According to Rosstat data, industrial production growth in Russia accelerated in February: in January, it amounted to a modest 0.7% (seasonally adjusted), and in February — 1.7%. However, according to experts at the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), Rosstat has not fully taken into account seasonal and calendar factors. Given that in February 2024 there were two more working days than in February 2023, Rosstat should have calculated not +1.5%, but just +0.5%, according to the calculations of the experts of the Centre for Macroeconomic Analysis and Short-Term Forecasting. They themselves estimate the growth in February at 0.6%, after a decline of 0.3% in January. On the contrary, the Higher School of Economics (Vladimir Bessonov's group) saw a decline in February after a noticeable growth the month before. However, the estimates of analysts at HSE are traditionally more volatile than those of other organisations (differences in estimates are determined by seasonal adjustment procedures and the exclusion of some sub-sectors that demonstrate high volatility). Alexander Isakov, Chief Economist for Russia at Bloomberg Economics, estimates growth in February at 0.8%.
On the whole, however, these estimates (including Rosstat’s estimate adjusted by the CMSAF experts) indicate that the state of industry is nearing stagnation: the indicators have seen a horizontal trend for the ninth month. According to the CMASF experts, who previously characterised the situation a little more optimistically, 'in most of the main types of activity, the transition to stagnation has either already taken place or is increasingly visible'. At the sectoral level, they note a contraction in hydrocarbon production (-0.6% compared to January) and oil refining (-0.8%), which was likely a consequence of the first attack on oil refineries by Ukrainian drones in late January and early February, as well as 'volatile stagnation' in the production of motor vehicles, where short periods of growth are followed by periods of decline.
Meanwhile, active growth resumed in the production of metal products, which can be considered an indicator of military production (+13.8% compared to January and +51.5% year-on-year). Stagnation was observed in this sector in January, and there was a decline in the fourth quarter. Accordingly, steel production is also growing. Alexander Isakov from Bloomberg Economics has also drawn attention to a notable increase in the production of radar and radio navigation equipment, which includes electronic warfare (EW) equipment: in monetary terms, output grew almost 2.5 times compared to the levels of 2017-2021. He attributes this to the need to protect oil refineries from Ukrainian drones.
Support for the industry in February was provided and will continue to be provided in March by the acceleration of budget expenditures: last year and this year the Ministry of Finance allocates a significant part of funds during this period. If expenditures amounted to 2.7 trillion rubles in January, then in February, they reached 3.3 trillion. At the same time, factors of stagnation persist, including high utilisation of production capacities, labour shortage and a reduction in oil production, note analysts from Raiffeisenbank. Taking these factors into account, they estimate the industrial growth potential for the year at only 2-2.5%. And even that will mainly be driven by the low base at the beginning of 2023. According to Rosstat's estimate, industrial production in January 2024 grew by 4.6% year-on-year, and in February, by 8.5%. According to CMASF data, the growth was 4.6% and 4.1%, respectively.
It is possible that accelerated budget financing boosted the mood of producers in February. In most industries, the business climate indicator, which is calculated based on a survey of enterprises, shows growth, according to the March issue of the Central Bank's enterprise monitoring. Moreover, against the backdrop of more favourable cost dynamics, the index of current estimates of production volumes and demand rose from 0.8 to 3.9 points.
Looking at the aggregated picture of the dynamics of Russian industry during wartime, among significant industrial sectors (with a share of no less than 3% of total industrial production), three groups can be distinguished. The first group consists of the industries that have not recovered to pre-war levels: mining, production of machinery and equipment, and production of motor vehicles. In mining, output amounted to 96.5% of the January 2022 level, but it has a huge specific weight. Motor vehicle production is 68% of the level from the beginning of 2022, and machinery and equipment production is at 82%. The second group is industries that, after experiencing a decline in 2022, have recovered and even surpassed pre-war levels, but have slowed significantly in recent months. These are basic industries: petroleum products, chemicals, metallurgy and railway transport. Finally, the last group consists of growing sectors: computers, electronic and optical products, as well as fabricated metal products, electrical equipment and food products.
What conclusions can be drawn from this? First, the notion that Russian industry is growing or even recovering is exaggerated. Structurally fundamental industries such as mining and machinery and equipment are far from pre-war levels and have recently shown only weak signs of recovery. Second, the strong recovery momentum that industry received in the second half of 2022 and the first half of 2023 appears to have been exhausted by the end of 2023. This is clearly visible in charts 1 and 2. Third, growth is concentrated in a limited group of industries and their impact on adjacent sectors is negligible. A typical example in this respect is metallurgy. The rapid growth of domestic demand for the notorious 'finished metal products' can only offset the unfavourable situation with external demand.