growth of investment expenditures largely represents an increase in the costs required to maintain production rather than investment in its expansion. Maintaining and updating existing capacities were identified by Central Bank analysts as the main priority of the companies surveyed (76% incurred forced expenditures related to the repair of production facilities).

'The most pronounced real investment growth (i.e. in physical volume) was noted in metallurgy, finished metal products, electrical equipment, as well as machinery and equipment, i.e. in industries with import substitution opportunities or with high demand from the state', note the authors of the study. In other words, state demand and the defence industry, which gave impetus to related industries, apparently played a key role in this increase.

Moreover, almost 40% of companies complained about the unavailability of imported machinery and equipment that they need. The majority of large enterprises surveyed by Kommersant at the end of last year avoided using available but outdated technologies and tried to overcome the situation through so-called reverse engineering, i.e. organising the production of analogues. This is the path being taken by, for example, Russian Railways and airlines. At the same time, when asked about the quality of their existing assets, representatives of the majority of companies (70%) said that the share of modern machinery and equipment required does not exceed 50%. 

In 2024, there is already a risk of weakening investment activity, the Central Bank analysts warn. The survey showed that the majority of enterprises (79%) in 2023 completed old investment projects. At the same time, the study states that the growth of costs for those projects, which were planned when the ruble was stronger, will restrain investment activity in the future.

The main factors limiting investment activity, as identified by enterprises, include uncertainty — both the macroeconomic situation in the country (55%) and geopolitical situation surrounding it (51%). In third place was the situation with labour resources (51%), followed by the cost of purchasing machinery and equipment (46%), the ruble exchange rate (42%) and the possibility of supplying imported machinery and equipment (38%). This list demonstrates the high import dependence of the Russian investment sector and, consequently, its dependence on the exchange rate of the ruble — five of the six main constraints are, in one way or another, related to these factors. In other words, Russian import substitution is very import-dependent. Interestingly, financial constraints for investment placed lower on this list: the payback period of investment projects as a constraint on investment was mentioned by 35% of companies, while the availability of bank loans and the financial situation of the company surveyed were mentioned by 32%.