The dynamics of industrial production in Russia have accelerated once again: in May, output increased by 2% compared to April, and since the beginning of the year, the growth has been 3.5%. However, as before, these figures conceal a highly varied picture across different sectors and functions.
Growth is primarily concentrated in manufacturing, with the highest rates shown by the production of 'finished metal products', i.e. military-industrial complex products. Recovery growth in several industries follows a sinusoidal pattern – each 'attempt' is followed by a decline.
In general, abnormally high output growth (13–23%) is demonstrated by only three industries, while nine show medium and low growth rates. Stagnation is observed in six industries, and a decrease in output in twelve.
Business surveys also paint a picture of 'stratification', but in terms of the types of products manufactured. While assessments of business conditions in consumer industries are simply positive, investment industries, which include military-industrial complex enterprises, demonstrate fantastic optimism.
If we exclude the military sector, it turns out that the civilian sector has only in recent months – after two years – recovered from the downturn caused by the war and sanctions, and is in a weakly positive trend. This indicates that import substitution is still not making a significant contribution to production growth.
The continuing high growth rates of the Russian industry, as before, conceal a very mixed picture across sectors and functions. Industrial production growth rates accelerated again in May (+2% month-on-month) after a pause in April (-0.1%), according to Rosstat data. Such acceleration this year was only observed in February; in other months, the growth rates were near zero. Overall, output has increased by 3.5% since the beginning of the year and by 5.3% since May last year.
Similar assessments of industrial dynamics are provided by experts from the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF): +1.4% month-on-month in May after +0.6% month-on-month in April. Experts from the Higher School of Economics (HSE) group led by Vladimir Bessonov also recorded a jump in May, but the previous month they observed a similarly significant decline. Their data traditionally show high month-to-month volatility and a steady sideways trend since July last year. According to their calculations, Russian industry has only now reached the pre-war level of December 2021. In contrast, according to Rosstat and CMASF, the volume of output already exceeds December 2021 by 5%. The main reason for their divergence from HSE is that Bessonov's group does not take into account military-related production. Thus, in the civilian sector, the industry has only in recent months – after just over two years – recovered from the downturn caused by the onset of the war and the imposition of broad sanctions against Russia.
As can be seen from the Rosstat data, growth remains primarily concentrated in manufacturing (+9.1% year-on-year and +1.5% compared to April). By sector, the highest growth was shown by the production of 'finished metal products' (+22.9% month-on-month; +55.9% year-on-year), which can be considered an indicator of military production. Experts from CMASF also name the food industry as a 'sustainable driver of growth for domestic industry’.
In addition to the leading sectors, there is also a group of industries where recovery growth follows a sinusoidal pattern – each 'attempt' is followed by a failure, note CMASF analysts. Thus, in May, a slowdown followed such 'attempts' in the most affected industries: automotive manufacturing and wood processing. In the former, output in May lagged behind the average monthly level of 2021 by 26%, and in the latter by 14%. Another heavily affected industry, pharmaceuticals, slowed down in March and April, but showed growth again in May. As a result, production intensity in this sector reached pre-war levels for the first time.
However, upon closer examination, the assertion that Russian industry is experiencing intense growth, which one might make by looking at aggregated figures, appears highly inaccurate. As seen in the table below, an abnormal increase in output (13-23% compared to the previous month) is observed in three sectors, medium and low growth rates (2-5%) in nine, stagnation in six, and a decline in twelve sectors ranging from 2% to 12%.
Market surveys paint a similar picture of 'stratification', but in terms of product types. Overall, current business climate assessments in May reached a historic high since 2008, significantly exceeding the average levels of 2023 and the first quarter of 2024, according to a Central Bank enterprise monitoring report. Assessments of both production volumes and demand have increased. The latest S&P Global survey also indicates an increase in business activity. The Purchasing Managers' Index (PMI) in Russian manufacturing rose to 54.9 points. This is close to the record level observed in 2017. Both surveys, however, record a slight decline in optimism. Expectations for future production volumes and demand in most activities were lower than in the previous month.
However, there is a significant difference in the perception of the business climate across investment, intermediate, and consumer goods productions. During the pre-COVID period, conjunctural assessments by producers showed virtually no differences. In the post-COVID recovery period, there was a notable increase in assessments within investment sectors, and this gap has become especially significant during the wartime period. While assessments in consumer sectors are merely positive, it is the investment productions (which include a significant portion of military production) that provide abnormally high values of the integrated indicator.
The fact that the indicators for consumer and investment sectors differ so significantly suggests that the contribution of import substitution to production growth remains modest. According to analysts from the Gaidar Institute for Economic Policy, ‘the potential associated with Russian producers occupying market niches left vacant by the departure of foreign manufacturers has not been fully realised’. This potential, they believe, could sustain growth rates until the end of the year, despite increasingly stringent credit policies. Analysts from Raiffeisenbank make a similar assumption. They point to high investment activity in many sectors, not only those linked to budget stimulus. The expansion of supply could act as a disinflationary factor by narrowing the gap with demand, they note. However, the costs associated with increasing output are passed on to prices, so the effect is unlikely to be significant.
Thus, excluding the ‘growth’ from military production, Russian industry is showing divergent and unstable dynamics and is in a weakly upward trend, as indicated by the calculations of Bessonov's group.