According to Rosstat, investments in fixed capital increased by 11% in real terms in the first half of 2024. This marks a true investment boom, which has continued for the second year in a row. In the 2010s, the average annual investment growth rate was just 1.7%.
At the same time, experts note that a key indicator of investment activity, the supply of investment goods, has been stagnant for quite some time. In June 2024, it was roughly at the same level as the monthly average for 2021. This discrepancy highlights both the specific structure of Russia's investment boom and the exhaustion of several of its driving factors.
The growth in investment volumes over the past year and a half has been primarily driven by budgetary stimulus, the ramp-up of arms production, and ‘forced investment’ from the private sector, needed to adapt businesses to the fundamentally new environment following the rupture of ties with Western economies. For a time, this created a cumulative effect in the investment sector.
However, private sector investment activity has already started to decline, exacerbated by worsening financial results across the economy and the high cost of borrowing. Although profitability in most industries remains relatively high, its level is now close to the yield of ‘risk-free’ assets. In finance and several other sectors – such as trade, coal mining, and oil refining – profitability has been gradually declining since late last year or early this year. While businesses are still able to make ‘forced investments’, they lack sufficient incentives for investments aimed at expanding production.
According to Rosstat, in the first half of 2024, the growth in fixed capital investment in Russia was 10.9% in real annual terms compared to the first half of 2023 (+14.5% year-on-year in the first quarter and +8.3% in the second quarter). Even with the slowdown in the second quarter, this is an exceptionally high result. For comparison: in 2022, investment growth was 6.7%, and in 2023 it was 9.8%. Meanwhile, during the period from 2011 to 2020, growth averaged 1.7% per year. After the release of data for the first half of the year, the Ministry of Economic Development revised its annual investment growth forecast from 2.3% to 7.8%.
Such a surge in investment activity, signalling a sharp shift from the long-standing investment behaviour model, requires explanation, which is more or less clear. First, there is the powerful budgetary stimulus, and second, the phenomenon of forced investments (→ Re:Russia: Forced Boom). Faced with a sharp change in economic conditions following comprehensive sanctions from Western partners, businesses were forced to invest in restructuring their infrastructure and logistics. Regarding state investments, this includes infrastructure and import substitution projects, as well as investments in the military-industrial complex. Preferential mortgages were an example of cooperation between the government, which subsidised interest rates, and private investment.
Despite the statistically observed investment boom, a critical indicator of investment activity – the supply of investment goods – has remained almost stagnant, as noted by experts from the government-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). According to CMASF calculations, the overall supply of investment goods in June was roughly at the average monthly level of 2021 (+1.1% year-on-year), while the construction sector even saw a slight decline.
Investment goods primarily include machinery and equipment needed for the production of final goods, as well as construction materials. The lack of growth in their supply points to both the specific structure of investments and economic growth, and suggests that the investment boom is nearing its end. For much of 2021, the supply of investment goods was at 115% of the average monthly level of 2019. The economy was recovering after the COVID pause. After the war began, there was a sharp drop to 2019 levels, followed by growth that peaked in the summer of 2023. After that, a slight decline and stagnation set in, with supply stabilising at spring 2021 levels.
The experts at CMASF explain the high fixed capital investment figures amid stagnant investment goods production by increased output in the military sector. Analysts from the Institute for Emerging Economies at the Bank of Finland (BOFIT) also highlight the significant contribution of the defence industry to overall growth. Additionally, they point to the important role of the oil and gas sector in the total volume of investments.
In 2022, budgetary funds played a leading role in investment growth, but by 2023, the primary source became the enterprises' own funds, primarily their profits (→ Re:Russia: Forced Boom). AAt that point, the supply of investment goods reached its peak. In the first half of 2024, this source still accounted for 60% of investments. Experts from CMASF associate the slight decline in investment activity, reflected in the stagnation and decrease in the supply of investment goods, with a slowdown specifically in the private sector. The main reason for this, according to them, is the high key interest rate, which ‘makes private investments unviable’. While profitability in most industries remains relatively high, its level is close to the yield of ‘risk-free’ assets such as government bonds (OFZs). In some sectors – particularly machinery manufacturing, woodworking, and light industry – the yield on OFZs is already higher than profitability. Food and metallurgy companies are also at risk. In other words, enterprises have been making and continue to make ‘forced investments’ necessary to maintain and support their businesses but lack strong incentives for investing in production expansion.
