29.06.22 Sanctions Review

Worse Gets Better: Central Bank surveys show signs of import substitution, decline of production in extractive industries and a general reduction in the intensity of negative assessments

The Business Climate Index calculated by the Russian Central Bank has demonstrated some improvement for the second time since the March low, having now risen from April's -4.4 to -2 points.

While in April the index increased due to businesses' improved assessments of their prospects, in May assessments of their current conditions turned out less pessimistic. These are still deeply negative numbers, but they have improved over the course of the month from -11.4 to -8.2 points.

Consumer goods companies show the most noticeable improvement in their assessments of the current conditions, which the Central Bank thinks is due to prompt import substitution of goods withdrawn from the market as a result of the sanctions. Meanwhile in extractive industries the index shows a general deterioration and a decline in output as compared with the previous months.

The "improvement" of polling indicators should be perceived with caution: the index is based on a modified difference of replies "the situation has improved" and "the situation has worsened", and the negative index values indicate further deterioration, but not at such a fast pace as before.

Overall the negative balance of estimates is not as dramatic as it was at the beginning of the pandemic and is roughly at the level of the 2015 crisis. However, the final scale of the downturn will depend on the depth of decline in extractive industries and the dynamic of import substitution.