It is impossible to precisely determine the ratio between the two key components of investments – stabilisation investments’ and ‘development investments’, according to CMASF experts. However, they point to several indirect indicators suggesting that stabilisation investments have played the dominant role in the investment boom. One such indicator is the structure of investments. Experts highlight the sharp acceleration in investment dynamics in intellectual property assets (including software) and ‘other types of funds’, while the growth in the ‘physical’ core of investments (non-residential buildings, structures, machinery, and equipment) has slowed. According to CMASF estimates, the physical volume of investments in intangible assets grew 1.6 times in 2022–2023, contributing 6 percentage points to the overall growth of 17.2%. Meanwhile, the physical volume of investments in machinery and equipment during the same period not only failed to grow but actually declined by 8.1%. On the other hand, investments in non-residential buildings and structures increased by 35%.
Like the CMASF experts, BOFIT analysts expect the investment boom to end due to declining business profitability. They note that beyond budgetary infusions and companies' own funds, there are practically no other sources of financing for investment projects. Few companies can access credit under standard conditions, as most have profitability below market interest rates. A new report on financial sector development by the Central Bank reveals that loans are mainly used to replenish working capital. In 2023, borrowed funds accounted for only 9% of total investments. According to CMASTF experts, the inflow of funds from Russian banks in 2022-2023 decreased several times, amounting to only 178 billion rubles – compared to 453 billion in 2019-2021 and 508 billion in 2017-2019. Foreign financing is virtually absent. In the first half of the year, foreign investors provided a mere 0.03% of the investments made by Russian companies, according to BOFIT analysts.
Another factor contributing to the slowdown in private sector investments is the relative worsening of companies' financial positions. In the first months of 2024, corporate revenues in real terms were higher than at the beginning of 2023 but still fell short of 2022 levels. In the first five months of 2024, the consolidated financial result grew by 13.6% year-on-year, totaling 13 trillion rubles. However, in June, there was a dramatic collapse – down 3.5 times year-on-year to 860 billion rubles. As a result, the overall profit of organisations in the first half of the year was 5.8% lower than in 2022. The most significant decline occurred in the financial sector. In June 2023, the sector reported a net profit of around 700 billion rubles, whereas in June 2024, it posted a loss exceeding 300 billion. It is important to note that in the first half of 2023, Russian banks achieved record profits. The Central Bank attributed this primarily to foreign exchange revaluation: due to the weakening of the ruble, the value of foreign currency assets and liabilities on banks' balance sheets surged in ruble terms.
Meanwhile, in finance and several other sectors, profitability began to gradually decline at the end of last year or the beginning of this one. For example, in the first half of the year, the financial result in the trade sector decreased from 1.5 trillion to 1 trillion rubles, mainly due to wholesale trade. One possible reason is the ongoing rise in logistics costs, which analysts from the Central Bank noted in one of the latest editions of the ‘Regional Economy’ report. A significant part of the overall decline came from coal mining enterprises, which lost a large portion of their export revenue due to sanctions. In the first half of 2023, coal companies made a profit of 282.5 billion rubles (375 billion for the entire year), but in the first half of 2024, they recorded a loss exceeding 7 billion rubles. In the oil refining sector, frequent operational disruptions caused by Ukrainian drone attacks led to a financial result that was down by more than 300 billion year-on-year, totaling 1.4 trillion rubles in the first half of 2024. In finance, profits in January-June were 40% lower than a year earlier (less than 1 trillion rubles). Almost half of the largest banks saw their profits decline by the end of the half-year, according to estimates by the publication Frank RG.
Thus, the end of the adaptation period of ‘forced investments’, the high cost of borrowing, and the worsening financial position of enterprises indicate that in the near future, investments will mainly be supported by government funds, while the private sector's contribution will shrink significantly, leading to the end of the 2023 investment boom.
In a conversation with Sberbank's CEO, German Gref, Vladimir Putin offered another explanation for the recent surge in investment activity: ‘Apparently, there is a growing awareness that it is better to bring everything home’. Indeed, undeclared funds or those returned to the country may have played a role. Meanwhile, the Ministry of Economic Development expects investment growth next year to be ‘only 2%’ due to the ‘high base of this and previous years’, with 3% growth in the following years. The main driver is expected to remain companies' own funds.